The EU’s Fourth Money Laundering Directive, implemented in the UK by the Money Laundering Regulations 2017 (MLR 2017), introduced a risk-based approach to tackling money laundering and terrorist financing (see our related blog). The FCA has now published guidance on one aspect of the new regime: dealing with the appropriate treatment of Politically Exposed Persons (PEPs) for anti-money laundering purposes.
By way of recap, at the heart of the new risk-based approach is effective customer due diligence where different due diligence measures will be applied to different types of customers. The Regulations require that the highest risk scenarios receive enhanced customer due diligence (EDD) – such as when dealing with PEPs. One of the changes under the new regime was to introduce “domestic” as well as “overseas” PEPs into consideration.
In determining what risk-management systems and procedures are appropriate under the MLR 2017, a relevant person must take into account the extent to which that risk would be increased by its business relationship or transactions with a PEP, or a family member or known close associate of a PEP. Moreover, in assessing the extent of EDD, guidance issued by the FCA or other supervisory authority (approved by the Treasury), may be taken into account.
Under the MLR 2017 the FCA must also give guidance in relation to the treatment of PEPs by those who fall within its regulatory reach, defined in the guidance as any institution that has its anti-money laundering systems and controls overseen by the FCA.
The FCA Guidance
Recalling that the MLR 2017 set out that all firms must apply a risk sensitive approach to identifying PEPs and then applying enhanced due diligence measures, the FCA stated that: “we expect firms to take appropriate but proportionate measures in meeting their financial crime obligations”.
To that end the guidance provides clarity on how firms should apply the definitions of a PEP in the MLR 2017 in a UK context.
This includes providing that firms should only treat those in the UK who hold “truly prominent” positions as PEPs and not to apply the definition to local government, more junior members of the senior civil service or anyone other than the most senior military officials.
The Guidance addresses the following questions:
- What are firms’ obligations under the Regulations?
- Why do PEPs, family members of PEPs or known close associates of PEPs pose a risk?
- Who should be treated as a PEP?
- Who should be considered a family member?
- People who are ‘known to be close associates’ of a PEP?
- Do all PEPs pose the same risk?
- What are some indicators that a PEP might pose a lower risk?
- What are indicators that a PEP might pose a higher risk?
- What are some indicators that a PEP’s family or known close associates pose a lower risk?
- What are some indicators that a PEP’s family or known close associates pose a higher risk?
- What measures should firms take when they identify a customer is a PEP, or a family member or known close associate of a PEP?
- What measures may firms take in lower risk situations?
- What measures may firms take in higher risk situations?
The Guidance underlines that the legislation confirms that a case by case basis is required with the risk assessed of individual PEPs rather than applying a generic approach to all PEPs.
The FCA concludes that “as such it is unlikely in practice that a large number of UK customers should be treated as PEPs”.