Who are Politically Exposed Persons? (copy)

Who are Politically Exposed Persons?Professional Indemnity InsuranceThe various MLR have long required that PEPs are identified and treated as high risk. This article discusses how to manage client PEPsContents

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A PEP is a Politically Exposed Person. The various Money Laundering Regulations have long required that PEPs are identified and treated as high risk. On 10 January 2020 The Money Laundering and Terrorist Financing (Administration) Regulations 2019 (MLR 2019) were implemented into domestic law in the UK¹. Firms’ obligations to identify and verify whether their clients, the beneficial owners of their clients, family members or close business associates of their clients, are PEPs, and to apply Enhanced Due Diligence (EDD) remains.The Financial Action Task Force (FATF)² has long been concerned about bribery and corruption amongst government officials and politicians globally. Within the UK the connection between PEPs and money laundering is clear with the UK’s first Unexplained Wealth Order issued to Zamira Hajiyeva in February 2018³.

"Within the UK the connection between PEPs and money laundering is clear"

PEPs are considered higher risk, because their positions enable them to influence legislation and decision making, and the concern is that they might do so to suit their own needs.The definition of a PEP is wide ranging and does not just cover public officials. MLR 2019 should assist firms in identifying PEPs, as all European Union (EU) Member States are required to produce and maintain an up to date list of the prominent public functions that qualify as a PEP.FATF defines a PEP as⁴:

a current or former senior official in the executive, legislative, administrative, military, or judicial branch of a government (elected or not)

a senior official of a major political party

a senior executive of a government owned commercial enterprise, being a corporation, business or other entity formed by or for the benefit of any such individual

an immediate family member of such individual; meaning spouse, parents, siblings, children, and spouse’s parents or siblings

any individual publicly known (or actually known by the relevant financial institution) to be a close personal or professional associate

The Law Society have also provided guidance on identifying and managing the relationship with a PEP⁵.

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1. http://www.legislation.gov.uk/uksi/2019/1511/made/data.pdf

2. http://www.fatf-afi.org/media/fatf/documents/reports/Corruption%20Reference%20Guide%20and%20Information%20Note%202012.pdf

3. https://www.bbc.co.uk/news/uk-458122104.

4 https://www.fatf-gafi.org/documents/documents/peps-r12-r22.html

5. https://www.lawsociety.org.uk/support-services/advice/articles/peps/}

The list of prominent public functions will significantly assist firms in understanding who is a PEP, but you will also need to consider:

The beneficial owner
There is therefore a requirement to accurately identify the beneficial owner and consider whether they might be a PEP

A family member or known business associate of a PEP; there is a concern that PEPs gift assets to family members or friends, which have been obtained corruptly

Money launderers want to ensure that their funds will be returned to them, so typically launder the funds via someone they trust, which typically has included a family member or close associate

Someone who used to be in a prominent public function (and so may have obtained their assets and wealth illegitimately) but no longer is

The legislation says within the last year, but it is recommended that you check back longer if you consider it appropriate to the risk

How do I know if they are a PEP?

The Legal Sector Affinity Group Guidance requires that you take a risk based and proportionate approach to the identification of PEPs⁶. Based on your own firm wide risk assessment, (as required under Regulation 18 (1) of The Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017⁷) you should understand how likely it is that your clients might be PEPs or associated with PEPs.Standard client due diligence should establish whether your client is a PEP, and if so then you need to enhance your client due diligence measure.Standard due diligence that might help you to identify a PEP, or connection to a PEP, includes:

Advising the client what a PEP is, who it typically covers and ask them if they might be a PEP or associated with a PEP

Ask your client who their employer is and what their job title is

Undertake a Google search for the client

Check the EU Commissions list of public prominent functions (once available)

Electronic ID providers searches should identify whether the client is a PEP. However, it is important that you are aware of how these searches work and confident they pick up all domestic and international PEPs and their associates.

During a transaction the following warning signs may indicate that your client is a PEP:

Correspondence on official government, state or party letterhead

Email address is government style

Diplomatic passport is used as ID

Funds / monies received from a government account

News reports

General discussions with your client may also reveal further information that makes you suspicious

Remember conducting client due diligence and Know Your Client procedures is an ongoing requirement throughout your relationship with your client. It is not a tick box exercise, and you should remain alert to indications throughout the course of your business dealings.

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^{6. https://www.sra.org.uk/globalassets/documents/solicitors/code/lsag-anti-money-laundering-guidance.pdf

7. http://www.legislation.gov.uk/uksi/2017/692/pdfs/uksi_20170692_en.pdf}

Can we do business with a PEP?

Yes of course, but the transaction may be higher risk and so you need to mitigate those risks appropriately. This might include:Paying close attention to the source of funds; they might be paid from a third party or state bank accountClearly identifying the source of wealth; this is how the client accrued the funds being used for the transactionPaying close attention who you pay monies to; are they going to family, friends or other businesses and not directly to the clientRemember whenever you identify a PEP you must seek and gain approval from senior management to proceedBe aware being a PEP is only one aspect of the transaction that makes the matter high risk, you also need to stay vigilant to other risk factors.

I think my client is a PEP what should I do?

You should consider the following areas before continuing the business relationship;

Check your firm’s policies and procedures, what do they say and require of you?

Consider reporting the matter to your MLRO, remember under Regulation 35 you must have senior management approval for establishing or continuing the business relationship

Treat each transaction with a PEP on a case by case basis. If you identify that a client or close associate of the client is a PEP, then you should assess the level of risk associated with that client and transaction, and then consider the level of enhanced due diligence that may be required. Ultimately considering all the risks you may decide not to continue the transaction, as you might for any other client.

Ensure that you take adequate measures to establish source of wealth and source of funds. How do I establish source of wealth for PEPs?

i. Ask the PEP; as you would for any other client.

ii. This information might be publicly available on a register of interestsRemember this is not simply identifying where the monies come from, as in the bank account, but the source of that wealth. Remember source of wealth is the origin of the monies, how they were accumulated, and you need to gather the evidence to support this.

5. Closely monitor the business relationship throughout the course of the transaction and be alert to anything that changes or is unexpected. Remember the warning signs suggested above.

What if I am not sure?

The different legislative models used by Member States means that prominent public functions will have different names, that might not always make your client obviously a PEP. Whilst the new register should assist there may still be some ambiguity.

The requirements around transacting with a PEP, are not unlike dealing with any other type of transaction. It is therefore suggested that you consult with your MLRO and senior management, consider the risk factors of the transaction and the client as a whole, and take a holistic view of those risks.

Further Details

Some useful links on identifying and managing relationships with PEPs are detailed below, Willis Towers Watson Risk Management team remains keen to assist if you have further queries on PEPs or any other aspect of the Money Laundering Regulations.

Legal Sector Affinity Guidance

https://www.sra.org.uk/globalassets/documents/solicitors/code/lsag-anti-money-laundering-guidance.pdf

The Law Society Guidance

https://www.lawsociety.org.uk/support-services/advice/articles/peps/

FATF

https://www.fatf-gafi.org/documents/documents/peps-r12-r22.html

FCA

https://www.fca.org.uk/publication/finalised-guidance/fg17-06.pdf

HM Treasury Consultation

https://www.gov.uk/government/consultations/transposition-of-the-fifth-money-laundering-directive

Legislation

MLR 2017:https://www.legislation.gov.uk/uksi/2017/692/contents/made

MLR 2019: http://www.legislation.gov.uk/uksi/2019/1511/made/data.pdf

For more information please contact:

John Hosie
Lead Associate

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