In December 2023, the UK government announced changes to the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (“MLRs”) in relation to the treatment of Politically Exposed Persons (“PEPs”) entrusted with prominent public functions in the UK (“domestic PEPs”). These changes came into force on 10 January 2024.
The update means that under the MLRs, when dealing with domestic PEPs (or a family member or known close associate of a domestic PEP) the starting point for banks and other regulated firms is to treat them as inherently lower risk than non-domestic PEPs. This means that firms must apply a lower level of enhanced due diligence (“EDD”) to domestic PEPs compared to non-domestic PEPs, unless other higher risk factors are present (i.e. risk factors other than the PEP status itself).
With this move, the government is encouraging regulated firms to take a more proportionate and risk-based approach to the treatment of domestic PEPs. This follows reports that a number of individuals that hold a prominent public position have encountered difficulties accessing financing services.
The new requirements largely mirror guidance previously published by the Financial Crime Authority (FCA) on the treatment of PEPs, but now enter into law for the first time. In parallel with this regulatory change, the FCA is undertaking a review of the treatment of domestic PEPs, with a report due to be issued in June.
However, the proposed changes have not been universally well received by industry experts, and have caused elements of confusion around how they should be implemented. For example, practitioners have questioned when enhanced measures will be applied and how higher risk factors will be identified, given the initial level of EDD is now low (i.e. how will firms know if there are any higher risk factors if they are not carrying out robust EDD?). The regulation is not prescriptive in this regard; and as such the onus is on firms to determine what “higher risk factors” may be and how they are to be determined by lower levels of EDD. This has raised the question of whether a firm that does not perform full EDD (per the regulations) and misses something will be deemed wilfully blind or reckless? Will it run the risk of regulatory blowback or prosecution? The upcoming FCA report may provide more clarity, given the speed with which the changes have entered into law, regulated institutions must use their own judgment in the meantime.
Commentators have also expressed concerns that the UK MLRs now do not align with the Financial Action Task Force (“FATF”) recommendations, specifically Recommendations 12 and 22 which require firms to implement measures to prevent the misuse of the financial system by PEPs, and Recommendation 10, which requires firms to take additional measures beyond performing normal customer due diligence on PEP customers.
Given the regulatory focus on this topic, FINTRAIL has designed a checklist of points to consider for PEP customers across the anti-financial crime framework.
Download the PEP Guidance Checklist
What areas does the checklist cover?
Governance
Policies and procedures
Financial crime risk assessment
Customer risk assessment
Customer due diligence and enhanced due diligence
Ongoing monitoring (including screening)
Transaction monitoring and suspicious activity reporting
Awareness and training
Assurance