HM Treasury has published a consultation on the transposition of the EU’s fourth money laundering directive (4MLD). Its wide ranging scope certainly gives anti money laundering (AML) professionals food for thought.
A Competitive UK
HM Treasury are clear on the need for balance, with a strong message that the implementation of 4MLD will not put UK businesses at a competitive disadvantage to their European counterparts. This is supported by the declared aim of the UK’s AML/CFT regime ‘to make the UK financial system an increasingly hostile environment for illicit finance, whilst minimising the burden on legitimate businesses and reducing the overall burden of regulation.’
This is not the first time we have heard such talk, with the UK government last year launching a review of the AML regime as part of its ‘Cutting the Red Tape Programme’. The programme looked at the impact of the AML regime on firms with the intention of scrapping unnecessary bureaucracy. The call for evidence closed in November 2015 with a report expected shortly.
UK PEPs – A change in approach
This an emotive topic for AML professionals, and what for me particularly stood out in the consultation is the discussion on UK Politically Exposed Persons (PEPs).
The simple question, is this client a PEP? is not so easy to answer in practice.
The legal definition of a PEP in the UK (as per the Money Laundering Regulations 2007) specifically states that the individual had to be located outside of the United Kingdom, excluding British politicians. In practice many firms chose to include UK PEPs within their internal definition of a PEP, referred to as ‘domestic PEPs’.
But this approach ruffled a few feathers, with a debate held in the House of Commons after suggestions that banks had adopted a ‘somewhat heavy-handed approach towards UK politicians.’ Interestingly, HM Treasury are asking to hear about cases where a PEP was treated unreasonably, such as being refused a business relationship solely because they were identified – in some cases incorrectly - as a PEP.
The feedback from the industry is that more clarification is needed on handling PEP relationships. Responses from the ‘Cutting the Red Tape Programme’ raised concerns on the consistency and clarity of the Financial Conduct Authority’s (FCA) financial crime guide and JMLSG guidance. One of the ten questions in the consultations PEP section asks what specific changes could be made to the guidance in order to clarify the treatment of PEPs.
Although HM Treasury have not yet shared specific details of the concerns, when reading the financial crime guide we can see that it takes a much broader view of the risk posed by people with political connections. Part 2 of the financial crime guide identifies good and poor practice following thematic reviews. An example of poor practice of PEPs and customer take-on is identified as:
‘Failing to give due consideration to certain political connections which fall outside the Money Laundering Regulations definition of a PEP (e.g. wider family) which might mean that certain customers still need to be treated as high risk and subject to enhanced due diligence.’
Whereas JMLSG Guidance (Part 1, 5.5.21) closely mirrors the wording of the Money Laundering Regulations 2007.
In the meantime, we can see the approach from HM Treasury: ‘in low risk cases…UK PEPs, their family members and close associates should be treated at the lowest level of enhanced due diligence.’
What does this mean?
None of this should really come as a surprise, with amendments made earlier in the year to the Financial Services Bill paving the way for a change to the PEP regime. The FCA is now required to issue guidance on the definition of a PEP, which could include a ‘proportional, risk-based and differentiated approach’ creating varying categories of PEPs.
The FCA now also have a responsibility to consider where firms have adopted an overly conservative approach to its PEP regime, and whether financial compensation is required if a firm has chosen not to onboard a customer solely based on their PEP status.
These changes, and the emphasis provided in HMT’s recent consultation, will no doubt make an already difficult process more challenging. AML professionals will need to walk a tightrope and ensure that they manage the risk posed by PEPs effectively, without applying an overly conservative approach.
Know your customer
It’s clear that a one-size-fits-all approach cannot work and isn’t in line with the risk based approach. It’s also true that though some UK based PEPs can be low risk, scandals such as ‘cash for influence’ show that UK MPs are not always squeaky clean.
Whilst further guidance on how to manage relationships with high risk customers will no doubt be welcome, the changes to the PEP regime further stress the importance of knowing who your customer is. Assessing the risk posed by that individual is key, allowing firms to carry out enhanced due diligence that is commensurate with the risk posed by that individual and documenting the rationale for a low or high risk rating.
Whatever else changes the fundamental rules of effective AML will stay the same: ensure that you know your customer and know your risks.
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