PEP Level 1, 2, 3
PEP levels are an industry convention for grading exposure, not a regulatory definition. Here is what regulators actually distinguish and how tiers are used.
Definition
"PEP Level 1, 2, 3" (sometimes extended to Level 4) refers to a tiering scheme that data providers and compliance teams use to grade politically exposed persons by how much exposure their role carries. A typical scheme looks something like this:
- Level 1: heads of state and government, senior ministers, members of national parliaments, senior judges, central bank governors.
- Level 2: senior officials below that tier, such as heads of national agencies, senior military officers, ambassadors and board members of state owned enterprises.
- Level 3: regional or subnational figures, senior officials of international organisations, and other roles near the edge of the definition.
- Some schemes add a further level for relatives and close associates, or for local office holders.
The important point is that no regulation defines these levels. The numbering, the boundaries between tiers and the roles assigned to each differ from one provider to another and from one firm's policy to another's. Two datasets can label the same person Level 1 and Level 2 without either being wrong, because each is applying its own convention.
What regulators actually distinguish
The distinctions that carry legal weight are different, and they are about the type of exposure rather than a number.
Foreign PEPs hold a prominent public function in a country other than the one where the firm is regulated. Under the international standard, enhanced measures always apply to them.
Domestic PEPs hold a prominent function in the firm's own country. Under the international standard, enhanced measures apply where the relationship is assessed as higher risk. EU and UK rules apply PEP measures to domestic PEPs too, with scrutiny proportionate to the risk.
International organisation PEPs hold senior roles at intergovernmental bodies. The international standard treats them on the same risk based footing as domestic PEPs.
Family members and close associates are not PEPs themselves, but fall within scope because of their relationship to one. They are covered in the article on RCA.
Former PEPs may remain in scope for a period after leaving office, subject to a risk based judgement.
Why a regulated firm cares
A risk based approach needs gradation. A single yes or no PEP flag forces a firm to treat a head of government and a deputy regional official identically, which either over-resources low risk cases or under-resources high risk ones. Regulators have criticised both outcomes.
Used well, tiers drive the depth of due diligence, the seniority of the approver and the frequency of review. Used badly, the tier number is accepted without asking why it was assigned.
Because tiers are a convention, the firm owns the mapping. If a policy says "Level 1 PEPs require board level approval", the firm should be able to say which roles it considers Level 1 and why, rather than inheriting a vendor's definition without review.
How tiers are used in practice
Common practice is to treat the tier as one input to a customer risk score, alongside:
- whether the PEP is foreign, domestic or from an international organisation;
- whether the individual is current or former, and how long ago they left office;
- the corruption risk of the jurisdiction concerned;
- the products and value of the relationship;
- whether any adverse media exists.
A Level 3 foreign PEP from a jurisdiction with high corruption risk may therefore end up with a higher overall rating than a Level 1 domestic PEP in a low risk jurisdiction. The tier describes the role; the risk rating describes the relationship.
Regulatory basis
FATF Recommendation 12 and the FATF Guidance on Politically Exposed Persons (2013) establish the foreign, domestic and international organisation distinction and the treatment of family members and close associates. Directive (EU) 2015/849, as amended by Directive (EU) 2018/843, applies PEP measures to foreign and domestic PEPs alike and required member states to publish lists of prominent public functions. In the UK, the Money Laundering Regulations 2017 and the FCA's finalised guidance on PEPs emphasise proportionate treatment, and the regulations have since been amended so domestic PEPs start from a lower risk position than foreign PEPs where no other risk factors are present.
None of these instruments sets out numbered PEP levels. Firms should confirm the categories and treatment required in their own jurisdiction and document how any internal tiering maps to them.
Worked example (hypothetical)
A firm's policy defines three tiers. Two customers are flagged on the same day.
Ms Petra Lind is a sitting member of the national parliament in the firm's home country, a Level 1 role under the policy. Ms Nadia Orel was, until last year, deputy governor of a province in the fictional state of Varnia, which the firm rates as high corruption risk. She is Level 3.
The tier alone suggests Ms Lind is the higher risk case. The full assessment shows otherwise: Ms Lind is a domestic PEP with a salaried income and a modest savings account. Ms Orel is a foreign PEP, recently in office, seeking to move a large sum from an offshore company. Ms Orel receives the more intensive review. The file records both the tier and the factors that moved the final rating.
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