Although there is no global definition of a politically exposed person, the majority of global financial institutions and the countries in which they're headquartered base their definition on the guidance issued by the Financial Action Task Force on Money Laundering (FATF). This definition was implemented in the UK through the Money Laundering Regulations 2007.
Broadly speaking it defines a politically exposed person as an individual who in the previous year "has held a prominent public position". The definition was widened further by the Fourth Money Laundering Directive 2015 to incorporate, among others, domestic politically exposed persons as well as directors, deputy directors and board members of international organisations. Furthermore, the enhanced scrutiny referred to in Articles 20 and 21 of the Directive also apply to close family members of a politically exposed person, including parents, spouses, children and partners, as well as close associates which may include fellow directors and business partners.
The directive places an obligation on lenders and financial institutions to "take adequate measures to establish the source of wealth and source of funds which are involved in the proposed business relationship" and "conduct enhanced ongoing monitoring of the relationship" but gives no guidance on what these measures should entail. It is up to the financial institution to further categorise the risk that a politically exposed person may represent, and the nature and extent of the enhanced due diligence and ongoing monitoring that it undertakes.
Section 30 of the Bank of England and Financial Services Act 2016, enacted in May 2016, is specifically concerned with the enhanced due diligence requirements necessary when providing services to customers who are defined as a politically exposed person. Its aim is to balance the additional burden placed on politically exposed persons by the Fourth Money Laundering Directive and provides for a complaints process through the Financial Conduct Authority (FCA); which is regulated by the Secretary of State for Business, Innovation and Skills (BIS). The complaints will concern the way in which regulated firms have interpreted their obligations under the regime; specifically, have they treated an individual like a politically exposed person when they are not, or if they are a politically exposed person, have they been treated unreasonably?
The Act requires the FCA to issue guidance on the above, which means it is too early at this stage to determine the long standing impact it will on upon a politically exposed person. The expectation is though, that these guidelines will help to differentiate between the risk posed by categories of politically exposed persons while also providing clarity surrounding the proportionality of due diligence required to reflect the risk they pose.
It is understood that this guidance is currently under advisement and is due to be published later this year (2016). But when coupled with a wider lack of transparency in the commercial decision making processes adopted by financial institutions, it is clear that current scrutiny of politically exposed persons, their families and close associates is here to stay.
Our recent three-part series on politically exposed persons aims to provide further clarity on this often misunderstood status, while also providing insight on the steps a politically exposed person can take to create a sustainable long-term reputation strategy; to ensure that such status needn't be a hindrance.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
