SPCB(2017)Paper 38 20 April 2017 FINANCIAL CONDUCT AUTHORITY DRAFT GUIDANCE POLITICALLY EXPOSED PERSONS Executive Summary 1. The Financial Conduct Authority ( FCA ) has invited the Scottish Parliament to respond to a consultation on draft guidance for banks and financial institutions. The draft guidance relates to the treatment by banks of Politically Exposed Persons under the newly updated UK-wide money laundering regulations, which will come into force in June. The new rules will require banks to carry out enhanced due diligence in their dealings with customers who fall within the definition of Politically Exposed Person ( PEP ). From June, this will include Members of UK parliaments, including MSPs. The FCA wishes to understand the views of those on whom the guidance will impact and accordingly has asked the Scottish Parliament to respond to the consultation, with an extended deadline of the end of April. 2. The purpose of this paper is to invite the SPCB to note that updated UK rules on PEPs will be coming into force in June which will affect MSPs, and that FCA guidance on how banks should apply the new rules will be published in advance of that date. The SPCB is further invited to note that the Scottish Parliament has been asked to respond to a consultation on the draft FCA guidance. A proposed letter from the Chief Executive in response to the consultation is set out in the Annex. The SPCB is invited to approve the terms of that proposed response. Issues and Options Background 3. The current UK rules on money laundering (the Money Laundering Regulations 2007) require banks to carry out enhanced due diligence where the customer of the banking services is a Politically Exposed Person that is, where the person has been entrusted with a prominent public function. This includes Members of parliaments or similar legislative bodies. The rules also catch family members and business associates of the PEP. 4. Currently, this requirement for enhanced due diligence only applies to foreign PEPs that is, those who have been entrusted with a prominent public function by a state other than the United Kingdom. Therefore, under the current rules, Members of UK parliaments (including MSPs) are not caught. 5. The EU legislation on money laundering, from which the UK rules derive, has now been updated. The definition of PEPs has been amended to extend to domestic as well as foreign PEPs. The updated definition of PEPs will therefore now catch those who have been entrusted with a prominent public function within the United Kingdom - this will include Members of UK parliaments, including MSPs and their family members and business associates. 1
6. There is a deadline of 26 June 2017 for the new EU rules to be implemented by UK legislation. The UK Government is currently consulting on draft regulations to implement the new rules. 7. The rules on PEPs extend to three classes of person: PEPs (which now includes Members of UK parliaments/ assemblies, including MSPs); family members of PEPs (including a spouse or partner of the PEP, children of the PEP and their spouses or partners, and parents of the PEP); and known close associates of PEPs (broadly, any individual known to have close business relations with a PEP) 8. Under the rules, banks must: have in place appropriate risk-management systems and procedures to determine whether a customer falls into one of these categories, and to manage the enhanced risks arising; assess the level of risk associated with that customer, and the extent of the enhanced due diligence measures to be applied in relation to that customer; and take adequate measures to establish the source of wealth or funds involved and conduct enhanced ongoing monitoring of the business relationship. 9. An individual who is affected by the rules on PEPs when accessing banking services may take any complaints about their treatment to the Financial Ombudsman Service. Correspondence with UK Government 10. During Session 4 the Chief Executive s office was made aware of issues encountered by certain MSPs and their family members when accessing banking services. The issues arose out of enhanced due diligence measures being applied to MSPs, in light of their perceived status as PEPs (despite the fact that domestic PEPs were not at that time caught by the rules). 11. The Chief Executive wrote to the FCA setting out various concerns around how enhanced due diligence procedures were being implemented in practice, including: that it appeared that banks were routinely treating transactions with Members as potentially high risk; and that Members and their families had in some cases been asked for substantial new information in respect of standard, low risk transactions and despite long standing relationships with the banks in question. 2
