Guidance on the Treatment of Politically Exposed Persons (PEPs)
Our Compliance Briefing this month covers, among other things, the Financial Conduct Authority's (FCA) guidance consultation on how financial services firms should handle customers who are politically exposed persons (PEPs). The FCA will issue a response to feedback on the consultation before the law requires it to be in place by 26th June 2017. But in the meantime, the draft guidance offers an interesting perspective on due diligence in light of the Fourth Money Laundering Directive.
The FCA defines a PEP as 'an individual who is entrusted with prominent public function, other than as a middle-ranking or more junior official', e.g. heads of state, MPs or similar, members of courts or judicial bodies, members of administrative, management or supervisory boards of state-owned enterprises, and directors and members of the board of an international organisation, whether in the UK or abroad. PEPs should continue to be treated as such for a period of at least 12 months after the date of cessation of public function. A longer period of time may be deemed appropriate, where there are risks of money laundering or terrorist financing in relation to the PEP.
The guidance states that affected firms are required to have 'appropriate risk-management systems and procedures to identify when their customer (or the beneficial owner of a customer) is a PEP and to manage the enhanced risks arising from having a relationship with that customer. Business relationships with the family and known close associates of a PEP are also subject to greater scrutiny.' The FCA clarify that in meeting these obligations, firms are expected to do so in a proportionate manner. In most cases, firms need only have regard for information that is publicly known and available, but firms are expected to investigate, making use of credible public information, where attempting to establish sources of wealth or income. As a guide, this information could be sought from any publicly available register (beneficial ownership registers, registers maintained by the Electoral Commission, etc).
Effectively, whilst firms should ensure that their risk management systems and procedures are designed to identify and manage when their customer is a PEP, they should also be able to differentiate that risk on a case by case basis. The current guidance distinguishes between high risk and low risk individuals. A PEP may be considered to pose a lower risk if they operate in a country that:
is associated with low levels of corruption
is politically stable, and has free and fair elections
has strong state institutions
has credible anti-money laundering defences
has a free press
has an independent judiciary and a criminal justice system free from political interference
legal protections for whistleblowers
and if the individual themselves is subject to rigorous disclosure requirements and does not have executive decision-making responsibilities (examples given include a government MP with no ministerial brief, or an opposition MP). Any individual that has ceased to be a PEP for at least 12 months can also be considered low risk.
Indicators that a PEP may pose a higher risk include those from countries that:
are associated with high levels of corruption
are politically instable
have weak anti-money laundering defences
have armed conflict
have widespread organised criminality
have a political economy dominated by oligopolistic actors with close links to the state
have weaknesses in the transparency of registries of ownership for companies, land and equities.
In particular, high risk individuals would include those whose personal wealth or lifestyle is inconsistent with known legitimate sources of income or wealth, anyone who has been subject to credible allegations of financial misconduct, including bribes, or about whom there is evidence they have sought to disguise the nature of their financial circumstances.
The lists are not exhaustive, and firms should be prepared to scrutinise individuals, and family and known close associates of a PEP. Family are defined in the guidance as spouses and partners, children, and parents. Close associates are defined as individuals known to have joint beneficial ownership of a legal entity or legal arrangement or any other close business relationship with a PEP, or an individual who has sole beneficial ownership of a legal entity or a legal arrangement which is known to have been set up for the benefit of a PEP. The list is not exclusive; a firm may consider those with other links to the PEP for scrutiny, if necessary. It should be noted that known close associates are not considered a PEP themselves, purely as a consequence of being associated with a PEP.
Key to dealing with PEPs is the evaluation of each case on its own merits. The Regulations require that enhanced customer due diligence measures are taken to manage any risks posed by PEPs, including the use of appropriate risk management systems to evaluate whether the customer, or the beneficial owner of the customer, is a PEP, or a family member or a known close associate of a PEP. Regulation 35(5) is clear that firms must ‘have approval from senior management for establishing or continuing business relationships with such persons’ and ‘take adequate measures to establish the source of wealth and source of funds that are involved in business relationships’. In addition, firms must conduct enhanced, ongoing monitoring of those business relationships.
So, if a firm identifies a PEP, what do they need to do? In low risk situations, a firm should be able to prove that it has undertaken customer due diligence to establish whether the customer is a family member or has a close relationship with a PEP, but it may take less exhaustive steps to establish the source of wealth, funds, or income – by using only information already available to the institution – and may elect not to make further inquiries unless anomalies arise. In such cases, it may also be appropriate that oversight and approval of the relationship takes place at a less senior level of management. Reviews should still take place, but may be less frequent.
In high risk situations, firms must take more intrusive and exhaustive steps to establish the source of wealth, funds and income of family members or known close associates of a PEP. These steps and any and all determinations from them must be fully documented. In such cases, oversight and approval of the relationship should take place at a more senior level of management and formal reviews should be frequent.
The full Guidance on the treatment of politically exposed persons (PEPs) under the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 from the Financial Conduct Authority is available by clicking on the link, and should be read in conjunction with the guidance on PEPs produced by the Joint Money Laundering Steering Group and guidelines issued by the joint European Supervisory Authorities. The FCA is due to issue its final response to the feedback on the consultation, we’ll keep you updated when that happens.