Insight
In a continuation to the 2017 final guidance from the Financial Conduct Authority (FCA) on Politically Exposed Persons (PEPs) the UK Money Laundering Regulations (MLRs) are to be amended under The Money Laundering and Terrorist Financing (Amendment) Regulations 2023. These Regulations came into force on 10th January 2024.
This amendment has direct relevance to any firm’s assessment of applicants for an account (potential customers) and for the ongoing monitoring of customers.
Where a customer or applicant is a domestic PEP, or a family member or a known close associate of a domestic PEP the starting point for any assessment is that such “business relationships” may present a lower level of risk than a non-domestic PEP unless there are other “enhanced risk factors” involved.
The extent of enhanced customer due diligence (EDD) measures to be applied in relation to such a customer or potential customer is less than the extent to be applied in the case of a non-domestic PEP.
It is key that firms understand the inherent differences between PEPs. A “domestic PEP” means a PEP entrusted with prominent public functions by the United Kingdom whilst a “non-domestic PEP” means a foreign based PEP.
Enhanced risk factors mean risk factors other than the customer’s position as a domestic PEP, or as a family member or a known close associate of that domestic PEP. This includes transaction monitoring concerns or common risk factors aligned to joint money laundering steering group (JMLSG) guidance.
Both the FCA and the MLRs expect that firms take appropriate but proportionate and risk sensitive measures in meeting their financial crime obligations including when applying EDD measures.
It remains important that firms do not “de-risk” and decline or close a business relationship with a person merely because that person meets the definition of a PEP.
Firms should train staff on what amounts to “less intrusive and less exhaustive EDD measures” to allow a firm to satisfy itself that it does not handle the proceeds from corruption or other criminal activity. The lesson here is that EDD must be applied on a risk sensitive basis.
Following the well-publicised incident in June 2023 between Coutts and Nigel Farage it is clear that there has been concerns around the interpretation of mandatory EDD measures.
As per comments made by the Economic Secretary (HM Treasury) on 14 Dec 2023: “While the new requirements have featured for some time in FCA guidance on the treatment of PEPs, legitimate concerns continue to be raised that a number of holders of prominent public positions have encountered problems accessing financial services due to their status as Politically Exposed Persons under the Regulations, as have their family members. Often, this takes the form of potentially disproportionate or overly frequent requests for information about personal financial matters and affects both PEPs themselves and family members or close associates”.
All PEPs are naturally higher risk but with the tiered nature of PEPs now being codified, domestic PEPs (or a family member or known close associate) must be treated in a proportionate and risk sensitive manner. A key aspect here is around what constitutes “adequate measures to establish the source of wealth and source of funds”.
Following the MLRs, firms should take a proportional, risk-based and differentiated approach to conducting transactions or business relationships with PEPs, depending on where they are assessed on the scale of risk.
Firms must review their framework approaches now to ensure they are equipped to handle the differences in the treatment of PEPs. This will entail;
DCM has a dedicated advisory division led by a taskforce of skilled practitioners and MLROs. If you need support to comply with the latest FCA regulations, please contact our specialist team at info@dcmoperations.com or call us on +44 20 3882 9626.
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