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Financial Institutions Must Ensure Adequate Controls to Mitigate ML/TF Risks when Dealing with Politically Exposed Persons (PEPs)

In an effort to prevent the misuse of financial institutions by corrupt officials and individuals, the Financial Action Task Force (FATF) has issued guidelines requiring financial institutions and designated non-financial businesses and professions (DNFBPs) to implement robust controls to mitigate money laundering (ML) and terrorist financing (TF) risks when dealing with Politically Exposed Persons (PEPs).

Assessing Risk

According to Recommendation 12, financial institutions and DNFBPs must assess the risk of a business relationship with a PEP based on the data collected during customer due diligence. If the assessment indicates that the relationship poses a higher risk, the institution or DNFBP must apply enhanced due diligence measures, including obtaining additional information about the PEP’s business relationships, sources of wealth and income, and other factors.

Factors to Consider

The guidelines also emphasize that financial institutions and DNFBPs must assess the risk of each customer on a case-by-case basis, taking into account various factors such as:

• The PEP’s level of seniority
• Access to public funds
• The nature of their position

If the assessment suggests that the business relationship poses a normal or low risk, the institution or DNFBP is not required to apply enhanced due diligence measures.

Jurisdiction-Specific Considerations

However, in some jurisdictions, certain business relationships with domestic/international organization PEPs may pose an equally high risk as those with foreign PEPs. Therefore, financial institutions and DNFBPs must undertake their own assessment of risks and communicate the appropriate guidance to each other.

Key Takeaways

• Financial institutions and DNFBPs must assess the risk of a business relationship with a PEP based on data collected during customer due diligence.
• If the assessment indicates that the relationship poses a higher risk, financial institutions and DNFBPs must apply enhanced due diligence measures.
• The risk assessment should take into account various factors such as the PEP’s level of seniority, access to public funds, and the nature of their position.
• In some jurisdictions, certain business relationships with domestic/international organization PEPs may pose an equally high risk as those with foreign PEPs.

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