In July of this year, the FCA launched a review of how regulated firms treat domestic PEPs. The review assessed how firms conduct proportionate and risk-based due diligence on their clients in accordance with anti-money laundering legislation and its guidance. The review was a requirement of the Financial Services & Markets Act 2023 (FSMA 2023).
Following the review, the FCA published a guidance consultation (GC24/4) regarding the treatment of politically exposed persons (PEPs). This guidance consultation is to amend the finalised guidance FG17/6.
The FCA concluded that the 2017 guidance remains appropriate and that no significant changes are required. However, it identified room for improvement in the way in which firms are putting the guidance into practice.
As a reminder, the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (the Regulations) set out requirements that those firms subject to the legislation like banks, lenders, and advisory firms need to follow. This includes applying ‘enhanced customer due diligence’ (EDD) when a client is a PEP: defined as someone holding a prominent public position entrusted with prominent public functions either in the UK or elsewhere in the world. The Regulations extend to close family members or known close associates of a PEP.
The FCA expects firms to take appropriate but proportionate measures in applying their obligations to prevent financial crime
The Regulations derive from standards set by the Financial Action Task Force (FATF). Financial firms are required to do extra checks on political figures, their families and close associates. The reason for these global standards is the increased risk that PEPs, and those connected to them, may be targeted for bribery and corruption, with the financial system used to launder the associated proceeds.
However, under both the law and in the FCA’s expectations, domestic PEPs, their family members and close associates should be treated as lower risk, unless there is a reason otherwise. As FATF says ‘these requirements are preventive (not criminal) in nature and should not be interpreted as stigmatising PEPs as such being involved in criminal activity’
The FCA expects firms to take appropriate but proportionate measures in applying their obligations to prevent financial crime. EDD should consider the source of the wealth or source of funds associated with the transaction rather than solely the status of the individual client.
Firms should assess the risk posed by an individual PEP rather than applying a generic policy to all PEPs, and this approach will be in accordance with the Regulations and Guidance. This is no different to firms considering the risk that any client poses to the firm by reference to the KYC collected and the nature of the business relationship. In addition, domestic PEPs, i.e. those within the UK may be treated as lower risk than PEPs from third countries, unless other risk factors that are unrelated to their PEP status apply.
Firms must record and retain the evidence they use to assess the risk posed by a PEP and how they arrived at that assessment. The guidance also provides that lower levels of EDD can be taken for PEPs who are from another country assessed as having a similarly transparent anti-corruption regime as the UK. The key, as stated above, is the source of wealth and source of funds in addition to the business relationship with the client.
If you are unsure how to apply EDD to an individual client, the FCA’s Financial Crime Guide (FCG) contains updated guidance. The Guidance applies to all FCA authorised and regulated firms and to those firms registered with the FCA as Annex I financial institutions.
The FCA considers that there are four areas within the Guidance in which it can make changes. The following is in the guidance consultation:
- Non-executive board members (NEBMs) of civil service departments
Non-executives are appointed to government departments from the public, private and voluntary sectors. Their role is to provide advice and bring an external perspective. As such these NEBMs do not have any executive authority. During the review the FCA was made aware that some firms might be treating NEBMs as a PEP. It proposes to clarify in the Guidance that these are not roles, in the UK context, a firm should be treating as a PEP.
- Sign off for PEP relationships
The Regulations require that all PEP relationships are signed off by Senior Management. The Regulations require that the FCA Guidance should interpret, for the financial sector, which appropriate functions should be considered as Senior Management. The Guidance sets the expectation all PEP relationships to be signed off at a minimum by the MLRO with higher risk relationships potentially being signed off at higher level. Feedback from the industry is that this part of the Guidance causes concerns about the MLRO’s independence.
The FCA proposes to amend the Guidance to allow for alternative approaches provided the MLRO continues to have oversight of all PEP relationships within the firm.
- Reflecting changes to the Regulations
The Guidance provides that firms should treat domestic PEPs as lower risk unless there are other risk factors apparent that are unrelated to their PEP status. In January 2024, the Government updated the Regulations to require that the starting point for a firm’s risk assessment is that domestic PEPs are lower risk than foreign PEPs. The FCA proposes to make targeted amendments to reflect this legislative change within its Guidance.
- Minor additional changes
The FCA has also taken the opportunity to review its Guidance. As a result of this review, it proposes a small number of minor and mostly non-substantive changes to the Guidance. This includes removing outdated references to EU Guidance that no longer applies in UK law.
The FCA has requested comments by 18th October 2024 using the online response form within this link.
In the light of the above, you may want to revisit your internal AML guidelines and how you apply EDD to all clients, and PEPs in particular.
