This article was first published by Solicitors Journal on October 23, 2023.
The UK Financial Conduct Authority (FCA) launched in September a review of the treatment of domestic politically exposed persons (PEPs) by UK-regulated financial services firms. This review will look at firms’ arrangements for dealing with domestic PEPs and the potential money laundering risks that these PEPs can pose.
Rules on the treatment of PEPs
The Financial Action Task Force (FATF) issued internationally recognised mandatory requirements in relation to the treatment of foreign PEPs in 2003, which were expanded to domestic PEPs in 2012. PEPs, according to the United Nations Convention against Corruption, are defined as both domestic and foreign “individuals who are, or have been, entrusted with prominent public functions and their family members and close associates”.
The UK and other FATF members accept that heightened controls are required around the financial arrangements of PEPs because they could abuse their position for the purpose of laundering money and committing corruption offences. The UK Money Laundering Regulations 2017 (MLRs) set out the requirements for UK firms to identify and undertake enhanced due diligence on PEPs, their family members, and close associates.
Following this legislation, the FCA released guidance in 2017 to firms on the treatment of PEPs. This provided some clarity to firms on how they should go about identifying PEPs, the steps that they should take to assess the risks posed by PEPs and how to mitigate these. The guidance was clear that firms should only treat those in the UK who hold “truly prominent positions” as PEPs, noting that it was unlikely in practice that a large number of UK customers should be treated as PEPs.
The FCA’s review
The approach taken by firms towards PEPs in the UK has come under criticism from politicians, who have noted the inconvenience that enhanced due diligence can cause to themselves and their families when they are trying to access financial services. There has also been recent publicity around ‘debanking’ of UK PEPs. Perhaps in light of these concerns, the FCA has announced that it is undertaking a review of firms’ actions regarding PEPs and has written to UK PEPs asking them to describe their experiences with firms. The FCA is also engaging with firms to undertake a risk-based supervisory review of their practices around PEPs.
What does this review mean for UK firms?
The FCA’s review is focused on domestic PEPs and appears to be influenced by the idea that these individuals may be being treated unfairly by firms, which would conflict with firms’ FCA obligation to treat customers fairly.
In practice, most firms in the UK already have robust systems and controls in place to prevent money laundering, including around PEPs. Neither the MLRs nor the FCA’s 2017 guidance on PEPs set out the specific steps that firms must take to identify, risk assess, onboard and continually monitor PEPs. Instead, the FCA has so far trusted firms to establish their own procedures.
While firms have an obligation to treat customers fairly, they do not have any obligation to provide bank accounts to customers. The FCA guidance states that firms should not decline or close a business relationship with a person merely because that person meets the definition of a PEP, but firms are open to make their own assessments of the risks posed by PEPs and can decide whether their risk tolerance allows them to provide certain products to those individuals. Bearing this in mind, firms should be conscious of the fact that PEPs are entitled to make data subject access requests under UK General Data Protection Regulation. These requests require firms to provide a copy of their personal data to individuals when requested, which could include copies of customer risk assessments.
Preventing money laundering is a difficult and evolving area. Money launderers are increasingly sophisticated and well resourced, and they are prepared to lose money in order to launder money. It is widely accepted that PEPs pose a higher money laundering risk, so it is appropriate and necessary for firms to conduct more stringent due diligence on them, even if this is inconvenient for the individuals affected. Given the complexity of this area, the FCA’s review (and hopefully consequential guidance for firms) should be welcomed insofar as it provides additional clarification and certainty for firms.