The recent Anti-Money Laundering (AML) legislation passed by the UK Parliament reflects a continued effort to strengthen the integrity of the financial system, particularly concerning the treatment of Politically Exposed Persons (PEPs). Aligned with global standards established by the Financial Action Task Force (FATF), this legislation requires financial institutions to adopt a proportionate, risk-based approach to due diligence. However, concerns have arisen regarding how companies have implemented these guidelines, prompting the Financial Conduct Authority (FCA) to conduct a detailed review of the matter.
The Parliament approved AML legislation requiring financial institutions to carry out proportionate, risk-based due diligence when dealing with PEPs. This legislation is in line with global standards set by the FATF, applicable in over 200 jurisdictions. However, the FCA decided to review how companies have been treating PEPs in response to concerns raised about the way these entities have approached the issue.
During interactions with PEPs in the UK, especially Members of Parliament, the FCA received reports of disproportionate due diligence requests and account closures or rejections with little or no explanation. Upon contacting the major firms involved, the FCA was informed that these decisions were not solely based on PEP status but were related to investigations into financial crimes.
The review identified several inconsistencies in companies’ practices regarding risk assessment for PEPs. Many companies applied improper definitions of PEPs, including close family members and associates, and failed to adhere to legal requirements. Some did not reassess the status of PEPs after their terms ended, applying definitions that were not aligned with a risk-based approach. Classifications and declassifications were not always based on the actual risk associated with PEPs, and companies frequently failed to provide clear explanations for their decisions. Moreover, inadequate training within these organizations led to disproportionate risk assessments of PEPs, leaving them uncertain about their status, as declassifications occurred without sufficient justification.
Following the review, the FCA did not find evidence of questionable practices or rejections solely based on PEP status. However, the authority noted that all companies have areas for improvement. Proposed enhancements include recognizing that UK PEPs pose a lower risk compared to PEPs from other jurisdictions, limiting the definition of PEPs to the minimum required by law (including close family members and associates), reassessing the PEP status after leaving public office, offering more flexibility in PEP evaluations, and clarifying the reasons for rejection.
These measures are to be implemented immediately, and the FCA has provided guidance until October 18, 2024, committing to monitor the implementation of these improvements.
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Published on October 8, 2024