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?

In any case, the implementation of enhanced due diligence measures with regard to PEPs forces required entities to turn to private third-party companies in the absence of a public list, in order to fulfill their obligations in this regard and without the ability to confirm that the service provider actually proposes an extensive and current list of PEPs, in the broadest sense of the term.

A prohibitive financial obstacle frequently stands in the way of the obliged entity being able to fulfill its commitment. Reporting entities must have sufficient risk management processes in place to assess whether the customer is a PEP, even if the rule does not specifically call for using a list service provided by outside sources. In fact, using automated solutions may be necessary to successfully fulfill the duty.

Fortunately, the medium-term outlook for the situation appears to be improving.

In fact, the European Parliament and the Council's legislative proposal for a regulation on the prevention of the use of the financial system for the purpose of money laundering or terrorist funding seeks to enact a single European set of rules.

Even though the standards for Politically Exposed Persons only require minor clarifications, the proposed regulation includes significant changes in this area.

The Commission is specifically tasked with compiling and releasing a comprehensive list of significant public roles performed by Union institutions or agencies.

The proposed regulation further states that the newly designated Anti-Money Laundering and Anti-Terrorist Financing Authority (AML/CFTMA) will be in charge of releasing guidelines on the following two matters within three years of the date the regulation enters into force:- Criteria for identifying persons falling within the definition of Close Associates;

- The level of risk associated with a particular category of politically exposed individuals, their family members, or close associates.

In order to level the playing field for all participants on a European scale, the future European Regulation should establish unified guiding principles that are applicable to all EU Member States with regard to the required due diligence and the implications for pursuing or entering a business relationship.

Solutions

For a number of reasons, most notably because public decision-makers will encounter the same challenges in identifying PEPs as obliged entities, it is possible that the challenges faced by obliged entities in identifying PEPs will endure despite the publication of an official list of PEPs at the European level.

In any event, in order to keep the duty at the level of obliged entities, the official list of PEPs established will probably be non-exhaustive.

In order to collect additional data (on Relatives Close Associates, or "RCAs," or family members and those who are known to be closely affiliated with them), obliged organizations would have to continue relying on third-party sources, which would exacerbate the current issues.

Therefore, required entities will always have to deal with potentially low-quality data (a non-exhaustive list, for example) or make do with a technology that is not always proven (when, for example, "fuzzy logic" is not sufficiently advanced to identify possible approximate spellings), in addition to the frequently huge costs assigned to this type of service (depending on the volume of clients concerned). Therefore, the cost-benefit-assurance balance could continue to be approximate.

In conclusion, supervisory authorities will find this list to be just as useful as the list providers currently available on the market, and they will undoubtedly use it as justification to penalize PEP misidentification.

However, the establishment of an official list of PEPs, in the form of a registration, for instance, that is aggregated at the European level will be a great starting point for locating PEPs who are clearly so and without charge.

Thus, access to legal and verified information would be made possible by this record, the terms and circumstances of which have not yet been established. According to a system comparable to the register of beneficial owners, for which specific information can only be disclosed to authorized authorities and persons, access to the register of PEPs could be confined to the obliged entities stated in Article L. 561-2 of the Monetary and Financial Code.

The registrars in charge of maintaining the Trade and Companies Register (RCS) and the Register of Beneficial Owners could be given the task of creating this specific file or register (RBE).

This would enable the direct correlation between the PEPs and any potential RCS/RBE characteristics, the efficacy of which has been acknowledged by the FATF. Of course, the market's primary concerns will continue to be the price and quality of this register.

For instance, it is important to highlight that Uruguay has made the list of national PEPs freely available. Even though this is not totally perfect, it is important to applaud the political stance and the message it sends to the required parties.

And last, would RCAs be included in a list of PEPs that the appropriate authorities produced, published, and maintained? If not, would the law change to exempt certain RCAs from PEP status so that required entities can comply with the requirement without incurring further astronomical costs? What is the compromise between AML-CFT law and GDPR if, on the other hand, the aforementioned list should contain RCAs?

For this final query, let us refer back to the public call to action made on this matter by the European Data Protection Supervisor (EDPS) and the CNIL (the French data protection authority), which "call [...] the attention of legislators to the need to frame the activity of service providers specialized in the provision of information (commonly called "watchlists") with regard to the requirements of GDPR."

By fLEXI tEAM