The Fourth Money Laundering Directive was transposed into UK law when the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 came into force on 26 June 2017. The change allows firms to take a more nuanced approach to assessing the risks posed by politically exposed persons (“PEPs”).
The new regulations were released in draft form in mid-March and represent a significant change in anti-money laundering regulation.
PEPs are defined as people who have a prominent public function in the government. Foreign PEPs (including their family members and business associates) have long been subject to enhanced due diligence. From now on domestic PEPs will be subject to the same regulations.
Proportionality
The justification for the enhanced treatment of foreign PEPs is that their very position leaves them exposed to bribery and corruption. The measures are said to be preventive, rather than punitive. However, it has long been a complaint that all foreign PEPs are treated alike.
Under the previous regime, there were often complaints that a disproportionate application of enhanced due diligence (“EDD”) to PEPs. The new regulations apply a more nuanced approach, requiring firms to assess the risks posed by PEPs in a proportionate way.
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. The regulations now endorse that approach. They 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. Regulation 35(4) specifically provides 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 banks have been turning away clients who are PEPs, and their families, because of their status. HM Treasury has stated 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 issued a strong guideline that firms must not form judgments based solely on anyone’s status as a PEP.
It states:
‘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’.
Future Guidance
The Financial Conduct Authority is currently consulting on guidance on the treatment of PEPs, their family and their associates. Factors which are considered to be relevant to assessment of an individual’s risk as a PEP include:
- Their prominence in public life and level of influence within their organisation;
- Their ability to 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
- Relevant media coverage.
Under the new regulations, firms must continue to apply EDD for at least 12 months after the PEP ceases to perform a prominent function. However, they will not be obliged to apply EDD to the PEP’s family and business associates because they would no longer have the same connection to an influential person.
