Related to a PEP? Banks ramp up due diligence procedures

Hundreds of people across the Maltese islands are likely to be affected under tighter rules to fight money laundering, as the definition of a politically exposed person will now include not just people with political functions, but also their spouses and close associates and relatives.

Under the new rules to come into force within weeks, the 4th Anti-Money Laundering Directive will see at least 300 domestic PEPs in Malta – possibly more – as well as family members and business associates, under closer scrutiny by banks and financial services providers.

The rules, to be adopted by 26 June, are aimed at strengthening existing EU rules on anti-money laundering and combating the financing of terrorism. But for PEP relatives, this will mean that opening a bank account will now be subject to enhanced due diligence measures.

Not only politicians, or party executives and directors of government entities will be subject to enhanced due diligence, but also their family members, such as spouses and partners, children, the PEP’s parents, as well as ‘close associates’ who have business relations or joint ownership of companies.

This will mean that institutions such as banks or insurance companies will have to obtain senior management approval to even establish a business relationship with such persons.

It will also affect notaries while drawing up contracts for property acquisitions, stockbrokers who manage holdings for clients, and other corporate service providers when they take new clients on board.

With some domestic banks already adopting a cautious approach and even putting PEPs’ siblings – akin to FATF standards – under enhanced due diligence rules, anything up to 2,000 people could theoretically be expected to fall under this new level of scrutiny.

The number could be even greater if banks adopt a strict approach with people whose job in government was granted to them on a ‘person of trust’ basis – even though such placements include low-grade employees on security or cleaning duties.

Under such procedures, entities like banks will have to make sure they can establish the source of wealth and funds that PEPs and their associates have, and then apply ongoing monitoring of the business relationship.

Entities will also have to take reasonable measures to determine whether the beneficiaries of a life insurance or investment policy are PEPs, and inform senior management before the pay-out of any policy proceeds, and carry out enhanced scrutiny of the relationship.

Even after a PEP is no longer entrusted with a public function, banks will still have to continue applying their enhanced due diligence for the next 12 months at minimum, until that person can be considered to be no longer a ‘PEP risk’.

The same will apply to family members and people close to the PEP.

Effectively, this tightens due diligence rules for PEPs entrusted with prominent public functions domestically, as well as those who work for international organisations.

Under 4AMLD’s forerunner – 3AMLD – banks and financial institutions could offer various levels of due diligence according to the customer. But under the new rules, all due diligence policies are now standardised.

Additionally, there is no longer any automatic exemptions from enhanced due diligence. In those cases where due diligence would have been exempt, now simplified due diligence must be undertaken with institutions required to justify why, in every case, simplified due diligence was chosen. 

Various banks have already started their own enhanced due diligence procedures, with HSBC Malta traditionally taking a more cautionary approach and applying a more vigilant policy with family members of PEPs.

As one banking source explained: “There is nothing preventing banks from going further and applying enhanced due diligence on clients. We have seen cases where a foreign bank [not HSBC] refused to open an account for a Maltese client because her surname was the same as that of a high-ranked Maltese politician.”

With the increased scrutiny of PEPs comes a word of warning in the rules themselves, which stress that the requirements on PEPs are preventive, not of a criminal nature. “Refusing a business relationship with a person simply on the basis of the determination that he or she is a politically exposed person is contrary to the letter and spirit of this Directive.”

Apart from Malta’s own minister and the PM’s chief of staff, the Panama Papers revealed family relatives of PEPs who held secret offshore companies

Siblings, spouses and lovers...

The FATF (Financial Action Task Force), an intergovernmental organisation set up by the G7 countries, offers a wide definition of who is considered to be a close associate of a PEP.

In fact, it notes that “family members and close associates” can actually depend on the social-economic and cultural structure of the country of the PEP. 

“Identifying such persons is also challenging, since the number of persons who qualify as family members and close associates is fluid, and may change significantly over time.”

For example, in some cultures, the number of family members who are considered to be close or who have influence may be quite small (e.g., parents, siblings, spouses/partners, and children). In other cultures, grandparents and grandchildren might also be included, while in others, the circle of family members may be broader, and extend to cousins or even clans.

For close associates, examples include the following types of relationships: (known) (sexual) partners outside the family unit (e.g. girlfriends, boyfriends, mistresses); prominent members of the same political party, civil organisation, labour or employee union as the PEP; business partners or associates, especially those that share (beneficial) ownership of legal entities with the PEP, or who are otherwise connected (e.g., through joint membership of a company board). 

In the case personal relationships, the social, economic and cultural context may also play a role in determining how close those relationships generally are.

Who is a PEP in Malta?

Under 4AMLD, the following are considered to be politically exposed persons, and rules of enhanced due diligence will affect their spouses, partners, as well as their children and their own partners

•    The President of the Republic, the Prime Minister, all ministers and parliamentary secretaries;

•    MPs, members of executive and administrative committees and governing bodies of political parties;

•    Judges presiding the Constitutional Court or any member of high-level judicial bodies from which there is no appeal;

•    Members of the Court of Auditors, or the board of the Central Bank;

•    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.