There have been a number of political scandals in various countries that have put bribery and corruption firmly in the headlines.
Such incidents have also served to emphasise the financial crime issues surrounding politically exposed persons (PEPs): the unique legal situation they can find themselves in, the laws relating to them and the precautions that they (and those who do business with them) need to take.
Who is a Politically Exposed Person (PEP)?
When it comes to the meaning of PEP in law, Regulation 35(12)(b) of the UK’s 2007 Money Laundering Regulations (1) provides a definition. It says a ‘politically exposed person’ is an individual who is entrusted with a prominent public function.
This means the definition of a politically exposed person, including foreign PEPs includes heads of state, leaders of governments, ministers, members of parliament, senior figures in political parties, members of supreme courts or other high-level judicial bodies, those in senior positions at central banks, ambassadors, high-ranking officers in the armed forces and senior figures in state-owned enterprises or international organisations.
When Does a Person Cease to be a PEP?
PEP Regulations UK; Regulation 35(9)(a) and (b) states that a PEP should continue to be treated as one for at least 12 months after they leave their public function – or longer if there appears to be a risk of money laundering or terrorist financing relating to that person.
The decision, when does a person cease to be a pep after they leave their position, is based on a risk assessment of that PEP and wealth – the risk of them or their family members or close associates and friends being involved in wrongdoing relating to assets.
They may be considered a lower risk if they only function in a country that is associated with low corruption levels, political stability, free and fair elections, strong state institutions, transparency of ownership and an independent judiciary. If some, or all, of these factors are not present, that person is likely to be considered a higher risk profile.
Money Laundering Regulations and Politically Exposed Persons
The UK’s Money Laundering Regulations (Regulation 33(1)(b)) made enhanced due diligence (EDD) necessary for any business relationship with a person established in a high-risk country. The list of high-risk countries was determined by the European Union (EU) under the Fourth Money Laundering Directive (4MLD). Related read: Anti-Money Laundering Investigations.
However, now the UK is no longer part of the EU, the UK has devised its own list – permitted by Section 49 of the Sanctions and Anti-Money Laundering Act (2) – and is not bound by the EU’s list (or any changes made to it).
In January 2024, an amendment to the UK’s Money Laundering Regulations came into force that made changes to the treatment of PEPs. It means that the status of UK PEPs is now different to that of overseas PEPs.
While UK PEPs must still be subject to thorough checks - known as enhanced due diligence, which is explained below - they should be treated as being a lower risk than overseas PEPs; unless there are factors that increase the level of risk associated with them.
Due Diligence for PEPs
Owing to their positions, PEPs are treated differently by companies and institutions. The 2007 Regulations require that enhanced customer due diligence measures be taken to manage and mitigate the risks posed by PEPs, their families and known close associates.
Such an approach should include:
- Having senior management approval for establishing or continuing business relationships with a PEP.
- Taking adequate measures to establish the source of wealth that a PEP is using in business relationships. This could also mean referencing PEPs lists as part of AML (anti-money laundering) checks.
- Ongoing monitoring of those business relationships.
The higher risk that a PEP poses or is believed to pose, then the more exhaustive the checks on their wealth and business transactions need to be. The seniority of management giving the approval to commence or continue business relationships with a PEP should also reflect the possible risk: the higher the risk, the more senior the person required to make the decision.
In short, PEPs are recognised as a potential problem – and those who have dealings with them are obliged to act in a way that recognises this.
How do UWOs relate to PEPs?
Under the UK’s Criminal Finances Act 2017, (3) unexplained wealth orders (UWOs) became part of British law in January 2018. What must be remembered is that UWOs can be challenged. We have written articles on how this should be done. Read our guide: Unexplained Wealth Orders (UWOs) - An In-Depth Guide.
They require a person who is suspected of involvement in - or of being connected to a person involved in - serious crime to explain how they obtained their assets, if there are reasonable grounds to suspect that their income would be insufficient for them to obtain those assets.
UWOs are another measure that brings closer scrutiny of PEPs. A UWO can be applied to politicians or officials from outside the European Economic Area (EEA), or those closely associated with them. A UWO made in relation to a non-EEA PEP would not even require suspicion of serious criminality. If, as a result of the UWO, the person produces evidence relating to their assets, a decision will be made by the authorities on how to proceed using that material.
Evidence produced in response to a UWO cannot normally be used against the person who provided it in any subsequent criminal prosecution. But a failure to provide evidence in response to a UWO could lead to the assets being recovered as part of a civil recovery action. Related read: Civil Recovery.
Of course, not everyone who would be classed as a PEP will be the subject of a UWO. But the introduction of the UWOs, like the 2007 Regulations, is part of a wider recognition by the authorities that those who hold significant public positions in any country need to be scrutinised as they may pose a corruption risk.
Those in political positions, therefore, must take careful and organised steps to ensure they can account for the sources of funds or any wealth they are known to possess. Whether they like it or not, their past or current position can be viewed as a vulnerability to corruption; which means they are liable for greater scrutiny than the more “normal” members of the population.
It also means that any individual, corporate or organisation that has dealings with a PEP (or is even only considering having such dealings) has to take all the necessary precautions and make all the checks required by law. Failure to do so could prove extremely damaging.
Recent Cases and Investigations Involving PEPs
This, it should be emphasised, isn’t just theory. The past 12 months or so has seen corruption investigations commenced into politicians in Singapore, Portugal and Japan, to name just three. (4,5,6)
Singapore saw a senior minister arrested in a corruption probe while Portugal’s prime minister resigned after his government became the subject of a large-scale investigation into illegal activities. In Japan, the government had to manage a crisis that saw four cabinet ministers from the long-term ruling party resign over alleged mishandling of funds.
Such issues highlight the issues relating to PEPs – and the need to respond to these issues appropriately.
References
2 - GOV.UK Legislation - Sanctions and AntiMoney Laundering Act 2018 CHAPTER 13 (PDF).
3 - GOV.UK Legislation - The Criminal Finance Act 2017.
4 - BBC World News - Singapore: City-state rocked by rare political scandals (20 July 2023).
6 - BBC World News - Japan: Corruption scandal threatens PM Kishida's government (22 December 2023).
7 - House of Commons Library - Research Briefing - Politically Exposed Persons Regime (16 February 2022).
