If your company is covered by the UK’s Money Laundering Regulations and is about to enter into a transaction with a customer, you are legally required to first undertake ‘due diligence’ measures to determine whether this individual is who they claim to be.

These checks include screening a customer for any sign that they are a Politically Exposed Person (PEP). This term is used around the world, where it generally means an individual holding a politically influential role. So, what should UK businesses technically class as a PEP?

The Law Society defines a PEP as “someone who has been appointed by a community institution, an international body or a state (including the UK) to a high-profile position within the last 12 months.”

However, under the UK’s Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (MLR 2017), what counts as a PEP can be even broader than this definition.

As a business, you need to tread carefully when considering either accepting a PEP as a customer or striking a corporate partnership with a PEP. 

This is because, compared to other potential customers or business partners, a Politically Exposed Person poses a higher risk of laundering money amassed through bribery or corruption.

How has the meaning of a PEP evolved?

The creation of the term ‘Politically Exposed Person’ can be traced back to the late 1990s, following reports of the participation of the former Nigerian dictator Sani Abacha in money laundering, global initiatives were spurred to combat this illicit activity.

The MLR 2017 provides a comprehensive rundown of what can be deemed ‘high-profile’ positions. Here are just selected examples of people who, under UK law, can be considered PEPs: 

• Heads of state
• Heads of government 
• Ministers
• Members of parliament (MPs)
• Ambassadors
• High-ranking officers in the armed forces 

 

Attempts to identify PEPs can doubtless be fraught with complexity — not least as PEPs can include not only all of the above but also their family members and close business associates.

Of course, if you embark on a business relationship with a client where both parties expect the relationship to be ongoing, the client may not initially be a PEP but become one further down the line — and increase their risk profile as a result. 

Here are a few potential indicators that an individual is a PEP: 

• The individual using an official letterhead in correspondence with you
• News reports implying that the individual is either a PEP or linked to one 
• The individual providing you with information suggesting that they are a PEP 

 

In your efforts to confirm or rule out that a current or potential client is a PEP, you should draw upon information reasonably available to your business — such as: 

• Parliament and government websites 
• The Companies House register of companies 
• Commercial databases 

 

You can, however, streamline a Politically Exposed Person check by taking advantage of our electronic AML (anti-money laundering) verification system, which would let you verify the client’s identity in an instant.

Why you must know how to identify a PEP

Entering a business relationship with a PEP would call for you to enact enhanced due diligence measures. Here are several steps you would need to take under MLR 2017’s regulation 35: 

• Ask senior management to approve the relationship 
• Take adequate measures to ascertain the source of funds the relationship would involve
• Carry out enhanced ongoing monitoring of the relationship once it has begun 

 

You should also carefully consider whether the client should be classed as ‘lower’ or ‘higher’ risk lest you apply a disproportionate or ineffective level of enhanced due diligence. You may have a lower-risk PEP on your hands if you establish that: 

• The client sources their funds through conventional means 
• PEPs will rarely carry out transactions between you and the client 

 

Conversely, you may need to ask the client more questions if:

• The PEP was appointed by one of the ‘high-risk’ jurisdictions listed in MLR 2017’s Schedule 3ZA
• The PEP is looking to transfer a significant amount of money to your business
• The funding for the transaction is from an unusual source 

 

All in all, you should ask the PEP as many questions as you deem necessary to judge whether or not the individual should be suspected of money laundering.

You must remember that failing to conduct a PEP check when legally necessary can see the business hit with a financial penalty and negative publicity even if no money laundering is known to have taken place. Such circumstances saw UK bank Barclays fined about £72 million in 2015.

 

To learn how to speedily complete a Politically Exposed Person check using Creditserve’s electronic AML verification system, please reach out to our team by phoning 01992 414222 or emailing sales@creditserve.co.uk.