Politically exposed persons (PEPs) have been a big point of discussion in financial services throughout this year, with the
Financial Conduct Authority (FCA) finding in July that financial firms need to be doing more to ensure that PEPs and their family members were being treated fairly.
The regulator did not find any firms denying accounts to PEPs and most organisations were not putting PEPs through excessive or disproportionate checks. The investigation had been a response to the debanking scandal in 2023, when NatWest closed
Nigel Farage’s account.
Following their findings, the FCA opened a further consultation for proposed clarifications to the PEPs status which closed in October, the results of this have not yet been published.
So what is a politically exposed person? And how (and why) are they categorised by banks?
Who can be a PEP?
The Financial Action Taskforce on Money Laundering (FATF) laid out a definition of a PEP in 2013 as an individual who has been entrusted with a prominent function, and may hold positions which can be abused for the purposes of laundering illicit funds or
other offenses such as corruption or bribery.
Given this definition, PEPs are generally people who hold public office or prominent state positions such as heads of state, senior politicians, judicial or military officials, or important political party officials. FATF breaks this down into foreign PEPs,
domestic PEPs, international organisation PEPs, relatives of PEPs, and close associates of PEPs.
In the UK a similar definition was enshrined into law through The Money Laundering, Terrorist Financing and Transfer of Funds 2017. It stated a PEP is “an individual who is entrusted with prominent public functions, other than as a middle-ranking or more
junior official.” This can include a family member of a PEP or their legal partner, and known close associates.
Lexis Nexis also noted that there are non-governmental examples of PEPs, such as from central financial institutions, like board members of central
banks, or international sports committee members.
How do banks categorise a PEP?
It can be a challenge for financial institutions to correctly identify all PEPs, especially their associated family members. In recent years this has also been a point of contention when people think they have been unfairly categorised with this status,
or their treatment has been disproportionate.
Identifying a PEP will be part of any financial institution’s anti-money laundering (AML) and know your customer (KYC) procedures.
They might be identified by receiving funds from a government retainer account, communications might be on official letterhead, conversation with the client shows they are a PEP or related to one, and news reports suggesting they are a PEP or related to
one. Publicly available data can also be used to identify a PEP, such as Companies House and other government websites.
After that identified PEP is no longer holds the position, they may still be regarded as a PEP for up to 12 months or longer if there is still a risk to money laundering or terrorist financing.
Why do banks categorise PEPs?
PEPs bring a different risk vector to financial services, as defined by FATF, largely due to potential money laundering, bribery, or terrorist financing risks. Financial institutions are legally required in the UK to identify PEPs and their close associates,
and put them through enhanced customer due diligence.
In the UK, if a client is identified as a PEP or an associate of a PEP, you must have approval from a senior manager to continue the business relationship; establish the source of wealth and source of funds which are involved in the proposed business relationship
or transactions; and when a business relationship is entered into, conduct enhanced ongoing monitoring of the business relationship with that person.
What does the FCA recommend for PEPs?
Although the FCA’s findings didn’t identify any financial institutions being overzealous in this area, they said all the firms investigated needed to make improvements. These included:
- Ensuring a definition of a PEP or close associate is not wider than the regulations or FCA guidance;
- Improving systems to review PEP status after the person has left office or role;
- Communicate to PEPs effectively and in line with the Consumer Duty;
- Effectively consider the actual level of risk posed by the customer, and ensure that information requests are proportionate to those risks;
- Improve the training offered to staff who deal with PEPs;
- Some firms needed to update policies to reflect recent legislative amendments to treat UK PEPs and relations as having a lower level of risk than a foreign PEPs.