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by Rory Traynor
The FCA launched their finalised guidance on the treatment of Politically Exposed Persons (PEPs) for anti-money laundering purposes in July 2017; you can read it in full here.
In this article, we consolidate the key points.
Here are terms you need to know:
PEP – Politically Exposed Persons
FCA – Financial Conduct Authority
MLR – Money Laundering Regulations
FATF – Financial Action Task Force
EDD – Enhanced Due Diligence
PSC – Person of Significant Control
NB: When PEPs are referenced, read also their family or known close associates.
FCA PEP Guidance: Executive Summary and Background
Legislative Background
- Guidance issued to satisfy the duty of section 333U of the Financial Services and Markets Act 2000.
Summary of the Guidance issued
- Firms must take appropriate but proportionate measures in meeting financial crime obligations. A case-by-case basis is required when assessing all PEPs.
- Guidance provides clarity on the definition of PEP in a UK context and it is unlikely that a large number of UK customers should be treated as PEPs.
- Where a UK customer does meet the definition, the firm is required to recognise the risk factors of such customers as illustrated later in the guidelines.
- Firms must, however, apply more stringent approaches where the customer is assessed as having a higher risk.
Final Guidance
- Introduction
- This guidance covers obligations when opening new (or monitoring existing) relationships for any institution overseen by the FCA. It is only applicable to business relationships undertaken in the UK.
- Any additional measures beyond this guidance should only be taken by firms if:
o this is justified on the basis of their risk assessment; and
o risk factors are associated with that customer unrelated to their position or connection to a PEP.
Why are PEPs higher risk clients?
- PEPs, their families and any close associates are subject to enhanced scrutiny. The FATF issues international standards that recognise a PEP may be in a position to abuse their public office for private gain;
- Family and close associates are not themselves PEPs solely as a result of their connection to a PEP but rather they may benefit from, or be used to facilitate, the abuse of public funds by the PEP.
Firms’ obligations
- Appropriate risk management systems and procedures must be in place to determine if a customer or beneficial owner of a customer is a PEP.
- Information readily available should be utilised to identify PEPs:
o Public domain information, i.e. websites of parliaments and governments and reliable news sources;
o Reliable public registers including registers of companies, PSCs and those maintained by the Electoral Commission; and
o A firm may choose to use commercial databases that contain lists of PEPs, family members and known close associates.
- Once confirmed, a firm must assess the level of risk associated with that PEP and as a result, calculate the extent to which EDD measures need to be carried out. This all needs to be clearly documented.
- A business relationship should not be terminated unless the risks posed by a PEP are higher than the firm can adequately mitigate.
- If a firm continues a business relationship, they are required to:
o Have approval from senior management for the establishment or continuation of any relationship;
o Establish the customer’s source of wealth and source of funds; and
o Conduct enhanced ongoing monitoring of the business relationship.
Who should be treated as a PEP?
- PEPs are individuals entrusted with prominent public functions including:
o Heads of state/government, ministers and deputy/assistant ministers;
o Members of parliament or of similar legislative bodies (this does not include local government in the UK);
o Members of the governing bodies of political parties (only applies to parties with representation in a national/supranational Parliament);
o Members of supreme courts, constitutional courts or any judicial body whose decisions are not subject to further appeal except in exceptional circumstances (in the UK only judges of the Supreme Court would count as PEPs);
o Members of courts of auditors or on the boards of central banks;
o Ambassadors, chargés d’affaires and high-ranking officers in the armed forces;
o Members of the administrative, management or supervisory bodies of state-owned enterprises; and
o Directors, deputy directors, and members of the board of international organisations.
FCA would expect firms to understand the nature of each position and whether this gives rise to the risk of abuse of power; middle-ranking and junior officials could act on behalf of a PEP and, therefore, the risk may arise from customer due diligence to EDD.
A PEP no longer entrusted with a prominent public function should continue to be viewed as a PEP for at least a 12-month period after the date they ceased to be entrusted with a public function.
Who should be considered a family member/known close associate?
- Spouse or civil partner.
- Children and their spouses or civil partners.
- Parents.
- Brothers and sisters are also possibilities.
- As soon as a PEP leaves office, the family members should immediately be treated as ordinary customers subject to the normal customer due diligence process.
- A known close associate is:
o An individual known to have joint beneficial ownership of a legal entity or arrangement or any other close business relationship with a PEP; and
o An individual who has sole beneficial ownership of a legal entity or a legal arrangement that is known to have been set up for the benefit of a PEP.
Do all PEPS pose the same risk?
- Firms must distinguish between lower risk and higher risk PEPs based on an assessment of:
o The prominent public function the PEP holds;
o Nature of the proposed business relationship; and
o The potential of the product to be misused for purposes of corruption.
Signs that a PEP may be lower risk include:
o Seeking access to a product deemed as low risk;
o Prominent public function is in the UK;
o Does not have executive decision-making responsibilities; and
o Is in a country with certain political, economic and judicial characteristics similar to the UK.
Signs that a PEP may be higher risk include:
o Prominent public function in a country with a high risk of corruption;
o Personal wealth or lifestyle inconsistent with known legitimate sources of income; and
o Credible allegations of financial misconduct.
Indicators of a PEP’s family or associates being of lower/higher risk:
Family members of a low-risk PEP are often considered to themselves be lower risk. The following might suggest a family member or associate of a PEP poses a higher risk:
o Wealth derived from the granting of government licences/from preferential access to the privatisation of former state assets or from commerce in industry sectors associated with high barriers to entry;
o Wealth or lifestyle inconsistent with known legitimate sources of income;
o Credible allegations of financial misconduct; and
o Appointment to a public office that appears inconsistent with personal merit.
Enhanced due diligence measures to be taken upon identifying a PEP:
Obtain senior management approval for establishing/continuing business relations;
Take adequate and reasonable measures to establish the source of wealth and funds involved in business relationships; and conduct enhanced, ongoing monitoring of business relationship;
The nature and extent of the EDD should be appropriate and proportional to the risk of that PEP.
In high-risk situations, a firm may take the following measures:
o Take more intrusive/exhaustive steps to establish the source of wealth and/or funds;
o Oversight and approval of the relationship should take place at a more senior level of management; and
o Business relationships should be subject to more frequent/thorough reviews.
Long-term insurance contracts
Firms providing long-term insurance contracts must take reasonable measures to determine whether any beneficiaries of its insurance policies are PEPs. This must be done before any payment is made.
Beneficial owners of legal entities who are PEPs
Firms should identify when a PEP is a beneficial owner of a customer; They should assess the risks posed by the involvement of the PEP and then apply appropriate measures; and
When a PEP is a beneficial owner of a corporate customer, the firm should not automatically treat other beneficial owners/shareholders as a PEP or known close associate but can do so once they have assessed the relationship based on information available.
Red Flag Alert: the Perfect tool for PEP Monitoring
The guidelines steer firms towards “commercial databases that contain lists of PEPs, family members and known close associates” and our Red Flag Alert database is the perfect tool for this purpose.
Not only do we track all PEPs, but this information is also plugged directly into your database and any key changes are sent directly to your inbox – in short, Red Flag Alert makes screening for PEPs and sanctions seamless and promotes proactive best practice.
Click here for a free trial of our fully digital AML platform.