The letter asked about any plans for guidance to be issued to banks, and called for a more proportionate, risk-based and transparent approach to be applied in dealings with PEPs. 12. Responses to that letter received from the Scotland Office and HM Treasury noted the UK Government s commitment to applying the rules on PEPs in a risk-based, proportionate way. The letters noted that the EU rules enable enhanced due diligence measures to be adapted so as to be proportionate to the risk posed, and confirmed that the UK Government would consult on how the new UK money laundering regulations (and guidance to support them) could reflect that approach. 13. The Chief Executive s office wrote to all Members at the start of Session 5 advising them of the background and inviting them to share any experiences relating to this issue. So far as we are aware, no further issues have been raised by Members. FCA Draft Guidance 14. The FCA is required by statute 1 to publish guidance for banks and other financial services providers on how they should apply the new rules on PEPs. The FCA guidance must cover the definition of PEPs, and must: include a requirement to take a proportionate, risk-based and differentiated approach to conducting transactions or business relationships with PEPs; and specify categories of persons to be included in, and excluded from, any definitions of PEPs. 15. The FCA guidance must also include: what functions are and are not to be taken to be prominent public functions for the purposes of determining whether an individual is a PEP; who should be treated as coming within the definition of a family member/ known close associate of a PEP; what account is to be taken of the jurisdiction in which the PEP operates; how the level of risk presented by a PEP is to be assessed, and what approach is to be taken to low-risk PEPs; what type of enhanced due diligence measures and ongoing monitoring should be applied; and the extent to which information on public registers may be taken into account. 16. The FCA has now published draft guidance, and has asked the Scottish Parliament for comments by the end of April in order to understand the views of those on whom the guidance will impact. 1 This requirement was inserted into the Financial Services and Markets Act 2000 by section 30 of the Bank of England and Financial Services Act 2016, in response to concerns around the potential effect on domestic PEPs of the new rules. The draft UK regulations themselves expand on this requirement, setting out in more detail what the FCA guidance must cover. 3
Content of the draft guidance 17. The draft guidance takes some positive steps in supporting a proportionate and risk-based approach by banks. For example, the guidance states that banks should: meet their obligations in a proportionate manner; only decline a business relationship where a PEP poses a high money laundering risk; differentiate between PEPs that represent a lower risk and those that represent a higher risk; take a proportionate, risk based and differentiated approach; and subject PEPs who represent a lower risk to less scrutiny. 18. The guidance sets out certain indicators that a PEP may pose a higher or lower risk. These include: geographical indicators (such as the political stability in the country in which the PEP operates); and personal indicators (such as whether the PEP is subject to rigorous disclosure requirements and the level of executive decision making authority of the PEP in question). The guidance also states that a family member or business associate of a PEP may pose a lower risk if they are under 18 or if the PEP in question poses a lower risk. 19. The guidance encourages banks to make use of information already held or credible public information when identifying PEPs and when establishing source of funds, e.g. registers of interests/ electoral commission registers. Banks should take account of this information in order to minimise the burden on customers and avoid duplication with other regimes. 20. Finally, the guidance suggests that certain measures may be appropriate in lower risk situations, such as undertaking customer due diligence to establish whether the customer is a family member or has a close relationship with a PEP; taking less intrusive and less exhaustive steps to establish the source of funds of family members or business associates of a PEP (for example, already held or publicly available information); and not making further inquiries of the individual unless anomalies arise. Response to guidance - Options 21. In our view, the draft guidance has taken significant steps towards promoting a proportionate and risk-based approach by banks to the rules on PEPs. However, it is also clear that there is more work to be done, and that the draft guidance does not at present fully meet all of the statutory requirements as to content discussed above. 4
