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The definition of politically exposed persons and the central European PEPs register

Due to the fact that both corruption and money laundering offenses violate property rights and governmental power, they are inextricably linked.

On June 20, 2003, the idea of Politically Exposed Persons (PEPs) was introduced for the first time.  The 40 recommendations of Financial Action Task Force (FATF) were updated on this occasion.

The identification of financial flows originating from corruption that have been reintegrated into the legal economy as inevitably prone to money laundering.

In fact, the FATF observed during its typology exercise in 2003–2004 that PEPs frequently use offshore banks and shell companies outside of their country of origin to launder their illicit proceeds when engaging in criminal activities. It was also observed that PEPs typically employed family members or middlemen to hold assets in trust for them.

Financial institutions may be able to identify potential money laundering activity by PEPs by using comparable diligence tactics utilised in combatting money laundering since the procedures used by PEPs were found to be similar to those of money launderers.

The concept of "Politically Exposed Persons" has evolved

In terms of practical application and hence efficiency, defining the idea of a PEP provides a significant problem.

PEPs were described as "individuals who are or have been entrusted with prominent public functions in a foreign country, for example Heads of State or of government, senior politicians, senior government, judicial or military officials, senior executives of state owned corporations, important political party officials." by the FATF in 2003.

"Business relationships with family members or close associates of PEPs involve reputational risks similar to those with PEPs themselves. The definition is not intended to cover middle ranking or more junior individuals in the foregoing categories."

Therefore, the FATF initially only used foreignness as a risk factor when evaluating the idea of PEPs.

Considering that the "international effort to combat corruption also justifies the need to pay special attention to such cases and to apply the complete normal customer due diligence measures in respect of domestic politically exposed persons or enhanced customer due diligence measures in respect of politically exposed persons residing in another Member State or in a third country," the European Union began to take the concept of PEPs into account in this regard as early as 2002.

Therefore, in the third directive, "politically exposed persons" refers to "natural persons who are or have been entrusted with prominent public functions and immediate family members, or persons known to be close associates, of such persons."  Without regard to their nationality or foreignness, they are regarded as PEPs.

In order to achieve a coherent application on the Community territory, Directive 2006/70/EC, which implements Directive 2005/60/EC, emphasizes that "when determining the groups of persons covered, it is essential to take into consideration the social, political, and economic differences between countries concerned." This directive acknowledges the operational issues involved in the concept of PEP.

As a result, the definition of "prominent public function" in article 2 of the directive includes a list of the different kinds of jobs that are considered PEPs as well as the definition of "immediate family members."

Furthermore, the European Union began stating in 2006 that the requirement to identify people intimately associated with PEPs is purely dependent on this association's renown, and hence on a specific level of publicity.

According to the Union, "this does not imply an active search on the part of the institutions and persons covered by the Directive," which explains why the Union did not specify this category in this instrument and why it was not explained until 2015.

When the FATF Recommendations were updated in 2012, the definition of PEP was expanded to include the domestic perspective by adding the following to the glossary definition of PEP: "Domestic PEPs are individuals who are or have been entrusted domestically with prominent public functions, for example Heads of State or of Government, senior politicians, senior government, judicial or military officials, senior executives of state owned corporations, important political party officials"

It should be noted that the introduction of the term "beneficial owner" and the requirement that obliged entities organize themselves in such a way as to be able to identify a beneficial owner who is a PEP broadened the definition of a PEP.

As Directive 2018/843 notes, the PEP category still requires operational considerations in 2018.

"In order to identify politically exposed persons in the Union, lists should be issued by Member States indicating the specific functions qualify as prominent public functions. States should request each international organisation accredited on their territories to issue and update a list of prominent public functions at that organisation."

The French Monetary and Financial Code's Article R. 561-18 facilitates the transposition of the PEPs-related European directives.

Since 2009, this article has had four revisions, including the addition of members of the governing bodies of domestic or international political parties or groups, the expansion of the list of international organizations' PEP roles, and the deletion of the general and career consul positions.

