Canada’s AML regulations require banks and financial institutions to check whether their clients are Politically Exposed Persons (PEP) in order to build accurate risk profiles and comply with legislation. PEP screening is required by regulatory authorities around the world: as a member of the intergovernmental Financial Action Task Force (FATF), Canada’s domestic PEP screening requirements are monitored by the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC).
Following recommendations from the FATF in 2016, Canada amended the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA) in 2017 to increase its regulatory focus on PEPs in Canada. In order to comply with current PCMLTFA requirements, financial institutions must understand their screening obligations.
Who Qualifies as a PEP in Canada?
Politically exposed persons are generally classified as individuals who have been entrusted with a prominent public function – this definition also applies in Canada. Since PEPs present a higher risk of being involved in money laundering because of their political position, power, and influence, financial institutions must take this into account when doing business with them.
As a member-state, Canada bases its definition of PEPs on the guidance issued by the FATF. According to that guidance, the following people may be considered politically exposed persons in Canada:
- Heads of state
- Senior politicians
- Senior political party officials
- Senior government or judicial officials
- High-ranking military officials
- Executives in state-owned corporations and entities
Examples of specific PEP roles and positions in Canada include members of federal and provincial legislatures, heads of government agencies, deputy ministers, city mayors, and judges. The term PEP also applies to relatives and close associates (RCAs) of the individuals listed above, who may become involved in financial crimes like money laundering because of family, professional, and social connections.
Following the FATF’s 2016 recommendations, the 2017 amendments to Canada’s PCMLTFA focused on the risk posed by domestic PEPs – extending the screening practices usually applied to foreign PEPs to their domestic counterparts. Under the new rules:
- Financial institutions in Canada must screen both foreign and domestic PEPs and Heads of International Organizations (HIOs).
- Clients must be checked for PEP status at onboarding, throughout the business relationship, and then whenever they facilitate transactions of $100,000 or more.
- While foreign PEPs are always considered high risk under the PCMLTFA, domestic PEPs are not: the level of risk domestic PEPs present should be established during onboarding.
- All PEPs and HIOs classified as high risk should be subject to enhanced ongoing monitoring.
- Financial institutions dealing with foreign PEPs must always take steps to identify the source of all funds, and ensure senior management reviews of transactions.
The PCMLTFA sets out the duration for which PEPs must remain classified as such:
- Domestic PEPs retain their classification until 5 years after they leave office. This rule applies even if the PEP is not considered high risk
- Foreign PEPs retain their classification indefinitely.
Canada’s approach to PEP classification differs from other territories which tend to allow clients to shed their status sooner after they leave office. With that in mind, it’s important that financial institutions in Canada implement screening solutions that can accommodate PCMLTFA compliance requirements, and monitor PEP status for the duration that clients are classified as such.
This obligation requires flexible, automated screening and monitoring processes with a range of capabilities. Ideally, the solution will be tailored to the needs of the institution it serves and updated daily to reflect potential changes in clients’ risk exposure.