22. The introduction to the draft guidance acknowledges that there is more work to be done, and states that the FCA will work with the UK Government during the consultation period to further refine the guidance in line with the statutory requirements and with feedback received. 23. The SPCB might wish to take the opportunity of responding to the consultation to acknowledge the progress made thus far in the draft guidance, and to express its support for robust legislation to combat terrorist financing. The SPCB might also wish to draw the attention of the FCA to specific issues encountered by Members who were impacted by the rules on PEPs during the course of Session 4, and to offer for consideration some suggestions as to how banks might apply a more proportionate and riskbased approach in future. Specific illustrations of this type might be helpful in assisting the FCA to refine the guidance in ways which take into account the impact on individuals, and might make it less likely that similar issues would arise again. 24. The proposed letter from the Chief Executive to the FCA in response to the consultation is set out in the Annex. The SPCB is invited to approve the terms of that proposed response. Resource implications 25. None. Governance issues 26. No specific governance issues arise. The SPCB is being invited to consider this matter as part of its overarching function of providing support and information to Members on the implications of their parliamentary role. Publication Scheme 27. This Paper will be published in accordance with the SPCB s Publication Scheme. Next steps 28. A further update will be provided once the new UK regulations and the finalised FCA guidance are in force. Decision 29. The SPCB is invited: to note that updated UK rules on PEPs will be coming into force in June which will affect MSPs; to note that FCA guidance on how banks should apply the new rules will be published in advance of that date; to note that the Scottish Parliament has been asked to respond to a consultation on the draft FCA guidance; and to approve the terms of a response to the consultation (set out in the Annex). 5
Solicitor's Office April 2017 6
Guidance consultation Guidance on the treatment of politically exposed persons (PEPs) under the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 March 2017 1 Consultation Background 1.1 The term politically exposed persons (PEPs) refers to people who hold high public office. The current regime, as per the Money Laundering Regulations 2007, requires firms to apply extra measures, called enhanced due diligence when dealing with those who are PEPs in a state other than the UK, as well as family members or close associates of those PEPs. 1.2 The UK must update its anti-money laundering regime by 26 June this year by transposing the 4th Money Laundering Directive (4MLD). This includes expanding the definition of a PEP to include those holding a politically exposed position in the UK. HM Treasury consulted on the transposition of 4MLD in late 2016 and published draft regulations on 15/03/2017. 1.3 Section 333U of the Financial Services and Markets Act 2000 (FSMA) requires us to publish guidance to firms we supervise under the Money Laundering and Transfer of Funds (Information on the Payer) Regulations 2017 (the Regulations), on how they treat customers who meet the definition of a PEP under these new rules prior to them coming in to force. Section 333U of FSMA states that this guidance must include guidance as to who should and should not be considered a PEP and set out requirements on how firms can take a proportionate, risk based and differentiated approach to meeting their obligations under the Regulations. Financial Conduct Authority Page 1 of 8
Guidance Guidance consultation consultation 1.4 The Government has proposed in the draft regulations to make changes to the FCA s obligation to provide guidance. Our proposed guidance already covers much of the new tasking but we will work with the Government during the consultation period to further refine the guidance in line with this requirement and in line with feedback from consumers and the industry. New Guidance 1.5 We have prepared guidance based on our understanding of the risks and experience of cases where firms have applied enhanced due diligence measures that were not commensurate with the risk posed by the PEP. 1.6 In the draft guidance in Chapter 2, we have set out the regulatory requirements as set down in the draft Regulations. Where the FCA interprets the regulatory requirements this is shown in italics. 1.7 This draft guidance is aimed at all relevant persons that are subject to supervision by the FCA under the regulations. This will include (but is not limited to) banks, building societies, wealth management firms and investment managers. 1.8 The guidance will impact consumers who hold public office in the UK or elsewhere and their family members and close associates. We welcome views from affected consumers on the impact of this guidance. 1.9 We will keep the final guidance under review, including taking in to account complaints to the Financial Ombudsman Service and feedback from consumers and regulated firms. Where the guidance is not meeting its aims, we will consult on amendments to the guidance. 1.10 We welcome any comments you may have including in response to the questions below. You can send your response by email to pepsguidanceconsultation@fca.org.uk or via post to Andy Watson, Financial Crime Department, Financial Conduct Authority, 25 the North Colonnade, Canary Wharf, E14 5HS. 1.11 As the law requires this guidance to be in place by 26 June 2017 we would welcome comments by Tuesday 18 April 2017. Q1- Do you agree with the definition we propose for who should and should not be considered a PEP, family member or close associate? Q2- Are there situations that are covered in the draft guidance that by their nature present a higher or lower risk than we have considered? Also, are there other risk factors which should be included in the guidance? Please provide supporting arguments on the level of risk associated with these situations/risk factors. Q3- Are there further measures that a firm might take in lower or higher risk situations? Financial Conduct Authority Page 2 of 8
