Under the Prevention of Money Laundering Act (PMLA) and SEBI guidelines, what mandatory compliance procedure must an intermediary follow when onboarding a 'Politically Exposed Person' (PEP)?

[ A ]PEPs are strictly prohibited from opening any investment accounts in India.

[ B ]PEPs are exempt from submitting PAN and Aadhaar documents.

[ C ]No special verification is required for PEPs.

[ D ]Must establish identity through Enhanced Due Diligence (EDD), obtain Senior Management approval before onboarding, and continuously verify the legitimate Source of Wealth and Source of Funds.[ CORRECT ]

Takeaway

Option D is correct: Must establish identity through Enhanced Due Diligence (EDD), obtain Senior Management approval before onboarding, and continuously verify the legitimate Source of Wealth and Source of Funds.

Derivation

PEPs — foreign heads of state, senior politicians, and their close associates or family — are not barred from investing, but PMLA and SEBI treat them as inherently higher-risk clients given the elevated potential for wealth to originate from corruption or abuse of public office. Standard KYC is deemed insufficient, so intermediaries must apply Enhanced Due Diligence: verifying and documenting Source of Wealth and Source of Funds, not just identity documents. Onboarding a PEP requires explicit Senior Management approval before the account opens, escalating the decision beyond a routine front-office check, and the intermediary must keep monitoring the relationship on an ongoing basis rather than treating EDD as a one-time formality.

Why the others fail

A — PEPs are strictly prohibited from opening any investment accounts in India.

PEPs are legally permitted to invest in India; they simply carry elevated anti-corruption risk requiring stricter onboarding scrutiny, not an outright ban.

B — PEPs are exempt from submitting PAN and Aadhaar documents.

PEPs must still furnish complete PAN, Aadhaar, and KYC documentation; EDD adds source-of-wealth scrutiny on top of these standard requirements, not instead of them.

C — No special verification is required for PEPs.

Standard diligence is explicitly considered inadequate for PEPs under PMLA; Enhanced Due Diligence with senior management sign-off is mandatory, not optional.