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Enhanced customer due diligence and PEPs

Enhanced customer due diligence and PEPs

After having discussed the simplified customer due diligence, I will take you to the other end of the scale: we’ll talk about enhanced customer due diligence and PEPs.

Basically, what is a PEP ?

We are talking about Politically Exposed Persons.

This term generally refers to bearers of a political mandate. Article 3, 9° of the 4th Directive specifically lists the persons covered:

  • 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.

After the enumeration of the positions, it is defined that public functions “ (…) covering middle-ranking or more junior officials” are not covered.

PEP and RCA

After this enumeration, one must add the definition of points 10° & 11° of the same article which extends this concept of PEP to “family members” or “persons known to be close associates“. This category of people is called RCA in our jargon, for Relatives or Close Associates.

In general, when talking about PEPs, we are encompassing the notion of PEP and RCA.

Article 20: enhanced customer due diligence

Article 20 clearly states in point iii) that it is necessary to conduct enhanced monitoring of the relationship.

This enhanced customer due diligence obligation shall terminate 12 months after the end of the mandate of the PEP (Art. 22 & 23), unless there is an opposing appreciation.

Precisely how to proceed at the entry level of the relationship?

There is first of all the need to have access to the information about whether a person is a PEP or not. The easiest way is to ask the person. A person in good faith will spontaneously declare its mandates.

In our application IBAKUS®KYC, it is necessary to complete a risk grid for all new customers. The issue of a political mandate is clearly inquired.

Not being totally convinced of the total integrity of all inhabitants of our beautiful planet, this information is verified via the Dow Jones Risk & Compliance List. There is no possibility to pass through the cracks because Dow Jones knows all the PEPs. If the risk grid did not register the political mandate during the initial entry, the Dow Jones namecheck automatically corrects the answer to the question.

The risk grid having been corrected, the system indicates that a PEP has an increased risk and diligence level.

Incidentally, if a PEP hides their status when entering into a relationship, it does not bode well for the future …

Alternatively, there is another question to be answered : what acceptance policy does your firm apply in this case? I know some entities which refuse such kind of customers.

What next?

The level of vigilance being reported as high; two consequences are prescribed:

  • automatic namechecks in the Dow Jones database which will necessarily be made at a monthly rate,
  • those in charge of regular relations with the PEP are constantly compelled to tighter controls on transactions made by the client. Some new features able to help in this direction will be published in the planned developments on IBAKUS®COMPTA this fall.

At the customer’s annual review, particular attention has to be attached to this file by comparing the opinions of the various team members.

In conclusion

Working with a PEP is not something insurmountable. Do not engage in the most ridiculous populism thinking that all politicians are corrupt. There are men and women of quality who are entitled to fair treatment and all our consideration.

The contribution of the 4th Directive on the subject should be considered as very positive because clear rules are enacted which should enable a healthy cooperation in the interest of both parties.

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