Guidance Guidance consultation consultation 2 Draft Guidance Who is this guidance aimed at? 2.1 This guidance is aimed at relevant persons whose compliance with the Regulations is overseen by the FCA (referred to as firms throughout this guidance). What is the purpose of this guidance? 2.2 This document provides guidance required by section 333U of Financial Services and Markets Act (FSMA) on the definition of PEPs in line with the Regulations and how firms should meet their obligations when conducting transactions or business relationships with PEPs. A reference in this guidance to regulation refers only to provisions in this legislation unless otherwise stated. 2.3 This guidance should be read in conjunction with guidance on PEPs produced by the Joint Money Laundering Steering Group and guidelines issued by the joint European Supervisory Authorities (ESAs). What do firms need to do? 2.4 Firms are obliged by Regulation 35 to have appropriate risk-management systems and procedures to identify when their customer (or the beneficial owner of a customer) is a PEP and to manage the enhanced risks arising from having a relationship with that customer. Business relationships with the family and known close associates of a PEP are also subject to greater scrutiny. This guidance discusses this further. 2.5 In meeting obligations under the Regulations and this guidance, the FCA expects firms to do so in a proportionate manner. The FCA's view is that there should be relatively few cases where it is necessary to decline business relationships solely because of antimoney laundering requirements and, in relation to this guidance, this should only happen where PEPs pose a high money laundering risk. Why do PEPs pose a risk? 2.6 PEPs - as well as their families and persons known to be close associates - are required to be subject to enhanced scrutiny by firms subject to the Regulations. This is because international standards issued by the Financial Action Taskforce (FATF) recognise that a PEPs may be in a position to abuse their public office for private gain. As FATF says Financial Conduct Authority Page 3 of 8
Guidance Guidance consultation consultation these requirements are preventive (not criminal) in nature, and should not be interpreted as stigmatising PEPs as such being involved in criminal activity. 2.7 A PEP may then use the financial system to launder the proceeds of this abuse of office. It is by virtue of their function that a person becomes a PEP and hence is required to be subject to enhanced scrutiny by firms. 2.8 Likewise, a PEP s family or close associates may also benefit from, or be used to facilitate, abuse of public funds by the PEP. It is as a result of this connection that family and known close associates are required to be subject to greater scrutiny. Family and close associates are not themselves PEPs solely as a result of their connection to a PEP. Do all PEPs pose the same risk? 2.9 No. The risk will differ between PEPs. This guidance discusses how firms may differentiate between PEPs that represent a lower risk and those that represent a higher risk. Should firms apply the same measures to all relationships with PEPs? 2.10 No. When conducting transactions or business with PEPs, firms should take a proportionate, risk-based and differentiated approach. This means that PEPs, PEPs family and PEPs close associates that pose a lower risk should be subject to less scrutiny than those who present a higher risk. Who is a PEP? 2.11 Regulation 35(12)(b) defines a politically exposed person as an individual who is entrusted with prominent public function, other than as a middle-ranking or more junior official. It includes, but is not limited to, the following: heads of state, heads of government, ministers and deputy or assistant ministers; members of parliament or of similar legislative bodies; members of the governing bodies of political parties; members of supreme courts, of constitutional courts or of other high-level judicial bodies, the decisions of which are not subject to further appeal, except in exceptional circumstances; members of courts of auditors or of the boards of central banks; ambassadors, chargés d'affaires and high-ranking officers in the armed forces; members of the administrative, management or supervisory bodies of state-owned enterprises; directors, deputy directors and members of the board or equivalent function of an international organisation. 2.12 This includes those who hold such a position in the UK or abroad but is not an exclusive list. Financial Conduct Authority Page 4 of 8
