‘PEP families’ are under closer scrutiny under new money laundering rules

Malta’s financial intelligence unit (FIAU) is advising banks and other money handlers to apply “proportionate” risk profiles to clients who could be associated with politically-exposed persons (PEPs).

Under new anti-money laundering rules, PEPs will be subject to stricter, enhanced due diligence procedures by institutions like banks, but so will their spouses, partners, children and even parents: a long list of associates that could mean complicated banking services for relatives of a politician or high-profile functionary.

But the FIAU, which this week issued revised guidelines to Malta’s money laundering rules, is asking banks and other subject persons to carry out due diligence measures that “commensurate and proportionate to the risks posed”.

“A high-risk investment is one thing, but the child of a government minister opening up a bank account to receive their university stipend is another,” said one high-ranking FIAU official this week during a briefing on the new implementing procedures.

PEPs must undergo enhanced due diligence because their roles could be abused for private gain, such as being involved in corrupt practices, accepting bribes or abusing or misappropriating public funds.

But under the EU’s fourth Anti-Money Laundering Directive, family members and business associates come under closer scrutiny by banks and financial services providers, because their connection to the PEP can be used to facilitate the abuse of this influence or for money laundering.

These onerous conditions have led some risk-averse banks to outright refuse to have any dealings with PEPs, but the FIAU is calling on institutions to carry out due diligence measures that are proportionate to the risk posed.

The FIAU is saying that while EDD must be applied on PEPs and their relatives and associates, “this is not to be interpreted as meaning that…. such a business relationship or occasional transaction is connected to money laundering or financing of terrorism.”

These include people who are spouses or partners, children and their own spouses, and also parents, as well anyone who as a close business relation.

The FIAU says questionnaires should be drawn up for these people to answer, to understand the social, economic and cultural context of the relationship, and that any such PEPs must remain under ongoing monitoring, even 12 months after that PEP has ceased their prominent public function.  

The FIAU also says these people do not need to be turned away on the basis of their relationship with the PEP.  “EU rules do not distinguish between foreign and local PEPs so anyone entrusted with a prominent public function is considered to be a PEP,” the FIAU said, cautioning against treating less influential people like Maltese mayors as PEPs when the same function for the mayor of a large city might expose him to a higher risk.

“In case of lower risk situations, [banks] may take less intrusive and less exhaustive steps to establish the source of funds and wealth of the PEP, family members or known close associates.”

But the FIAU says PEPs not only include Maltese elected officials and executive appointments, but also permanent secretaries within government ministries, chiefs of staff within all government ministries, and the Commissioner of Police and his deputy commissioner.

The FIAU also says certain business relationships can be low-risk, and some PEPs may not have executive decision-making responsibilities, like Opposition MPs or a government backbencher, who are also subject to rigorous disclosure requirements.

On the other hand, a high-risk PEP is someone who is seeking to have access to a service that is capable of being used to launder the proceeds of corruption or bribery, has personal wealth that is inconsistent with known legitimate sources of income, or has faced credible allegations of financial misconduct.

Banks are being told that they must satisfy themselves that sources of funds and wealth are not related to any possible criminal activity.