ECSH33316 - Politically Exposed Persons

A politically exposed person (PEP) is defined in regulation 35(12) of the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (MLR 2017) as an individual who is entrusted with prominent public functions, excluding middle-ranking or more junior officials.  

Prominent public functions are listed in regulation 35(14) include: 

(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 any judicial body 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, charges 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.  

 

Enhanced due diligence measures

Businesses are required to apply enhance due diligence (EDD) when dealing with PEPs, and also when dealing with their family members or known close associates. This is because their position and potential influence often present a greater risk for involvement in such crimes as corruption and bribery. 

A family member of a PEP includes: 

  • a spouse or civil partner of the PEP 
  • children of the PEP and the spouses or civil partners of the PEP’s children  
  • parents of the PEP.

A “known close associate” of a PEP is: 

  • An individual known to have joint beneficial ownership of a legal entity or a legal arrangement or any other close business relations with a PEP, for example, a PEP’s business partner.
  • An individual who has sole beneficial ownership of a legal entity or a legal arrangement which is known to have been set up for the benefit of a PEP, for example, the trustee of a trust of which the PEP is a beneficiary.

 

MLR changes on 10 January 2024

Amendments to the MLR 2017 on 10 January 2024, made changes to the treatment of PEPs. PEPs who are entrusted with prominent public functions by the UK are now known as domestic PEPs whilst PEPs who are not domestic PEPs are known as non-domestic PEPs. Prior to this date there was no distinction between domestic and non-domestic PEPs.

Both domestic PEPs and non-domestic PEPs are subject to EDD measures.

Where a business has identified that a customer or a potential customer is a PEP and/or a family member or known close associate of a PEP, the business must assess the level of risk associated with that customer, and as a result of the assessment, the extent  of the EDD measures that need to be applied.


Domestic PEPs

From the 10 January 2024, the starting point for the risk assessment where a customer or potential customer is a domestic PEP, or for their family members and known close associates is that they present a lower level of risk than a non-domestic PEP.  Where no enhanced risk factors are present, the level of EDD measures to be applied will be less than the measures to be applied than for non-domestic PEPs.

There are additional EDD requirements other than those set out in regulation 33 MLR 2017, where a business enters or proposes to enter a business relationship with a PEP, or their family members and known close associates. The business must:

  • have approval from senior management for establishing or continuing the business relationship with that person;
  • take adequate measures to establish the source of wealth and source of funds to the proposed business relationship or transactions with that person; and
  • where the business relationship is entered into, conduct enhanced ongoing monitoring of the business relationship with that person.

 

Groups and Subsidiaries

Regulation 20 MLR 2017 require that group companies must ensure that the policies, procedures and controls referred to in regulations 19(1) and 19(A) MLR 2017, apply to all its subsidiary undertakings, including subsidiary undertakings located outside the UK and any branches it has established outside the UK. It must also ensure that those subsidiary undertakings and branches apply measures equivalent to those required by the MLR 2017, as far as permitted under the law of the third country. As such, it is expected that UK PEPs are treated as lower risk across a group unless that is not permitted by the local law in that jurisdiction.

 

PEPs who have left office

The obligation to apply EDD measures to PEPs continues for 12 months after they have left office, or for such longer period as the business considers appropriate, in order to address risks of money laundering/terrorist financing in relation to that person. 

For family members and known close associates of a PEP, the obligation to apply EDD measures ceases immediately as soon as the PEP has left their office.