Guidance Guidance consultation consultation 2.13 Regulation 35(9)(a) and (b) provides that a person who is a PEP should continue to be treated as a PEP for a period of at least 12 months after the date on which that person ceased to be entrusted with that public function; or for such longer period as the relevant person considers appropriate to address risks of money laundering or terrorist financing in relation to that person. For lower risk situations it will not normally be necessary to continue to treat someone as a PEP for longer than 12 months after they left office. Who are the family of a PEP? 2.14 Regulation 35(12)(c) defines family members of a PEP to include the following: a spouse or partner of that person children of that person and their spouses or partners; parents of that person. This is not an exclusive list. 2.15 Regulation 35(11) states that the provisions in Regulation 35(9) (that require a PEP to continue to be treated as a PEP after he or she leaves office) do not apply to family members who should be treated as ordinary customers, unless other risks are apparent, from the point that the PEP leaves office. Who are people known to be close associates of a PEP? 2.16 Regulation 35(12)(d) defines a known close associate of a PEP to include the following: an individual known to have joint beneficial ownership of a legal entity or a legal arrangement or any other close business relationship with a politically exposed person; an individual who has sole beneficial ownership of a legal entity or a legal arrangement which is known to have been set up for the benefit of a PEP; A known close associate of a PEP is not a PEP themselves purely as a consequence of being associated with a PEP. What are some indicators that a PEP poses a lower risk? 2.17 In the FCA s view, these are indicators that a PEP poses a lower risk: Lower risk indicators - geographical A PEP may pose a lower risk if he/she solely operates in a country, such as the UK, that has the following characteristics: associated with low levels of corruption political stability and free and fair elections strong state institutions credible anti-money laundering defences Financial Conduct Authority Page 5 of 8
Guidance Guidance consultation consultation a free press with a track record for probing official misconduct an independent judiciary and a criminal justice system free from political interference a track record for investigating political corruption and taking action against wrongdoers strong traditions of audit within the public sector legal protections for whistleblowers well-developed registries for ownership of land, companies and equities Lower risk indicators personal and professional A PEP may pose a lower risk if he/she has the some of the following characteristics: is subject to rigorous disclosure requirements (such as registers of interests, independent oversight of expenses) does not have executive decision-making responsibilities (such as a government MP with no ministerial brief or an opposition MP) has ceased to be a PEP for at least 12 months. What are some indicators that a PEP poses a higher risk? 2.18 In the FCA s view, these are indicators that a PEP poses a higher risk: Higher risk indicators - geographical A PEP may pose a greater risk if she/he is from, or closely connected to, a country with some of the following characteristics: associated with high levels of corruption political instability weak state institutions weak anti-money laundering defences armed conflict non-democratic forms of government widespread organised criminality a political economy dominated by oligopolistic actors with close links to the state lacking a free press and where legal or other measures constrain journalistic investigation a criminal justice system vulnerable to political interference lacking expertise and skills related to book-keeping, accountancy and audit, particularly in the public sector law and culture antagonistic to the interests of whistleblowers weaknesses in the transparency of registries of ownership for companies, land and equities Higher risk indicators personal and professional A politically exposed person may pose a higher risk if she/he has any of the following characteristics: personal wealth or lifestyle inconsistent with known legitimate sources of income or wealth subject to credible allegations of financial misconduct (e.g. facilitated, made, or accepted bribes) there is evidence they have sought to disguise the nature of their financial circumstances Financial Conduct Authority Page 6 of 8
