Undertaking due diligence for relatives of PEPs

Guest post by Barry Faudemer, chief executive of Baker Regulatory Services

Faudemer: Take a step back and ask, does it all make sense?

Picture the scene: at breakfast you open the daily news to discover the name of your firm (and your name in particular) headlined and linked to a grand corruption scandal involving your client, the son of a politically exposed person (PEP) in a jurisdiction prone to corruption.

The day gets worse with the arrival of the National Crime Agency at your offices seeking to access your records in connection with the case.

So, what should officers expect to find in your files if you have been complying with the requirements of the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017?

You must be in a position to demonstrate that, at the outset of the business relationship, the firm identified the client as a close relative of a PEP and, in accordance with regulation 33, applied enhanced due diligence (EDD).

Deciding if the client is a PEP or close relative and falls within the regulations can be challenging, but they do list the following roles as PEP positions:

  • Heads of state, heads of government, ministers and deputy or assistant ministers;
  • Members of parliament or of similar legislative bodies;
  • Members of the governing bodies of political parties;
  • Members of supreme courts, constitutional courts or of any judicial body the decisions of which are not subject to further appeal except in exceptional circumstances;
  • Members of courts of auditors or of the boards of central banks;
  • Ambassadors, charges d’affaires and high-ranking officers in the armed forces;
  • Members of the administrative, management or supervisory bodies of state-owned enterprises; and
  • Directors, deputy directors and members of the board or equivalent function of an international organisation.

The regulations also state that certain family members or close associates of a PEP should be subject to the same level of scrutiny as the PEP:

  • Family members of a PEP – spouse, civil partner, children, their spouses or partners, and parents.
  • Known close associates of a PEP – persons with whom joint beneficial ownership of a legal entity or legal arrangement is held, with whom there are close business relationships, or who is a sole beneficial owner of a legal entity or arrangement set up by the primary PEP.

In our experience, the lists of what constitutes a PEP, family member or close associate under the regulations do not go far enough given the volume of corruption cases involving individuals that fall outside the current definitions.

In addition, the UK approach of only requiring businesses to regard a PEP as such for 12 months after they leave office needs a review. Such individuals, in our view, can continue to pose a considerable money laundering risk for several years given their circle of influence.

The regulations set out that EDD measures must include, as a minimum, examining the background and purpose of the transaction and increasing the monitoring of the business relationship.

Regulation 33(1) sets out a list of circumstances in which EDD measures must be applied, including any transaction or business relationship involving a person established in a ‘high risk third country’ or a PEP, family member or known associate of a PEP, or any other situation that presents a higher risk of money laundering or terrorist financing.

So, what does that mean in practice? In the context of the above example, this means establishing the identity of the client and assessing if they are a PEP, family member or close associate, conducting a risk assessment, asking the client to evidence source of funds and obtaining source of wealth information and researching the information to assess if it is accurate.

It is important to maintain meticulous records of your risk assessment and the research undertaken. Any reluctance by the client to provide information should be factored into your assessment.

Additionally, you should remain vigilant to receiving funds from a government account or trust structure linked to the PEP, or simply receiving correspondence on official letterhead from the client or a related person.

Checking news reports, collating information linking the client to any allegations of corruption and retaining records of the actions you have taken to satisfy yourself that you are not receiving dirty money.

With all the information at your disposal, it is best to then step back and ask the question: does it all make sense and have I complied with my own take on procedures and the full requirements of the regulations?

Most of all, avoid the pitfalls of being blinded by the potential fee or being hesitant to seek out your money laundering reporting or compliance officer, and discuss the client prior to take on.

Any fee, no matter how large, is usually dwarfed by the reputational damage incurred from being embroiled in a large-scale corruption and money laundering scandal.

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