Article PEPs (The Fourth EU Directive)

Politically Exposed Persons (PEPs): The Draft EU Fourth Money Laundering Directive based on Proposed Changes to the FAFT Standards

By

Benjamin M Musau^[1]

Copyright  ã 2011   by Benjamin M Musau

All rights are Reserved. ã  No part of this document may be reproduced in any form, stored in a retrieval system, or transmitted, in any form, or by an means, inclusive of, but not limited to the following: electronic, mechanical, photocopying, recording, digitizing, or otherwise, without the express written acknowledgment, consent and permission of the author,

Benjamin M Musau

B M Musau & Co., Advocates, Reinsurance Plaza, Taifa Road, P.O. Box 16393-00100, Nairobi, Kenya

Phone: +254733704743

 Politically Exposed Persons (PEPs): The Draft EU Fourth Money Laundering Directive based on Proposed Changes to the FAFT Standards
 The EU Third Money Laundering Directive (3^rd Directive)

• The 3^rd Directive incorporates the objectives of the EU Second Money Laundering Directive and is intended to further cub abuses of the European financial and banking systems[2].
• The primary aim is to include Anti Terrorist Financing within Anti Money Laundering provisions.
• Requires[3] application of enhanced due diligence to all PEPs, foreign and domestic without distinction with appropriate risk-based procedures to determine if a person is a PEP, senior management approval, adequate measures to establish source of wealth and funds, and enhanced monitoring of business relationship.

 FATF Consultation Paper[4]
The Consultation Paper contains five paragraphs that are relevant to the issue of PEPs:

• Paragraph 27 on how to strengthen the FATF Recommendations to help deter and detect corruption by including the UN Convention on Corruption 2003 (UNCAC) – the Merida Convention – in Recommendation 35.
• Paragraph 28 deals with the consequential implication of paragraph 27 as it impacts on Recommendation 6, which deals with PEPs, by changing Recommendation 6 to require enhanced scrutiny (enhanced CDD) on both domestic and foreign PEPs.
• Paragraph 29 in which it is proposed to amend the Recommendation 6 to require financial institutions to take reasonable measures to determine whether a customer is a domestic PEP, and to require enhanced CDD measures for domestic PEPs if there is a higher risk.
• Paragraph 30 in which instead of requiring a financial institution to determine whether a customer or beneficial owner is a family member or close associate of a PEP, it proposes to focus on the cases where the PEP (whether foreign or domestic) is a beneficial owner of the account.
• Finally, paragraph 31 proposes to amend the existing FATF Recommendation 6 to require financial institutions to have risk management systems to determine whether the beneficiary of a life insurance policy, or any beneficial owner, is a PEP, and, if so, conduct appropriate CDD measures including the new approach for PEPs, where enhanced CDD measures would always be require when the beneficiary is a foreign PEP, whilst the risk based approach would apply when the beneficiary is a domestic PEP.

 
Review of industry comments following consultation on proposed changes to the FAFT Standards

• The Association of German Banks (AGB)[5] generally agreed with the proposal of FAFT to have an approach as outlined in no. 29 CP and welcomed the recognition of the fact that there is a higher level of risk attached to foreign PEPs and that a risk based approach should be taken concerning domestic PEPs.  The AGB argued that while a rule-based approach is detrimental to the efficient fight against money laundering and terrorism financing it would be useful to have more specific information on objective risk criteria.  This would include lists of PEPs.
• The comments from Zentraler Kreditausschuss[6] are the same as those of AGB.
• The views of the Australian Bankers Association[7] are that the implementation of the “three-limbed” FATF approach is inappropriate arguing that the introduction of a “reasonable measures” obligation is unnecessary and would lead to an inefficient use of resources.
• The Australian Finance Conference[8] is concerned that inclusion of domestic PEPs in enhanced CDD would entail significantly more work and costs.
• Blom Bank – Jordan[9] totally concurs with FATF proposals to include domestic PEPs within the definition of PEPs and the enhanced CDD measures in ML/FT risks.
• The Canadian Bankers Association[10] takes the approach of applying a risk based approach to all PEPs rather than mandating that all PEPs are equally high risk
• CEA Insurers of Europe([11] believes that current CDD measures are sufficient and do not need further amendment although it concurs with FATF on extension to life insurance policies.
• The Chilean Banking Association[12] concurred with FATF proposal and sought clear definition.

 The Draft Proposed EU Fourth Money Laundering Directive on PEPs
The EU is likely to follow the substantive provisions of the revised FATF Recommendation 6 on PEPs.  The draft proposed EU Fourth Money Laundering Directive on PEPs would, therefore, deal with the following three key issues likely to be addressed by the FATF revised Recommendation 6 dealing with PEPs:

• Financial institutions to take reasonable measures to determine whether a customer is a domestic PEP and to require enhanced CDD measures for domestic PEPs if there is a higher risk.  This new proposed approach requires financial institutions to undertake enhanced CDD measures for foreign PEPs and the risk based approach would apply when the beneficiary is a domestic PEP, hence the need to have systems for determining domestic PEPs.
• Instead of financial institutions determining whether a customer or beneficial owner is a family member or close associate of PEP, it proposes to focus on the cases where the PEP is a beneficial owner.
• Financial institutions to have risk management systems to determine whether the beneficiary of a life insurance policy or any beneficial owner of the policy is PEP, and if so, to conduct the appropriate CDD measures based on the new proposed approach.

 Conclusion

• The EU is likely to follow the eventual approach that FATF takes on PEPs.
• If the TAFT proposals are adopted, the risk based approach would apply in respect of domestic PEPs while foreign PEPs would continue to be subjected to enhanced CDD measures as a matter of routine.
• The shift of focus from family relationships (currently a key determinant of the definition of PEPs) to the more substantive issue of beneficial ownership is a shift from the current emphasis on PEP definition of form (read the family relationships) to substance (beneficial ownership) which really ought to be the case.  The test will be whether or not the PEP is the beneficial owner (as opposed to legal ownership).
• Notwithstanding the benefits of revising standards to take into account the dynamic change of society, developing countries are likely to continue facing significant challenges in view of lack of political will and the costs of adopting the changing AML standards.
• It is nevertheless necessary for each country to achieve a high degree of implementation of the AML measures in view of the adverse economic, social and political consequences of terrorist and money laundering activities.

References:

1. http://www.cpaaudit.co.uk/pdfs/ThirdMoneyLaunderingDirective.pdf.  Retrieved March 29, 2011.
2. http://www.world-check.com/anti-money-laundering-aml-compliance/.  Retrieved March 29, 2011.
3. www.anti-moneylaundering.org/Document/Default.aspx?DocumentUid.  Retrieved March 29, 2011.
4. http://www.fatf-gafi.org/dataoecd/48/11/45139480.pdf.  Retrieved March 29, 2011.
5. http://www.fatf-gafi.org/findDocument/0,3770,en_32250379_32235720_1_1_1_1_1,00.html.  Retrieved March 29, 2011.
6. http://siteresources.worldbank.org/EXTSARI/Resources/5570284-1257172052492/PEPs-ful.pdf?resourceurlname=PEPs-ful.pdf.  Retrieved March 29, 2011.

Dr. Benjamin Musau

I am a Kenyan Advocate and the Managing Partner of B M Musau & Co., Advocates, a position I have held since 1999. My work encompasses regulatory reforms, reduction of administrative burdens, the structure of business entities, joint ventures, acquisitions, banking, foreign investment and other general corporate areas