Politically exposed person (PEP): AML regulation and KYC

21 September 2022

AML, Private Clients

How are politically exposed persons defined and regulated?

According to the Financial Action Task Force (FATF), a politically exposed person (PEP) is an individual who is or has been entrusted with a prominent political function. FATF Recommendations 12 and 22 gives guidance on the effective implementation of further measures for foreign, domestic and international PEPs, their family members, and close associates.

In addition, Directive (EU) 2015/849 of the European Parliament and of the Council of 20 May 2015 (4th AMLD) implements the FATF guidance and provides a more comprehensive definition of PEPs, which is mandatory for all member states of the EU. In Articles 20 and 21 of the 4th AMLD, the EU sets out the compulsory measures of customer due diligence when an obligated entity encounters a client who falls under the definition for PEP.

The Bulgarian PMLA defines PEP in s. 36 and closely follows the guidance outlined by the 4th AMLD.

 The United Nations Convention against Corruption provides for enhanced legal scrutiny for PEPs in Article 52(2)(b), where they are referred to as individuals “entrusted with prominent public function” together with their family members and close associates.  

As can be seen from the above, a unified  definition of a PEP exists not only between the United Nations and EU Member States, but also globally; they are seen as one of the higher money laundering risks, as PEPs are considered to be more vulnerable to corruption. Therefore, those who deal with them are often obliged to exercise a higher degree of caution.

What measures are applied when a customer is identified as a PEP?

If a customer falls into one of the PEP categories, i.e. during the initial KYC is identified as such, they will be subject to enhanced customer due diligence (ECDD) according to the regulations stated above.

The obligated entities are required to apply additional measures for all identified PEPs during the ECDD, which are:

  • obtaining senior management approval for establishing or continuing business relationships with such persons;
  • taking adequate measures to establish the source of wealth and source of funds that are involved in the business relationships or transactions with such persons;
  • conducting enhanced, ongoing monitoring of those business relationships.

The importance of sanctions and PEP screening

To mitigate the existing AML risks associated with PEPs, the obligated entities should perform screening checks against various databases for new and existing customers to determine whether a person, a member of his family or close associate might fall into any of the categories listed in the AML regulations as a PEP.

What happens when someone leaves the position for which they are classified as a PEP? Can their PEP status be removed?

According to the 4th AMLD, “where a politically exposed person is no longer entrusted with a prominent public function, obliged entities shall, for at least 12 months, be required to take into account the continuing risk posed by that person and to apply appropriate and risk-sensitive measures until such time as that person is deemed to pose no further risk specific to politically exposed persons.

FATF Recommendation 12, on the other hand, defines a PEP as being someone who has been, but may no longer, be entrusted with a prominent public function. The language of Recommendation 12 is consistent with a potentially open-ended approach (i.e. “once a PEP – could always remain a PEP”).

Unfortunately, some screening systems and some financial institutions take the approach that once an individual has been identified as a PEP they always will have that status, even after they have left their political and public roles and 12 or more months have past. This is in direct contradiction with the EU AML directives and the Bulgarian PMLA, which, unlike FATF Recommendations, are binding law.

NBLO has extensive experience in litigation and disputes and is highly qualified to offer a wide range of AML services. We were recently successful in helping  one of our clients in a dispute to remove their PEP status.

For more information please contact us at [email protected]

© New Balkans Law Office 2024

The Bulgarian and dual-qualified lawyers of New Balkans Law Office are regulated by the respective Bar of their registration. New Balkans Law Office is a brand name of Legal Services EOOD, a company registered under Bulgarian law. Reg’d No. 202331677. Further details are available here.

© New Balkans Law Office 2024