FCA releases guidance on PEPs and money laundering
19 Jul 2017 12:00 am by Mark Dunn
The UK's Financial Conduct Authority (FCA) has published guidance on how financial services firms should treat Politically Exposed Persons (PEPs) while meeting their legal Anti-Money Laundering (AML) requirements. It advises companies on what constitutes a PEP, why PEPs can pose a risk of money laundering, and how companies should manage this risk.
What's in a name?
PEPs are individuals who hold powerful positions in public office, and they are considered a risk to companies because they could abuse their office for private gain and launder the proceeds. The new guidance applies to any UK institution whose AML procedures are overseen by the FCA, and advises them on how they can meet their AML obligations when opening a new business relationship or monitoring an existing relationship with a PEP.
To help companies understand the exact definition of a PEP, the FCA has set out clearer criteria for how to identify them. It says that only the "most prominent" positions count as PEPs. Firms do not need to consider local government members, junior members of the senior civil service or anyone other than the most senior military officials to be PEPs. It clarifies that family members and "close associates" of PEPs should themselves be treated as PEPs for the purposes of AML monitoring.
This is consistent with the EU's Fourth AML Directive, which came into force in the UK last month. It also defines PEPs as "family members" or "persons known to be close associates" of PEPs. Additionally, the Directive expanded the definition of a PEP to include individuals from the UK, rather than only considering foreign individuals to be PEPs. It requires firms to continue to assess the risk posed by an individual for at least 12 months after they are no longer considered to be a PEP.
Not all PEPs are equal
The FCA advises companies that domestic PEPs carry a lower risk of money laundering and corruption than foreign PEPs. As a result, companies do not need to apply the same level of due diligence to domestic PEPs. This reflects the UK's relatively good reputation for preventing and tackling public sector corruption. It had the tenth best score in the latest Corruption Perception Index by Transparency International. This recommendation brings the UK into line with Hong Kong, Canada and Singapore, who also treat foreign and domestic PEPs differently. The FCA's advice also says that PEPs who come from another country with a good reputation for tackling corruption should be considered to have a lower risk of corruption.
A 'case by case' approach to PEPs
The FCA says companies must not treat all PEPs the same, but assess the level of risk of each individual on a "case by case" basis. It says that not all PEPs carry the same level of risk, and that refusing to do business with someone simply because they are a PEP is unacceptable. So it is up to companies to identify individuals who count as a PEP, assess whether each PEP poses a risk of money laundering. To support this risk based approach companies should have access to accurate and up-to-date information on PEPs.
The FCA's guidance identifies which sources companies should use in their due diligence before entering into a business relationship with a PEP. This includes the websites of parliaments and governments, reliable news sources, and the work of reliable anti-corruption pressure groups like Transparency International. Companies should also look at public registers like Companies House's register of companies and persons of significant control and those maintained by the Electoral Commission. The FCA also says firms may choose to use commercial databases that contain lists of PEPs as part of their due diligence process.
What should companies do?
- Implement a risk based approach to manage the risk of corruption from PEPs.
- Seek advice and permission from senior management when considering whether to start or continue a business relation with a PEP.
- Establish where a PEP obtained their wealth before entering into a business relationship with them.
- Continue to monitor a PEP throughout any business relationship with them.
- Use a wide range of sources such as legal information, news coverage and company data to assess the level of risk posed by a PEP.