On the 8th of October, the Malta Financial Services Authority (MFSA) announced issued “guidance notes” on Politically Exposed Persons (PEP’s) as part of its implementing procedure, to ensure its effort to enhance Anti-Money Laundering legislation. This announcement received immediate press coverage.
The Authority will adopt “good practice” recommendations in order to adequately and efficiently implement policies in the field of anti-money laundering (AML) and politically exposed persons (PEP’s). The guidance notes are intended help all subject persons and entities, licenced or otherwise authorised, in carrying out financial business to comply with AML Legislation and avoid, or reduce, risks related to business relationships and transactions performed with PEP’s.
(1) PEP’s Under the AML Directive
According the Directive (EU) 2015/849 of 20 May 2015 on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing (the so called “AML Directive”), a PEP is defined as a natural person who is or who has been entrusted with prominent public functions.
Situations involving PEP’s require the application of enhanced due diligence (‘EDD’) measures, with respect of the Article 20 of the AML directive (under Section 3), in addition to customer due diligence measures laid down in the directive. These include the need to:
- have in place appropriate risk management systems, including risk-based procedures, to determine whether the customer or the beneficial owner of the customer is a PEP;
- obtain senior management approval for establishing or continuing business relationships with PEPs;
- take adequate measures to establish the source of wealth and source of funds that are involved in business relationships or transactions with PEPs; and
- conduct enhanced, ongoing monitoring of those business relationships with PEPs.
In view of the higher risk attributed to PEP’s, the mentioned system and measures shall cover PEP’s as well as family members or persons known to be close associate of PEP’s.
Article 3, n. 10 of the AML Directive includes among “family members” the following: the spouse, or a person considered to be equivalent to a spouse, of a politically exposed person; the children and their spouses, or persons considered to be equivalent to a spouse, of a politically exposed person; the parents of a politically exposed person.
Article 3, no. 11 of the AML Directive further defines “persons known to be close associates” as: natural persons who are known to have joint beneficial ownership of legal entities or legal arrangements, or any other close business relations, with a PEP; natural persons who have sole beneficial ownership of a legal entity or legal arrangement which is known to have been set up for the de facto benefit of a PEP.
Lastly, the AML Directive provides that where a PEP is no longer entrusted with a prominent public function, obliged entities shall, for at least 12 months, be required to take into account the continuing risk posed by that person and to apply appropriate and risk-sensitive measures (Article 22 of the AML Directive).
(2) Maltese Prevention of Money Laundering
Malta transposed the AML Directive into its legal system by means of Prevention of Money Laundering Act (Chapter 373.01).
According to Article 2 of the Prevention of Money Laundering Regulations, a PEP is a natural person who is or who has been entrusted with prominent public functions other than middle ranking or more junior officials. Such definition includes:
- 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 organization;
- anyone exercising a function equivalent to those set out in paragraphs (a) to (f) within an institution of the European Union or any other international body
Under this law, and similarly to the provision of AML Directive, obliged entities shall conduct an enhanced customer due diligence in case of business relationships, transactions and professional services where clients and/or beneficial owners are PEPs (Article 24, par. 5). Moreover, in case of high risk of money laundering and financial terrorism, enhanced customer due diligence applies even to clients that, originally identified as PEPs, have not been qualified in such a way for more than a year (Article 24, par. 6). The same provision applies in connection with insurance policies, in case the beneficial owner of the beneficiary was a PEP.
Furthermore, as per the AML Directive, Article 25 of the Prevention of Money Laundering Act, provides that obliged entities implement adequate and risk-based procedures to determine whether the customer or the beneficial owner of the customer is a PEP and, in case of business relationships, professional services or transactions with PEPs, adopt the following measures:
- obtain senior management (or their delegated) approval for establishing or continuing business relationships with PEPs;
- take adequate measures to establish the source of wealth and source of funds involved in the business relationships or transactions with PEPs;
- conduct enhanced, ongoing monitoring of those business relationships or professional services with PEPs.
Furthermore, the MFSA announced that the subject persons are required to carry out customer due diligence (CDD) measures that are proportionate to the risks posed by the customer. In effect, not all PEP’s pose the same level of risk and the EDD measures to be applied should be proportionate to the risk attributed to a particular PEP.
Nevertheless, this applies also to a PEP’s family members and persons known to be close associates of PEP’s I view of their similar risk profile.
This wide definition of PEP’s recently introduced will increase the number of business relationships and transactions relevant under the AML legislation. The recommendations above-mentioned, are a good way to draw obliged entities’ attention in such matter and drive their AML policies, procedures and system in order to be compliant with the mentioned “good practice”.