Recently updated guidelines on Politically Exposed Persons (PEPs) strike a careful balance between managing financial crime risk and maintaining good client relationships.
The Financial Action Task Force (FATF) defines PEPs as those who have been entrusted with a prominent public function, such as heads of state, senior politicians or senior government officials.
According to the UK’s Financial Conduct Authority (FCA), PEPs are individuals whose prominent position in public life may make them vulnerable to corruption the definition extends to immediate family members and known close associates.
It is important however that FIs take a proportionate view of the risks that individual PEPs actually pose. The majority of PEPs do not represent additional risk. However, FIs should adopt a risk based approach (RBA) to gauge whether additional due diligence measures are required or not.
In May 2017, the Wolfsberg Group published updated PEP guidelines, closely followed by the UK’s FCA releasing updated guidance in July.
Comprising 13 global banks, the Wolfsberg Group was formed in Switzerland in 2000 and provides guidance for financial institutions (FIs) as they implement appropriate measures to manage financial crime.
The latest guidance, which updates recommendations made in 2003 and 2008, is aimed at helping FIs to manage potential threats linked to PEPs..
Watch: PEP sub-classification an advanced feature from Thomson Reuters World-Check
Once a PEP, always a PEP?
The Wolfsberg guidance highlights that there are minimum data quality standards required for effective PEP screening.
Some of the points that the Wolfsberg Group considers as essential to the appropriate management of PEP risk include:
- The definition of a PEP should focus on those in senior, prominent political positions, who have substantial authority
- The definition of a PEP should not include those who may exert considerable influence and are politically connected, but do not hold public office
- Not all foreign PEPs should be defined as higher risk
- Relatives and close associates should not always be treated as PEPs themselves
- The principle of ‘once a PEP, always a PEP’ is not in line with the risk-based approach.
Some pertinent points within the FCA guidance include:
- Firms should take appropriate, proportionate measures and must apply a risk sensitive approach to identifying PEPs and then apply enhanced due diligence measures.
- Firms should only treat those in the UK who hold prominent positions as PEPs.
- Even where a UK customer does meet the PEP definition, a firm is required to recognize if that customer presents lower risk and then consult the guidance on appropriate action in lower risk situations.
- On the other hand, if a customer is identified as posing a higher risk, then firms must apply more stringent measures.
Staying ahead of the pack
Identifying PEPs and managing any potential risk they may pose is not always a straightforward task.
At Thomson Reuters our global expertise and capabilities help organizations to know who their customers are.
Given the recent attention to PEP s from both the Wolfsberg Group and the FCA, this is clearly an area that FIs cannot afford to ignore. When applying a risk based approach to KYC compliance, it is important that informed decisions are made and therefore access to high quality data becomes paramount.
Watch: Thomson Reuters – Do you really know your customer?