The Financial Conduct Authority (FCA) has launched its near year-long review of the treatment of politically exposed persons (PEPs). Although the FCA does not have the power to change the law surrounding PEPs, it can review how firms are conducting risk assessments. But could it be doing more? We reached out to the industry to find out.
Ensuring financial firms are compliant when dealing with PEPs is of paramount importance. These customers are far more likely to be targets of bribery and corruption due to the nature of their position. As a result, it is a bank’s duty to ensure they are monitoring the accounts of PEPs to detect any suspicious behaviour. In light of this, the FCA is launching a PEPs review which will report by the end of June 2024. During this time, the regulator will take action against deficiencies that are identified in any of the assessed firms.
What the FCA is looking out for
Over the course of the year, the FCA will be investigating how organisations are:
- applying the definition of PEPs to individuals
- conducting proportionate risk assessments of UK PEPs, their family members and known close associates
- applying enhanced due diligence and ongoing monitoring proportionately and in line with risk
- deciding to reject or close accounts for PEPs, their family members and known close associates
- effectively communicating with their PEP customers
- keeping their PEP controls under review to ensure they remain appropriate
Commenting on the review’s announcement, Sarah Pritchard, executive director of markets at the FCA, said: “Under legislation adopted by Parliament, financial firms are required to do extra checks on political figures, their families and close associates. More than 200 countries and jurisdictions have signed up to the standards set by the Financial Action Task Force. However, if rules are applied inappropriately by firms, then individuals may find themselves excluded from products or services through no fault of their own.
“The FCA has already taken a number of steps to remind the industry and specific firms that they should follow its guidance on implementing current rules, and some firms have already changed their approach as a result. Individuals can also raise concerns with their financial institution or the Financial Ombudsman Service.”
Bringing the matter to the forefront
According to Marit Rødevand, CEO and co-founder of Strise, the anti-money laundering (AML) intelligence software company, what constitutes a PEP is far more nuanced than the current definitions and practices might suggest.
She gives local politics as an example: “Local politics often operates under the radar of traditional definitions but is a breeding ground for corruption. It wields enough power to influence local financial transactions, permits, and policies. This can create a grey area as to how far the current guidelines should be extended, which updated practices and greater transparency will help to remedy more broadly.”
“It’s important to note that the FCA’s report will not be a silver bullet for the problem either. Given how complex these issues are, and the speed at which the industry is evolving as technology continues to make huge strides, we must continue to keep these issues under review. Fluidity in our thinking will be vital if we are to continue evolving our understanding and handling of PEPs and their networks for a more transparent financial ecosystem.”
More time for review is needed
Although Rødevand suggests the reviews need to be ongoing, Cuautemoc Weber, co-founder and CEO of Gateway.fm, the decentralised blockchain infrastructure node provider, says the review itself needs to last longer than June 2024.
“While a comprehensive review is essential to address potential vulnerabilities in the system, some may argue that a year is an insufficient timeframe to conduct a thorough review, considering the complexity of financial systems and evolving risks. A more extended review period might allow for a more in-depth and rigorous assessment.”
Effective screening
Gabriel Hopkins, chief product Officer, Ripjar, the cybersecurity firm, explains the importance of taking a proactive approach to PEP screening.
“PEP screening measures are critical to effective AML/CFT compliance. However, part of the reason why the rules are so controversial is that, under the risk-based approach, they are often applied after a PEP’s political role ends. Or alternatively, after they have left the position that conferred the level of criminal risk.
“For example, banks commonly continue to apply PEP status to former senior MPs potentially restricting access to financial products and services unfairly or inconsistently.
“There is no universally accepted time limit for declassifying a PEP, and what limits there are vary across jurisdictions. While some regulators assert that PEP classification should be applied for life under a“ once a PEP, always a PEP” approach, others argue that customers can, and should, be declassified if certain conditions are met.
“The UK has historically enforced a minimum 12-month period on PEP classification. However, due to recent events, this may be updated. The banks will want to ensure that any changes made do not duly disadvantage any customers – whether PEP, ex-PEP or non-PEP.”
Continuing in this vein, Hopkins highlights how the FCA can be doing more in regard to screening: “Effective PEP screening is a challenge, but the FCA could advise financial institutions to make the process easier by leveraging technology, including integrating screening tools that can help them determine PEP status and true customer risk faster and more accurately than ever.
“The right screening platforms can offer financial organisations fast, flexible PEP screening, and facilitate customer name searches of global PEP lists that deliver actionable risk data in seconds.”
Removing consumer hardships
Despite PEPs differing from your average consumer due to their political position, they are still consumers, and firms must ensure they are treated as such. Emphasising the importance of fair treatment for all, Hava Rosenfeld, white-collar crime and investigations solicitor at Gherson Solicitors said: “This upcoming review could bring about significant changes in the way firms handle domestic PEPs, which could in turn lead to improved fairness and effectiveness in the application of the rules.
“By following the FCA’s guidance on conducting proportionate and risk-based due diligence, firms can achieve a more consistent and balanced approach to the application of the rules, thereby minimising undue hardships and limiting unfortunate situations where individuals (and their families and associates) lose access to essential products and services. The review appears to have the purpose of achieving this delicate balance.
“The FCA press release also provided clear indications of aims to eliminate “unnecessary barriers for public servants and their families”. This highlights the FCA’s awareness of the current potentially disproportionate application of the rules, the negative impact it can have on those designated (in some cases, incorrectly) as PEPs, as well as the ripple effects it can have on their family members and close associates.
“Of course, banks and other relevant entities will need to tread a fine line and treat each challenge with regard to their overarching obligations under the wider AML regulations, in order remain compliant.”
