The Role of PEPs in Money Laundering and Terrorism Financing

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Article 52 of the United Nations Convention against Corruption (UNCAC)

Article 52 of the United Nations Convention against Corruption (UNCAC) defines PEPs to be individuals who have been or are assigned influential public responsibilities and their close associates and members of family and includes both foreign and domestic PEPs. In the framework of the United Kingdom, PEPs could comprise, in among others, the role held by the head of government, the head of state, senior civil servants, government ministers, and senior military and judicial officers. Because of their power and role, it is acknowledged world over that PEPs hold influential positions that can be abused potentially with the aim of committing money laundering crimes and other related serious offences, such as bribery and corruption, along with performing activities that are likely linked to the financing of terrorism. These potential risks that are connected with PEPs do validate the employment of added counter-terrorist financing or anti-money laundering preventative strategies especially with respect to business associations with the PEPs.

Financial Action Task Force (FATF) recommendations 22 and 12

To respond to such risks, the Financial Action Task Force (FATF) recommendations 22 and 12 call on all nations to make sure that banks and other financial entities and regulated professional firms implement measures aimed at preventing the misuse of the non-financial businesses and the financial system and regulated professions by PEPs and to identify such likely abuse when and if it occurs. In particular, recommendation 12 of the FATF states that financial entities, in relations to the PEPs (whether the customers themselves, close associates, or family members), in addition to conducting usual measures of customer due diligence should: I) take practical measures to ascertain the source of funds and source of wealth, II) obtain the approval of senior management before establishing such business relationships, III) have appropriate systems of risk management to ascertain whether the beneficial owner or customer is a PEP, and finally IV) conduct improved continuing monitoring of the established business relationship.

Family members and close associates of PEPs

Considering that the family members of PEPs or their close associates do apply for services and goods and undertake transactions on behalf of the PEP, the PEP definition does include the close associates and members of family in addition to the senior public officials themselves. Since PEPs have the tendency to illegally favour firms for which they are beneficial owners, it becomes imperative to determine what enterprises or accounts they are beneficial owners, and these typically include those of close associates and family members. However, some PEPs such as the Members of the House of Lords have in the past complained that it has become extremely hard for them and their family members to open bank accounts. This is one example of where banks indirectly withdraw their services from clients associated with the PEP title, largely arguing that such action reduces their costs of compliance. In this light, it is important to note that the requirements regarding PEPs are not criminal in nature but rather preventive, and hence should not be interpreted in ways that can account for stigmatization.

August 18, 2023
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