Are your clients Policially Exposed Persons?

There is, as a matter of routine and almost without fail, regular suggestion in the press about corruption amongst persons who hold public office or who act in forms of public capacity, whether this include heads of state, politicians or even senior managers in charitable institutions. Why only this week I was reading.....

It is pretty obvious that one of a number of popular destinations for overseas PEPs is the UK where funds obtained by dubious means can be used for investments in property, school fees for children and all those many other things that are associated with a lavish way of living.

As a mortgage broker, you are now required to conduct enhanced due diligence on politically exposed persons (PEPs). Although technically, you are not covered by the FCA handbook on Money Laundering, there is an expectation and indeed in all truth an insistence that as a part of your systems and controls for mitigating the risk of financial crime, you will be  addressing this issue.

You should be  aware that the FCA appear to be  conducting some form of thematic review on anti money laundering  activity in small firms and that this is a part of the scope of that review. Lenders, who do have a specific obligation under the ML Handbook also have a significant interest in how you deal with this matter when introducing business to them.

Firstly, who is a PEP?

A PEP is someone who  within the previous 12 months has been entrusted by :-

• a state other than the UK
• a community institution, or
• an international body,

and who fulfils one of the following public roles:

• heads of state, heads of government, ministers and deputy or assistant ministers
• Members of Parliament
• members of supreme courts, or constitutional courts or of other high-level judicial bodies whose decisions are not generally subject to further appeal, except in exceptional circumstances
• members of courts of auditors or of the boards of central banks
• ambassadors, chargés d’affairs and high ranking officers in the armed forces
• members of the administrative, management or supervisory bodies of state-owned enterprises

PEPs will also include this person's family members and known close associates.

PLEASE NOTE THAT A UK MP IS NOT A POLITICALLY EXPOSED PERSON despite what you might think and their own credibility and public performances. If they are doing something wrong and it is illegal, then they are a criminal. If it is morally reprehensible then they are presumably something else. But they are not a PEP.

What do you need to do about PEPs?

Once you have established that you are dealing with a PEP, regardless of the size of your firm, you need to carry out the following:-

• have senior management approval for establishing a business relationship with a PEP
• take adequate measures to establish the source of wealth and source of funds which are involved in the business relationship or occasional transaction
• conduct enhanced ongoing monitoring of the business relationship

What does this mean in practice for a small firm?

Even if you are the only person in the firm, you should ensure that the client file indicates clearly that the person is a PEP and that the controller of the firm ( i.e. it may be  you) has authorised the transaction to proceed. There is no prescribed text but a date of action would also be  useful.

You should also make sure that you are absolutely clear about where funds are coming from and where income that is stated has been  derived. Third party evidence is good as long as it is valid and doesn't raise worries in its own right (e.g. a bank statement from a sanctioned country should raise alarms).

Where a PEP has been identified however, you should also be  undertaking a greater level of scrutiny. Looking around the internet for the individual may turn up some evidence as may a search on the web site of the organisation that has entrusted responsibility to the person.

There are also other plausibility approaches to take. Given that the issues around mortgages will normally relate to income and deposit money, these should be  interrogated fully.  A full audit trail on deposit monies should be  sought. Reviews for suspicious transactions should be made on bank statements and. if sound don't forget to SAR (Suspicious Activity Reports to the National Crime Agency (NCA)). Does the income of the individual support the lifestyle evident in the bank statements that you have available. Are there any other assets of concern in the background?

A check on the HM Treasury Sanctions List would be  mandatory in any case but I just state the obvious because it is not always so.

Finally on this point is the matter of proportionality and risk. if you are operating in a market that is home grown and local to you, where you know most of your clients and they either live within a stone's throw or they are past clients who have  moved away from the area, then the risk of exposure to PEPs is relatively low. However , it is never absent and you should always be on your guard against unusual or unexplained external contacts particularly introducers from outside of your normal area.

If on the other hand you work in a niche that involves persons of non-UK origin or deals with highly paid employees of non-UK businesses or foreign governments or NGOs for example, then the risk of exposure is greater and you need to make sure that you are on permanent and heightened alert.

So how to you spot a PEP?

Ok, so all seems most obvious so far but the bit that everyone seems to skirt around is how to spot a PEP?

There are a number of providers out in the marketplace that specify that they check various lists of PEPs although I am not sure how such lists are complied or who is accountable for them.

In my opinion, the easiest way to find out is to ask the applicants if they are PEPs. I don't necessarily think that it is of value to ask the question, Are you or anyone in your close family or associates, a Politically Exposed Person. It may simply provide a self fulfilling answer.

However, fact finding should be sufficiently robust to ask a number of questions such as:-

Do you, or anyone in your immediate family, hold any position with any of the following organisations (Such as a state other than the UK, a community institution, or an international body)?

If so, obtain Name and contact details on the entity.

What is the exact nature of your relationship with the entity above? 

Here you  should obtain in their own words the role that they carry out , their remuneration and contact point to obtain verification. If another member of the family is involved then obviously you need the nature of the applicants relationship with that person.

This information should be clearly evidenced on file together with a note from the firms controller to authorise  the transaction to proceed.

PLEASE NOTE: I use the term fact finding. I am aware that some fact finds provided by various systems do not include such questions but that is not relevant. What is relevant is that in your own fact finding  and know you customer KYC activity, you record that you have asked and that you have gathered any relevant details.