In addition to its broader regulatory responsibilities, the Financial Conduct Authority (FCA) also has specific oversight over certain financial institutions, such as insurance companies or banks. To combat financial crime, the FCA regulations aim for firms to take appropriate measures and fulfill their obligations related to financial crime prevention.
To effectively identify Politically Exposed Persons (PEPs) and implement enhanced due diligence measures, the FCA advises firms to adopt a risk-sensitive approach. Within the UK context, the FCA's PEPs manual provides clear guidance on how companies should interpret and apply PEP definitions in accordance with the Money Laundering Regulations (MLRs).
Should you have any inquiries regarding PEPs, the Financial Conduct Authority's Finalized Guidance for PEPs is a valuable resource that can offer detailed information and answers to your questions. This article will stress its finalized guide on PEP and answer the most common questions.
Why Are PEPs or Relatives And Close Associates Pose a Risk?
It is necessary for organizations to conduct additional scrutiny on PEPs and their Relatives and Close Associates (RCAs) under FCA regulations. This is because international standards set by the Financial Action Task Force (FATF) indicate that PEPs may pose a risk due to the potential misuse of their public office for personal gain, leading to the misuse of financial systems. Therefore, once an individual becomes a PEP, it is crucial for firms to screen customers and identify PEP and subject them to further investigation. Moreover, it is not just PEPs who pose a risk, as their RCAs may also be involved in the misuse of public funds or assist in such transactions. Hence, RCAs must also undergo more thorough scrutiny.
Who Should be Treated as a Family Member and Known to be Close Associates?
Family members of a PEP are defined as follows:
- spouse or same-sex partner
- children and their spouses or fellows
- parents, also FCA, consider this definition to include siblings.
A PEP A defines 'known close partner' as:
- an arrangement or other close business relationship that is politically exposed to a legal entity or a person known to have the common interest of a legal entity
- regulation is known to be established to benefit a legal entity or a legal entity with a single usufruct right.
What Are The Obligations Under FATF and FCA Regulations?
According to regulations, companies are required to identify and assess whether a client or their beneficial owner is a politically exposed person (PEP) or a relative or close associate of a PEP. This is done to manage the risks associated with such individuals effectively. As part of their due diligence process, companies need to understand why a PEP or their relatives and close associates are subject to regulatory scrutiny and use this information in their risk assessment.
When dealing with a PEP or their relatives and close associates, it is expected that firms conduct an assessment to determine the level of risk, which is typically considered high in terms of potential money laundering. The Financial Conduct Authority expects this assessment to be automated and thorough.
To identify PEPs and their relatives and close associates, companies are encouraged to use reasonably available information sources, such as official government websites, reliable news outlets, and reputable organizations focused on corruption risks, including Transparency International or Global Witness.
While the use of commercial databases containing lists of PEPs and their associates is not mandatory, companies may choose to use them depending on their nature and size. Suppose a firm decides to use such lists. In that case, it is important to understand how the databases are compiled and ensure that individuals flagged by the system meet the defined criteria of a PEP, family member, or close associate specified in the regulations.
PEP databases provide information that helps identify and profile PEPs, including their aliases, date of birth, legal background, and other relevant details. Additionally, the Financial Action Task Force (FATF) categorizes PEPs based on their location and associated risk levels, as indicated in the database. Therefore, companies must conduct PEP screenings based on confidential PEP data to determine the potential risk level when engaging in business with a PEP.
Suppose a firm determines that a customer meets the definition of a PEP or their family member or close associate. In that case, they should assess the associated risk level and decide on the extent of advanced due diligence measures required based on this assessment. It is crucial to document the decision to implement advanced due diligence measures clearly.
By following these procedures, companies can effectively manage the risks associated with PEPs and their close connections and ensure compliance with relevant regulations.
Politically Exposed Person in AML/CTF
There are two categories of PEPs as Domestic and Foreign. Under these categories, they can be in following roles:
- Heads of state, heads of government, ministers, and vice ministers or deputies
- Members of parliament or similar legislative bodies, members of governing bodies of political parties
- Members of high courts, constitutional courts, or any judicial body
- Members of the boards of supervisory courts or central banks
- Ambassadors, charge d'affaires, and high-ranking officers in the armed forces
- Members of the administrative, management, or supervisory bodies of the state- members of the board of directors, vice-directors, and members or members of an international organization
Are all PEPs at the Same Risk?
It's important to note that not all politically-exposed individuals carry the same level of risk. The risks associated with PEPs vary depending on the situation, and firms must conduct individual assessments that take these risks into account. For instance, factors to consider include the type of public function the PEP holds, the nature of the proposed business relationship, and the potential for misuse of products for corrupt purposes. Other relevant factors that firms may consider in their risk assessments should also be taken into account.
According to the Financial Conduct Authority's manual, firms should classify customers as either "low risk" or "high risk," and apply Enhanced Due Diligence measures on a risk-sensitive basis. FCA regulations require a comprehensive risk assessment to take into account all the risk factors that a client may present, and consider what measures should be taken to comply. To properly assess the risks associated with PEPs under FCA supervisory, it is necessary to consider all the characteristics of the customer.
