What is a politically exposed person?
The politically exposed person regime is an enhanced due diligence measure designed to tackle corruption and financial crime.
A politically exposed person is “an individual who is entrusted with prominent public functions, other than as a middle-ranking or more junior official”.
It includes senior politicians such as all United Kingdom ministers and MPs. It also includes others with a prominent public function such as ambassadors and supreme court judges.
Foreign and international officials also qualify as politically exposed people (PEP). The PEP regime as it is known includes Domestic PEP and Foreign PEP. A PEP list contains details of confirmed politically exposed people but it is unlikely to be exhaustive.
Precisely determining who is, and who is not, a politically exposed person can be a tricky business, and the intergovernmental Financial Action Task Force regularly issues fresh guidance.
The Financial Action Task Force also highlights the risk from close family members and associates.
UK rules defines a close family member as those closely related to politically exposed people, such as by marriage (or similar forms of civil union), or through being their parent or child.
The Financial Conduct Authority guidance says siblings also pose a risk, and that they should be included, alongside wider family such as aunts and uncles.
Close associates of politically exposed people are also considered a risk. These include professional connections (such as a business partners) or social connections such as a long standing friend).
Once a politically exposed person, always a politically exposed person?
There’s no set universal time frame defining how long a person remains politically exposed. The most high-risk individuals maintain the status for life.
The majority of countries specify that, in most cases, politically exposed person status should expire 12 to 18 months after a person leaves office. In the UK the status expiration period is currently 12 months.
What is special about a politically exposed person?
The UK and other legal systems recognise the risk of politically exposed people using their positions for private gain. There is also the potential for them to use the financial system fito launder the profits of such abuses.
The UK’s Money Laundering Regulations oblige regulated firms to observe enhanced scrutiny checks when offering services to politically exposed persons, along with their close family and associates.
How do you check for politically exposed people?
A financial institution or other regulated firm is required to have the “appropriate risk-management systems and procedures” in place to identify the risk from politically exposed people. This includes situations in which an agent (e.g. a solicitor) is acting on their behalf, or where there is a lack of clarity of the beneficial owner of a legal entity.
These firms must perform enhanced screening checks on politically exposed people, and their close family and associates, before they can offer them their services.
Before entering into a business relationship, they must have procedures in place to identify the customer risk of these individuals and the higher risk they pose.
How is the regime is enforced?
Firms that do not follow the appropriate checks in relation to politically exposed people are subject to criminal and regulatory sanctions. The regime is overseen by the Financial Conduct Authority.
If firms suspect financial crime or that a money laundering offence is taking place, the matter must be either be referred to senior management or the relevant senior executive responsible for reporting it, or passed direct to the National Crime Agency.
In 2019 Barclays received a record £72 million fine for failing to conduct appropriate politically exposed people checks.
For the most extreme breaches of customer due diligence requirements for Politically Exposed Persons, people can face up to two years in prison. There are also offences for prejudicing probes and declaring false or misleading information.
Criticisms of the PEP regime
The Treasury Select Committee has criticised the current system for not being centralised or defined enough in its approach.
In March 2019, the Committee described the politically exposed person regime as “an important part of the system for preventing money laundering”.
However through its evidence gathering, the committee said, “We have heard that defining a politically exposed person remains difficult for financial institutions, both large and small. While commercial solutions are available, they may be beyond the resources of very small companies. We recommend that the government creates a centralised database of PEPs for the use of those registered by AML [anti money laundering] supervisors.”
Many politicians themselves have complained about the current system, arguing that it requires excessive checks being done on themselves and or a close associate.
The Financial Ombudsman Service considers complaints from Politically Exposed People, family members or close associates, and may issue compensation if it has been found that they have been unfairly treated.
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