The FCA has issued new Guidance on how firms (that it supervises for money laundering purposes) should treat politically exposed persons (PEPs).
This Guidance forms part of a number of changes being implemented in connection with the Fourth Money Laundering Directive.
On 26 June 2017 the Money Laundering Terrorist Financing and Transfer of Funds (information on the Payer) Regulations 2017 (the 2017 Regulations) came into force which amend (and replace) the Money Laundering Regulations 2007.
These make changes to the scope of due diligence requirements, in the context of customers and in correspondent banking relationships and to the application of beneficial ownership requirements, as well as other changes to firms' obligations.
The FCA's Guidance is issued pursuant to a requirement in the 2017 Regulations and reflects a change in the approach, specifically to issues relating to PEPs.
All customer due diligence is now required to be on a risk-sensitive basis and therefore, in relation to PEPs, this also applies.
The Guidance explains that the identification and risk assessment of PEPs requires the collection of information that is publically available, including registers. The use of commercial databases is not mandatory; however it may be appropriate, depending on the nature of the customer base.
The risk assessments need to consider the PEP status of the individual, the nature of the transaction, the involvement of any other family members and of third parties or intermediaries.
If a PEP is identified, the commencement of the relationship should be approved by senior management (including the Money Laundering Reporting Officer) although the requirement may go higher in the organisation for high risk relationships.
There is a requirement to establish 'source of wealth' and 'source of funds' for PEPs, and the degree of measures needs to be correlated to the risk of the proposed relationship or transaction.
Arrangements for ongoing monitoring will also need to be decided upon, again reflecting the nature and risk of the transaction.
Who should be treated as a PEP?
Aside from the obvious candidates, heads of state and politicians, any individuals with prominent public functions are candidates:
- Members of political parties;
- Members of the Supreme Court, but not other Judges; and
- Board members of central banks or other state owned enterprises and international organisations.
Without any additional risk indicators, a PEP can cease to be treated as such after the expiry of 12 months from leaving their role. Although UK PEPs will be caught going forward, if the UK PEP left their role prior to 26 June 2017, they should not be treated as such under the 2017 Regulations.
The extent to which the PEPs relatives fall within in the requirements depends on the assessment of the risk in the situation on a case by case basis. The proximity of the relationship is not the only consideration nor is it reason per se to apply enhance due diligence. Relatives of PEPs lose that status as soon as the PEP leaves office and there is no 12 month extension.
The 2017 Regulations define 'known close associate' by reference to either business relationships or connection through an arrangement or an entity, but again the treatment of these types of relationship depends on the facts of the case.
Assessing the 'facts of the case'
The factors to be taken into account will fall into the categories of facts about the PEP; the proposed relationship; the product and any other relevant factors. A key consideration is geographical and where the PEP carries out their function.
Low risk jurisdictions are those with democratic regimes, low levels of corruption, credible anti-money laundering defences, free press, independent judiciary and a justice system free from political interference. Other considerations are whether the public sector has strong traditions of audit, legal protection for whistleblowers and well-developed ownership registers. Regimes that have human rights abuses will have a 'red flag' against them.
The bar for the Money Laundering Reporting Officer’s knowledge of the characteristics of different overseas regimes is therefore set quite high.
The other key component is the firm's own AML risk assessment. This will need to encompass assessment of the firm's products and of the type of relationship proposed, and whether these create a risk of abuse for money laundering.
The role of the PEP is also important, for example whether they have executive decision making responsibilities or can influence procurement exercises or the allocation of government licences.
If you are dealing with the relatives of a PEP’s, the starting point, according to this Guidance, is that those related to PEPs are still low risk. The assessment will need to look at similar factors, but also evidence of what might be termed ‘nepotism’, for example a public office appointment that appears inconsistent with merit, or wealth derived from industry sectors with high barriers to entry, particularly if those barriers are legal, regulatory or government policy.
Clearly even with UK PEPs firms will have difficult factors to weigh in risk assessing relatives or associates.
The process for dealing with a high risk PEP relationship has not changed significantly; the FCA has provided useful Guidance on low risk situations, in that only the bare facts are required to be established, although some ‘source of wealth’ evidencing is required.
The FCA’s publication is helpful in providing clarity on what has (and what has not changed) and will be a useful source of Guidance for all Money Laundering Officers in their day to day decision making.