In this multi-part series, we discuss the processes that businesses should have in place in order to have an effective and compliant PEP management programme. You can read part two here.
Doing business with customers who are Politically Exposed Persons, or “PEPs” in a compliant manner can be tricky. PEPs carry a higher financial crime risk than other customer categories, in view of the heightened potential for corruption, bribery and abuse of power that comes with their position. Because of this, anti-money laundering rules require subject persons to identify the PEPs they deal with, and to perform various enhanced due diligence measures.
This task presents several challenges. Firstly, there is no authoritative list of all PEPs around the globe. Subject persons therefore have to consider their customers’ political exposure in light of the existing rules, which are non-exhaustive, and come to a conclusion as to whether their customer is indeed a PEP or not. Not to mention that customers may not understand that they are PEPs, or may attempt to conceal their PEP status, meaning that simply asking a customer whether he or she is a PEP may not be enough. Once a PEP has been identified, appropriate compliance measures need to be undertaken. However it can be difficult to determine what measures should be undertaken. The mayor of a town is not the same as a prime minister of a nation, and actions undertaken need to be pitched accordingly. Finally there is the mundane, but critical task of ensuring that appropriate records are kept of all this information, such that it can be presented to regulators in order for the company to be able to demonstrate its compliance with the rules.
This “How to” guide aims to disambiguate the processes involved in dealing with PEPs in a safe and compliant manner. In this first part, we will look at the definition of a PEP, and the mechanisms that can be used to detect PEP customers.
Know Your PEP
You cannot manage your PEPs properly unless you know your PEPs in the first place. Therefore the first challenge for any company dealing with PEPs is effectively identifying PEPs it is dealing with. There are two aspects to this challenge:
- Understanding what constitutes a PEP, so you can “know it when you see it”; and
- Putting in place procedures that can reliably detect the PEP status of a customer
What is a PEP?
Let’s start from the basics. The Fourth AML Directive (4MLD) states that a “politically exposed person” means a natural person who is or who has been entrusted with prominent public functions and includes the following:
a) heads of State, heads of government, ministers and deputy or assistant ministers;
b) members of parliament or of similar legislative bodies;
c) members of the governing bodies of political parties;
d) members of supreme courts, of constitutional courts or of other high-level judicial bodies, the decisions of which are not subject to further appeal, except in exceptional circumstances;
e) members of courts of auditors or of the boards of central banks;
f) ambassadors, chargés d’affaires and high-ranking officers in the armed forces;
g) members of the administrative, management or supervisory bodies of State-owned enterprises;
h) directors, deputy directors and members of the board or equivalent function of an international organisation.
4MLD then goes on to state that “no public function referred to in points (a) to (h) shall be understood as covering middle-ranking or more junior official”.
It is important to note that this list is an indicative one. As at the date of this guide there exists no exhaustive list of PEPs. Under the Fifth Money Laundering Directive Member States will be obliged to create a lists of national public offices and functions that qualify as PEPs, which will start to alleviate the problem. But we’re yet to see how clear and precise these lists will be, and there is no global PEP list in sight for the rest of world. The challenge will therefore be around for a long while yet.
Compounding the challenge is the fact that 4MLD extends the application of PEP requirements to both “family members” as well as “persons known to be close associates” of politically exposed. This effectively means that such persons are to be deemed to be PEPs.
An element of judgment will therefore be required when assessing when assessing the potential PEP status of a person who has a political exposure which is not captured by the indicative list. In order to make such assessment, you should consider:
- The prominence of the position: is the function highly visible and/or influential?
- The powers associated with the function: does the function carry with it significant decision making powers? Does the function grant access to public funds? Or decision making power over the awarding of public contracts or other significant advantages?
If the answer to any of the above questions is yes, then you may be dealing with a PEP.
Customers will not walk into you office with a label identifying them as PEPs. Therefore businesses need to have in place processes that will alert them to the fact that they are dealing with a PEP, so the appropriate compliance procedures can be undertaken.
The simplest approach is to ask the client whether he is a PEP. This can be accomplished through a suitable question in customer onboarding forms. Many PEP customers will self-identify as such allowing the relevant processes to be immediately initiated. However a PEP may fail to self-identify, perhaps due to a good faith belief that he is not a PEP, or for more sinister reasons. The business should therefore put in place additional layers of assurance. A typical safeguard is that of screening the name of the customer against specialist databases that maintain lists of PEP names. Another safeguard is that of conducting checks through internet search engines, social media and other open source intelligence. None of these safeguards is infallible, and so a multi-pronged approach is recommended.
In Part 2 we will go through the processes involved in on-boarding a PEP.