Although the regulations appear to clearly describe the idea, identifying PEPs seems to be complex.

Challenges in recognizing PEPs

Two fundamental issues with the concept of politically exposed persons are seen from the perspective of professionals.

The first relates to the concept's definition, while the second deals with the tools at hand to carry out improved consumer due diligence measures.

On the one hand, the scope of the PEP concept prevents required entities from quickly identifying the individuals in question. PEPs, members of their close family, and close business partners are all listed as exempt persons in Article R. 561-18 of the Monetary and Financial Code.

The third of the three sections that describe the "close business associates" reads, "any natural person known to have close business ties with the person mentioned in I."

Both the close business relationship's nature and the idea of renown related to this definition's use of the word "known" are subjective features and may thus be open to interpretation in light of particular circumstances. Professionals are unable to evaluate these subjective factors in the field, especially small structures.

On the other hand, professionals subject to AML responsibilities cannot rely on any government database. For individuals subject to these restrictions, the creation of such a database—which involves the identification but also the updating of Politically Exposed Persons—is a crucial resource.

For instance, if the Monetary and Financial Code's article R. 561-18 makes it plain what constitutes an immediate family member of a Politically Exposed Person, experts would have no other way to carry out this verification but to expressly ask the client the relevant question. It is required to create a database with the names of those who are regarded politically exposed and their close relatives.

In fact, it appears that implementing expanded due diligence requirements at the operational level within the professions and organizations with limited resources may be challenging, necessitating an adaptation of the rule.

Non-financial sector vigilance measures

A partial harmonization of improved due diligence measures has been made possible by the implementation of Directive (EU) 2015/849, or the "4th Directive." In fact, several of them are written in a very general way, and the said updated 4th AML/CFT Directive does not even define the term "source of funds."

Therefore, it appears that these additional safeguards are better suited for banking and financial industry organizations that are already aware with the concept of PEPs.

However, because of the rarity of incidents and the sums set aside for PEP detection, the idea is still new and considerably more difficult to understand for the compelled companies in the non-financial sector.

Additionally, because PEP-related transactions are thought to be riskier, these additional due diligence steps lead to an increase in the surveillance of those transactions.

Regarding the increased, continuing monitoring necessary for business partnerships with PEPs, this measure operationally translates into the application of lower warning levels than for a business relationship exhibiting a medium risk of ML-TF.

It should be emphasized that this action necessitates the mobilization of suitable technological and human resources, which can be difficult for certain smaller firms to do in order to appropriately assess these warnings in a timely manner.

As a result, when categorizing PEPs' ML-TF risks, some professionals may believe that PEPs provide a high and unacceptable risk due to the de-risking method that the FATF has criticised.

The CMF's article R561-18, I specifies the functions that pose specific dangers. The law provides that those who have quit performing their duties for less than a year are also regarded as PEPs in addition to those who are currently in office.

Immediate family members, including their spouses, partners, and common-law partners as well as closely related individuals, must also be taken into account as posing hazards and be given more attention by the reporting entities.

However, the development of PEP lists and their routine maintenance are significantly made more difficult by the requirement to take into consideration personal or professional connections maintained by people who currently hold or formerly held prominent public positions.

Upcoming Regulational Changes?

At the EU level, the European Commission has not yet indicated that it intends to make nominative lists available to required organisations and professionals in order to facilitate the identification of PEPs.

How can we interpret the exclusion of certain political or administrative functions performed at the local level from the scope of PEPs, despite the real risks of ethics violation to which these people are exposed, in terms of the effectiveness of the proposed system with regard to PEPs for the risks mentioned?

Should we infer from this that there is no chance of corruption or money laundering in the jobs of mayor, head of a regional or departmental council, and police prefect?

Is it a volume issue, in that this inclusion would increase the number of PEPs, or is it a challenge separating the concept of PEP from the basic paradigm of foreignness?