This week, we have seen the Financial Conduct Authority ("FCA") publish the terms of reference in relation to its review of the treatment of UK-domestic Politically Exposed Persons ("PEPs").

This comes in the wake of the Nigel Farage/Coutts bank account issue. The FCA say it is launching a review of how regulated firms treat domestic PEPs in the context of meeting their anti-money laundering ("AML") obligations and FCA's guidance to conduct proportionate and risk-based due diligence on clients.

The FCA are carrying out the review because of concerns that firms may not be treating customers as directed by both the legislation and its guidance. Individuals may be unfairly excluded from products or services and this also potentially harms the reputation of the UK's financial services sector.

The review will seek input from UK PEPs, family members and known close associates and will also assess regulated firms’ arrangements in dealing with PEPs. The FCA will share any findings that may have bearing on the statutory framework with the Treasury and publish their findings by 29 June 2024, and, if necessary, initiate a consultation on revised guidance.

The AML obligations under the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (the "MLRs") require firms to carry out additional scrutiny when dealing with people who are entrusted with prominent public functions, wherever in the world they hold them (commonly known as Politically Exposed Persons ("PEPs"). The FCA explain the rationale for this being that PEPs may be able to abuse their public office for private gain and may use the financial system to launder the proceeds of this abuse of office.

In July 2017, the FCA published guidance (the "Guidance") which made clear that domestic PEPs (a "domestic PEP" means a politically exposed person entrusted with prominent public functions by the UK) and their family members or known close associates, should be treated as "lower risk" absent any other risk factors outside of their position as a PEP. The FCA say that their Guidance indicated that, in conducting the required enhanced customer due diligence ("EDD") for lower risk PEPs, firms should use information that is reasonably available to them, including information in the public domain, and take less intrusive steps to establish their source of wealth than they use for other, non-domestic PEPs.

At 2.35 of the Guidance, it states:-

"In the FCA’s view, in lower risk situations a firm may take the following measures:

• Seek to make no enquiries of a PEP’s family or known close associates except those necessary to establish whether such a relationship does exist.
• Take less intrusive and less exhaustive steps to establish the source of wealth and source of funds of PEPs, family members or known close associates of a PEP; for example, only use information already available to the institution (such as transaction records or publicly available information) and do not make further inquiries of the individual unless anomalies arise. It is necessary to seek source of wealth information but in all lower risk cases, especially when dealing with products that carry a lower risk of laundering the proceeds of corruption, firms should minimise the amount of information they collect and how they verify the information provided (for example, via information sources it has available)."

The FCA now report having heard from domestic PEPs that firms may not be applying an effective and proportionate risk-based approach to them and their family or known close associates, and the FCA have intelligence indicating some firms could be using standardised questionnaires, used automatically, for PEPs and their family members and known close associates that may not sufficiently recognise the expectations on lower risk for UK domestic PEPs.

In approaching their review, the FCA say they will assess how firms manage the risks from UK PEPs in line with the risk-based approach outlined in the MLRs and their Guidance. This will include among other issues how firms are applying the definition of PEPs, are conducting proportionate risk assessments of UK PEPs, their family members and known close associates (including how firms take into account any other risk factors outside the customer’s position as a PEP) and how firms carry out risk-based and proportionate EDD of individual customers.

They will also look at how firms apply enhanced ongoing monitoring for PEPs, keeping EDD up to date for UK PEPs, and they will examine decisions to reject or close accounts for PEPs, family members and known close associates. In the latter case, they refer to not only the MLRs and Guidance but also the new Consumer Duty.

The assessment above will be informed by both engagement with feedback from UK PEPs themselves, and/or family members and close associates, information collected from relevant firms and other stakeholders such as the FOS, and risk based supervisory reviews of firms. Firms will be prioritised and selected because of intelligence that indicates concerns, but the FCA will also assess firms with different practices to identify good practices.

Comment

The FCA's earlier Guidance around domestic PEPs already sets a pretty low bar. in terms of EDD However, given the large fines imposed around the world in relation to AML and CTF failings, and the constant emphasis by politicians, regulators and law enforcement upon the importance of having effective measures to combat money-laundering/terrorist financing, it is not entirely surprising that regulated firms may go beyond what is strictly required and adopt some standardised approaches to such matters. It is not often that we see the FCA, in effect, telling the regulated community to take a more relaxed approach in relation to a recognised anti-money-laundering risk.

However, and as they say; "We are where we are". Firms will have to expect the FCA may come knocking to ensure you are not doing too much……

Author: David Capps