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Politically Exposed Persons and High-Risk Business Relationships: Enhanced Due Diligence Measures

As part of Pakistan’s efforts to combat money laundering and terror financing, financial institutions are required to implement enhanced due diligence measures when dealing with high-risk business relationships, particularly those involving Politically Exposed Persons (PEPs) and Non-Profit Organizations (NPOs).

Definition of PEPs

PEPs are defined as heads of state, ministers, influential public officials, judges, military commanders, and their family members and close associates. These individuals may pose a significant reputational and legal risk to financial institutions due to their positions of power and influence.

Enhanced Due Diligence Measures for High-Risk Business Relationships

Financial institutions are required to apply enhanced due diligence measures when dealing with high-risk business relationships, including:

  • Obtaining additional information on customers, such as:
    • Occupation
    • Intended nature of business
    • Volume of assets
    • Information available through public databases
  • Updating more regularly the identification data of applicants/customers and beneficial owners
  • Obtaining additional information on the intended nature of the business relationship, source of funds or source of wealth, and reasons for intended or performed transactions
  • Obtaining senior management approval to commence or continue the business relationship

Source of Funds and Source of Wealth

Financial institutions must establish that a transaction is within the financial means of the customer by obtaining information on:

  • The volume of wealth they are reasonably expected to have
  • How it was acquired
  • Verifying the source of funds, net worth, and overall financial situation of customers, including high-net-worth individuals (HNWIs) and PEPs

Special Cases: Politically Exposed Persons

PEPs pose a unique risk due to their positions of power and influence. Financial institutions must be vigilant when dealing with PEPs and their associates, taking into account factors such as:

  • The customer’s public functions and business interests that may cause conflict of interest
  • Publicly available information about the customer’s financial behavior
  • The customer’s association with complex legal structures or countries with restrictions on asset ownership

Red Flags for PEPs

Financial institutions should be aware of the following red flags when dealing with PEPs:

  • Inconsistencies between provided information and publicly available data
  • Family members without financial means transacting with the institution
  • Complex legal structures or frequent transactions involving multiple countries
  • Unusual bank account activities

Ongoing Monitoring

Financial institutions must conduct ongoing monitoring of business relationships involving PEPs, including:

  • Regular reviews of transaction activity
  • Updates to customer information

Non-Profit Organizations

NPOs are classified as a high-risk sector for terror financing due to their potential misuse by terrorist organizations. Financial institutions must apply enhanced due diligence measures when dealing with NPOs, including verifying the organization’s purpose, structure, and activities.

By implementing these enhanced due diligence measures, financial institutions can help prevent money laundering and terror financing while maintaining a robust and effective risk management framework.