A broad definition
Politically Exposed Persons ("PEPs") are a category of clients that is inherently risky because of their exposure to corruption and their capacity to gain illicit patrimonial benefits from abuse of power. Article 41 of the Belgian AML laws requires the application of enhanced due diligence measures when establishing or maintaining business relationships with PEPs, their family members (including parents and the partners of their children) or persons known to be close associates.
The list of public functions is open-ended, with some examples provided in article 4-28° of the law. Traditionally, heads of state and government, ministers, high ranking judges, management of state-owned companies should be labelled as PEP. But not only. Public officials at local level (e.g. Mayors of important cities, influential members of significant inter-municipal associations) as well as their family members would probably qualify as well. This means that the number of PEPs in Belgium and abroad is important and requires a specific attention for financial institutions and other professionals who are in scope of the AML law (lawyers, accountants, crowdfunding platforms, etc.).
Enhanced Due Diligence
The identification and verification of the status of PEPs should take place at the start of a new business relationship or when performing occasional transactions. This is also a permanent obligation as part of the on-going due diligence requirement. This means that regularly, a check should be done to identify whether any existing client has become a PEP, which will influence the type of monitoring that should take place over their activities. This can be made for instance by comparing their data with reliable sources of information and by using their pre-contractual forms for requesting the execution of a transaction or the establishment of a business relationship.
Once identified as PEP, additional (cumulative) measures should be taken:
- Obtain senior management approval for establishing or continuing business relationships with PEPs (or carrying out an occasional transaction on behalf of a PEP);
- Take adequate measures to establish the source of the wealth and of the funds that are involved in the business relationship or transaction with such persons;
- Subject the business relationship to enhanced scrutiny.
Although all three measures are mandatory and deemed as a minimum, the intensity of the scrutiny to apply can be proportionate to the risk level allocated as part of the assessment performed at individual level - in line with the risk-based approach principle.
In practice, there has been numerous discussions about how to design such a risk-based approach for a category of clients that is inherently risky. It is admitted that enhanced due diligence does not mean that the individual risk level of a client should systematically remain high. Allocating the AML-related resources adequately is also part of sound risk management practices; therefore a distinction could be made between high and medium risk PEPs. For instance, the parents of a member of the Belgian Senate, who live in Belgium and are benefiting from standard retail banking services should receive a different scrutiny than a member of government of a high risk country, who is the UBO of a legal entity that is requesting wealth management and/or tax optimization services.
On August 21, the US banking agencies (e.g. Federal Reserve, FinCEN) have issued a joint statement that clarifies how to apply a risk-based approach to PEPs consistent with the (US) customer due diligence requirements. The statement indicates that the level of risk associated with PEPs varies and that not all PEPs are automatically higher risk. PEPs with a limited transaction volume, a low-amount deposit account with the bank, known legitimate source(s) of funds, or access only to products or services that are subject to specific terms and payment schedules could reasonably be characterized as having lower customer risk profiles. Therefore, a tailored approach about CDD steps to be taken can vary between PEPs, based on the individual risk assessment performed.
Although not of European source, the principles indicated in the statement can guide Compliance professionals in their design of AML programs because of the respected approach of US regulators in that domain. The full version of the statement can be found here.