UK Government Calls on FCA to Review PEP Guidance

Amid media reports that financial institutions are restricting the access of politically exposed persons (PEPs) and their associates to financial services, the UK government has ordered the Financial Conduct Authority (FCA) to review its PEPs risk management guidance. 

Indeed, per the FCA, firms should assess “the extent to which the risk would be increased by a business relationship with a PEP, family member or close associate. The FCA would expect … a case-by-case assessment and not an automatic assessment that a relationship creates a high risk of money laundering.”

According to the Financial Services and Markets Act 2023, the FCA must review its anti-money laundering and counter-terrorist financing (AML/CFT) related guidance on politically exposed persons. It must also evaluate regulated entities’ compliance with its guidance. Under the law, the FCA must publish its review plan within three months, with conclusions and new draft guidance following within the year. The Act received Royal Assent on June 29, 2023. 

Not All PEPs are Equal

Managing and categorizing PEPs effectively is inevitably a complex and growing challenge for financial institutions. In our 2023 State of Financial Crime survey of senior global compliance leaders, we asked compliance leaders which area of their PEP screening they “most value.” The ability to screen mid-level government officials was the most popular answer for the first time, rising by ten percentage points on the previous year. This answer exceeded global coverage and relatives and close associates (RCAs), indicating many firms are grappling with how to manage potential PEPs with different levels of influence and seniority.

To help create a nuanced approach to PEP risks, firms should consider four PEP risk quadrants.

1. Level 1 – High Risk: this includes top-ranking officials, royals, and heads of state.
2. Level 2 – Medium Risk: this includes ambassadors and regional officials.
3. Level 3 – Medium Risk: this includes senior management and board members of state-owned organizations.
4. Level 4 – Low Risk: this includes local officials.

High-risk PEP threats will demand enhanced due diligence. Lower risk PEPs will require less due diligence.

For high-risk PEPs that require enhanced due diligence, the process should include:

• Acquiring additional information on the PEP. 
• Obtaining additional information on the intended business relationship and the underlying reasons for the relevant transactions. 
• Obtaining information about the PEP’s source of funds and source of wealth.
• conducting increased monitoring of the business relationship.

Key Takeaways for PEP Risk Management

As the FCA completes its mandated review, firms should be on the lookout for its updated guidance within the year. In the meantime, compliance teams can consult existing guidance on a risk-based approach to PEPs, including:

• The FCA’s 2017 PEP Guidance and 2023 Financial Crime Guide. 
• The Wolfsberg Group’s PEP guidance.
• The Joint Money Laundering Steering Group’s 2023 financial sector guide.