Politically exposed persons and enhanced due diligence
The Fourth Money Laundering Directive allows firms to take a more nuanced approach to assessing the risks posed by PEPs, explains Michael Sinha
The Fourth Money Laundering Directive will be transposed into UK law when the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 come into force on 26 June 2017.
The new regulations were released in draft form in mid-March and have been described as a seismic shift in anti-money laundering regulation. The existing 2007 regulations run to 51 clauses; the 2017 regulations are more than double that at 107 clauses.
One change was widely pre-advertised. People who have a prominent public function in the government are described as politically exposed persons (PEPs) and foreign PEPs (including their family members and business associates) have long been subject to enhanced due diligence (EDD). From now on domestic PEPs will be subject to the same regulations. Or will they? The Treasury notes published alongside the draft regulations tell a rather different story.
The justification for the enhanced treatment of foreign PEPs is that their very position makes them more likely to be involved in criminal activity. It has long been a complaint that all foreign PEPs are treated alike. As one colleague put it, it is offensive to assume that all politicians from all countries (other than our own) are criminals who simply want to invest their ill-gotten gains in the UK. The message seems to have got through. The Treasury notes that there has been a disproportionate application of EDD to PEPs and the new regulations apply a more nuanced approach, requiring firms to assess the risks posed by PEPs in a proportionate way.
It is recognised that some firms have been distinguishing between high- and low-risk PEPs for some time and tailoring their EDD accordingly. This is now legitimised by the new regulations, which make it clear that when dealing with PEPs, firms must assess the level of risk associated with that client and the extent of the EDD to be applied. To make the point, regulation 35(4) says that the extent of the EDD measures to be taken in relation to a PEP may differ from case to case.
Level of risk
There is evidence that some institutions, mainly banks, have been turning away clients who are PEPs and refusing to do business with them and their families simply because of their status. The Treasury states that refusing to establish a business relationship or to carry out a transaction simply because that person is a PEP is contrary to the letter and spirit of the law and issues a strong guideline that firms must not form judgements based solely on anyone’s status as a PEP.
Furthermore, ‘when assessing the level of risk posed by UK PEPs and the extent of EDD to apply, firms should take account of the UK’s position as a world leader in the fight against corruption, money laundering, and terrorist financing’. The consultation on the regulations goes on to say that the government would expect that UK PEPs should generally be treated as lower risk and firms should apply EDD accordingly: ‘It is right that low-risk PEPs should be treated at the lowest level, just as it is right for high-risk customers to face more stringent measures'.
Of course, even in the UK there are PEPs and PEPs. The Financial Conduct Authority is to publish specific guidance on the treatment of domestic and foreign PEPs, their family members, and their known close associates. In the meantime, firms are to evaluate the risk posed by each customer, including:
- The individual’s prominence in public life, the level of influence within their organisation, and their ability to directly access or control public or party funds;
- Whether they have already been subject to disclosure requirements such as registers of interest or independent oversight of their expenses;
- Whether the PEP is associated with the local branch of a political party or the national one and whether they have any elected MPs;
- In the case of a foreign PEP, the level of risk associated with the country that appointed them;
- Whether they have stopped performing the prominent function in the preceding 12 months; and
- The tone of recent publicity about them.
Under the new regulations, firms must continue to apply EDD for at least 12 months after the PEP ceases to perform a prominent function, but are no longer obliged to apply EDD to their family and business associates of a former PEP because such individuals no longer have the same connection to an influential person as they previously did.
This article was first published by Solicitors Journal on 02/05/17, and is reproduced by kind permission.