Guidance Guidance consultation consultation is responsible for, or able to influence, large public procurement exercises, particularly where procurement is not subject to competitive tender, or otherwise lacks transparency is responsible for, or able to influence, allocation of scarce government licenses such as mineral extraction concessions or permission for significant construction projects. This is not an exhaustive list; other factors may suggest higher risk as new corruption typologies develop. What are some indicators that a PEP s family or known close associates pose a lower risk? 2.19 A family member or close associate of a politically exposed person may pose a lower risk if they have the following characteristics: He or she is a family member or close associate with a PEP who themselves poses a lower risk; He or she is a family member or close associate with a PEP who is no longer in office; He or she is under 18 years of age. What are some indicators that a PEP s family or known close associates pose a higher risk? 2.20 The family and close associates of a politically exposed person may pose a higher risk if they have any of the following characteristics: Wealth derived from the granting of government licences (such as mineral extraction concessions, licence to act as a monopoly provider of services, or permission for significant construction projects). Wealth derived from preferential access to the privatisation of former state assets Wealth derived from commerce in industry sectors associated with high-barriers to entry or a lack of competition, particularly where these barriers stem from law, regulation or other government policy Wealth or lifestyle inconsistent with known legitimate sources of income or wealth Subject to credible allegations of financial misconduct (e.g. facilitated, made, or accepted bribes) Appointment to a public office that appears inconsistent with personal merit What measures should firms take when they identify a customer is a PEP, or a family member or known close associate of a PEP? 2.21 The Regulations require that enhanced customer due diligence measures are taken to manage and mitigate the risks posed by PEPs and their families and known close associates. 2.22 This includes appropriate risk management systems to determine whether the customer, or the beneficial owner of the customer, is a politically exposed person, or a family or known close associate of a PEP. Regulation 35(5) requires that firms: Financial Conduct Authority Page 7 of 8
Guidance Guidance consultation consultation have approval from senior management for establishing or continuing business relationships with such persons; take adequate measures to establish the source of wealth and source of funds that are involved in business relationships or transactions with such persons; conduct enhanced, ongoing monitoring of those business relationships. To what extent may public information be taken into account? 2.23 When deciding whether a person is a known close associate of a PEP, firms only need to have regard for information that is already in their possession or credible information that is publicly known. Firms should also make use of credible public information when establishing source of wealth and source of funds and the true beneficiaries of long-term insurance policies. This could include information from public registers, such as beneficial ownership registers and registers maintained by the Electoral Commission under the Political Parties, Elections and Referendums Act 2000. Firms should take account of the information on these types of registers so that firms minimise the burden on customers and avoid duplication with other regimes where appropriate. What measures may firms take in lower-risk situations? 2.24 The FCA believes the following measures can be appropriate in lower-risk situations: Undertake customer due diligence to establish whether the customer is a family member or has a close relationship with a PEP. Take less intrusive and less exhaustive steps to establish the source of wealth and source of funds of family members or known close associates of a PEP; for example, only use information already available to the institution (such as transaction records or publiclyavailable information) and do not make further inquiries of the individual unless anomalies arise. Oversight and approval of the relationship takes place at a less senior level of management. After the firm becomes aware a PEP has left office, promptly cease to apply any enhanced measures to family and close associates A business relationship with a PEP or a PEP s family and close associates is subject to less frequent formal review. What measures may firms take in higher-risk situations? 2.25 The FCA believes the following measures can be appropriate in higher-risk situations: Take more intrusive and exhaustive steps to establish the source of wealth and source of funds of family members or known close associates of a PEP Oversight and approval of the relationship takes place at a more senior level of management. A business relationship with a PEP or a PEP s family and close associates is subject to more frequent and thorough formal review as to whether the business relationship should be maintained. Financial Conduct Authority Page 8 of 8