July 2023 Foodman Website
Financial Institutions Instituciones Financieras

Financial Institutions are required to have processes in place for identifying Politically Exposed Persons – known as “PEPs” within their customer base.  PEPs are individuals perceived as more vulnerable to corruption and bribery involvement due to a current or past governmental position of influence.  Financial Institutions include the immediate family and close associates in the PEP definition and require additional background checks covering those individuals.  A PEP relationship can arise out of an existing Banking relationship or identified as a new Relationship when a relationship is established at a Financial Institution.

The Financial Action Task Force (FATF) states that PEPs can at times be in a position that could lend itself to “abuse” for committing money laundering offences, including corruption, bribery, and activity related to terrorist financing.  As a result, Financial Institutions are expected to apply extra precautionary steps in identifying and managing their PEP relationships.

The FATF provides guidance when determining PEP categories

The FATF, a global money laundering and terrorist financing watchdog, provides PEP definitions that work in tandem with Article 52 of the  UNITED NATIONS CONVENTION AGAINST CORRUPTION (same meaning as the term persons with prominent public functions).   The definitions of the PEPs categories are:

  • Foreign PEP: an individual who is or has been entrusted with prominent public function by a foreign country (Heads of State, senior politicians, senior government, judicial or military officials, senior executives of state-owned corporations, important political party officials).
  • Domestic PEP: an individual who is or has been entrusted domestically with prominent public function (Heads of State, senior politicians, senior government, judicial or military officials, senior executives of state-owned corporations, important political party officials).
  • International Organization : a person who is or has been entrusted with a prominent function by an International Organization such as a member of senior management or  an individual who has entrusted with an  equivalent function (directors, deputy directors and members of the board or equivalent functions).
  • Family member: an individual who is related to a PEP directly (through marriage or similar form of partnership).
  • Close associate: an individual who is closely connected to a PEP (socially or professionally).

FinCEN’s position on PEPs is that they are subject to BSA/AML Requirements

FinCEN states that “like all bank accounts, those held by PEPs are subject to BSA/AML regulatory requirements.  These include requirements related to suspicious activity reporting, customer identification, CDD, and beneficial ownership. Banks must apply a risk-based approach to CDD in developing the risk profiles of their customers, including PEPs, and are required to establish and maintain written procedures reasonably designed to identify and verify beneficial owners of legal entity customers.  More specifically, banks must adopt appropriate risk-based procedures for conducting CDD that, among other things, enable banks to:

  • understand the nature and purpose of customer relationships for the purpose of developing a customer risk profile,
  • conduct ongoing monitoring to identify and report suspicious transactions and, on a risk basis, to maintain and update customer information”.

New or Existing PEP Relationships are required to be understood and documented

Once a Financial Institution determines that an existing relationship or a new relationship is a PEP, the Financial Institution undertakes a “risk assessment” process to determine the level of financial crime risk and applies the appropriate levels of due diligence and monitoring.  The Financial Institution ought to take into consideration the geography, product offering, business type and delivery channel.

Financial Institutions need to Understand and Document:

  • The time, the title or position and country in which the PEP holds, or held, and political exposure.
  • The nature and intended purpose of the relationship.
  • The source of the initial funds.
  • The anticipated levels of account activity.
  • The source of funds and source of wealth (salary and compensation from official duties and wealth derived from other sources).
  • The information provided by the customer against independent and reliable sources.
  • A dormant account that becomes “active” again.

A robust Corporate Governance Compliance Program includes PEP Management

The senior management of a Financial Institution ought to be engaged in the approval process of PEP relationships.  It is also their responsibility to ensure that there is adequate and sufficient training and education for employees and managers involved in the PEP process.

While Corporate Governance entails preventing and detecting financial crimes through its risk policies, procedures and processes associated with a PEP,  Financial Institutions ought to understand that a PEP is not necessarily synonymous with “criminal activity”.   Not allowing PEP relationships in a Financial Institution or asking to close out relationships could be viewed as a lack of understanding and implementation of a risk assessment process within a Financial Institution.

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