Malta: A Guide To Dealing With Politically Exposed Persons

There are many misconceptions about Politically Exposed Persons (PEPs).

Many people think that it is not allowed to service PEPs. Many people think that only Heads of State and Government Ministers are PEPs. Many people fail to realise or understand the ML/FT risks posed by PEPs. Many people think that all PEPs pose the same risk.

This article aims to address these misconceptions and will at the same time provide guidance to those practitioners who deal with PEPs or would like to service PEPs in the future.

Who can be classified as a PEP?

A PEP is a natural person who is or has been entrusted with a prominent public function, other than middle-ranking or more junior officials. Part I of the FIAU's Implementing Procedures provides a non-exhaustive list of public functions that the holder thereof would be classified as a PEP. These include positions ranging from Heads of State, Ministers, members of Parliament, ambassadors, charge d'affaires, members of the supervisory boards of state-owned enterprises, Chiefs of Staff, as well as other prominent public functions.

Family members and close associates of PEPs are also considered to be PEPs. The term 'family members' includes spouses, partners, children and their spouses and partners, and the parents. The term 'close associate' includes natural persons who have joint beneficial ownership of a corporate body or any other form of legal arrangement or any other close business relations with that PEP.

How do we check that a person is indeed a PEP?

Once we establish which prominent public functions are classified as PEPs, the next step is to know how to check that customer is indeed a PEP or not. There are several ways subject persons can check whether a customer is a PEP.

First and foremost, subject persons can rely on publicly available information, including the internet and media searches. It is important to note that the reliability of such sources should be assessed before taking a decision on whether that particular customer is to be classified as a PEP.

The reliability of the sources differs greatly when referring to blogs when compared to referring to reputable news sites. Therefore, it is important that one checks different sources rather than solely relying on just one source, as well as the quality of such sources.

Subject persons can also obtain this information directly from the customer. It is vitally important here that the customer is fully aware of the definition of a PEP and that this also includes family members and close associates of a PEP. In this case, it will be ideal that clients can sign a PEP Declaration where they confirm that they are or they are not a PEP.

Finally, a subject person can check that a customer is indeed a PEP by using commercial databases. Access to these commercial databases can be both free of charge or by paying a monthly/yearly subscription fee. It is important that subject persons here assess the extent to which these commercial databases can truly detect PEPs and their family members and close associates.

Ultimately, the ideal scenario would be using a combination of these three methods rather than relying on just one of the above-mentioned methods of checking the PEP status of a customer.

Why are PEPs considered to pose a high ML/FT risk?

PEPs are considered to pose a high ML/FT risk because they will be employed in high positions where they may have the opportunity to abuse their public office for private gain. Additionally, due to their political and social connections, PEPs may use their contacts and power in order to gain access to the financial system in order to launder the proceeds of this abuse of office. Also, family members and close associates can benefit from, or be used to facilitate, abuse of public funds by the PEP.

Of course, not all PEPs pose the same level of ML/FT risk. The ML/FT risk that a PEP poses can depend on a number of factors, including the geographical links of the PEP, the type of prominent public function that that PEP holds, as well as the potential for the product in question to be misused.

For example, lower risk indicators for PEPs may include PEPs that do not have executive decision making responsibilities or PEPs that are associated with countries with low levels of corruption and with a strong track record for investigating political corruption and taking action against politicians.

On the other hand, higher risk indicators for PEPs may include unwillingness of the PEP to provide information and documents in relation to source of wealth and source of funds, using corporate or legal entities in order to hide their identity and funds, having significant authority over access to state assets and public funds, as well as having power over regulatory approvals and the awarding of tenders and licences.

What measures should I take when on-boarding PEPs?

When on-boarding PEPs, their family members, or their close associates, subject persons are legally required to conduct enhanced due diligence on these types of customers.

Firstly, subject persons must obtain senior management approval prior to onboarding that particular PEP. A senior manager should have enough seniority, knowledge, and experience in order to take decisions that may affect the subject person's ML/FT risk exposure accordingly.

Secondly, subject persons must take appropriate measures to establish the source of wealth and funds of the PEP. This is vitally important as the subject person must ensure that it collects enough information and documentation to fully ascertain that it will not be handling proceeds derived from political corruption, bribes, or other criminal activities associated with PEPs. For more information on Source of Funds and Source of Wealth, please click here.

Finally, subject persons must also conduct enhanced ongoing monitoring. This means that subject persons need to regularly monitor customers with PEP involvements, ideally every six to twelve months. Apart from more regular monitoring, the extent of the monitoring should be broader, not only covering CDD documentation, but also more stringent monitoring of transactions involving PEPs.

Is there anything else that I must keep in mind when handling PEPs?

Yes - subject persons should also keep in mind that customers who are not PEPs may become PEPs during the course of the business relationship. Therefore, it is vitally important that subject persons conduct PEP screening of clients who are not PEPs when conducting ongoing monitoring of these types of clients.

Additionally, a PEP must continue to be treated as a PEP (with enhanced due diligence applied) for at least 12 months after that customer ceases to be a PEP. This 12 month period is the minimum required, and subject persons may continue to apply enhanced due diligence even after the lapse of this 12 month period, depending on the overall ML/FT risk that particular client poses.

Concluding remarks

Ultimately, the most important thing about dealing with Politically Exposed Persons is that the subject person identifies the ML/FT risks associated with that PEP that will enable the subject person to build a customer profile based on the information at hand. Enhanced due diligence is vital in case of PEPs as this will ultimately serve as a control measure against such higher risk of dealing with PEPs.

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.