What the change in PEP regulations means for you

There are two reasons behind the change to domestic politically exposed persons (PEPs).

First, it helps businesses to take a more pragmatic approach to risk management, working on the basis that domestic PEPs operate in a relatively well-regulated political system. As a result, the risk associated with them should be lower than that of PEPs from other countries.

Second, the approach previously applied to PEPs – grouping both domestic and international PEPs together – has resulted in some high-profile cases.

In July 2023 the now-leader of Reform UK, Nigel Farage, alleged that private bank Coutts had closed his accounts with them due to his political views. During the same period, former UK Chancellor Jeremy Hunt also revealed that he’d been denied a Monzo account due to his PEP status.

It was after these headlines that the government announced it was going to review how UK PEPs should be treated under the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017.

As a result of the review, since 10 January 2024, domestic PEPs have been given a lower starting risk status than foreign PEPs.

What this means for legal firms

For the users of our online compliance and risk management platform AMLCC, the transition is streamlined – the regulatory updates were incorporated when they were announced.

For others, a clear understanding is essential in ensuring these updates resonate throughout your firm’s anti-money laundering (AML) framework. Here is an outline of the key considerations.

Revising AML policies, controls and procedures

There needs to be an adjustment to your policies, controls and procedures (PCPs) to incorporate the two levels of assessment. To help with this, the regulations suggest the following:

“Where a customer or potential customer is a domestic PEP, or a family member or a known close associate of a domestic PEP –

a) the starting point for the assessment is that the customer or potential customer presents a lower level of risk than a non-domestic PEP, and

b) if no enhanced risk factors are present, the extent of enhanced customer due diligence measures to be applied in relation to that customer or potential customer is less than the extent to be applied in the case of a non-domestic PEP.”

Update your team

Awareness and understanding are crucial. Every member of your firm needs to know the details of the regulatory changes and how they impact your PCPs.

If you’re updating an AMLCC AML policy, all users in your business will have to acknowledge they understand the PEP changes you make. The money laundering reporting officer will be able to see the status of this on their live dashboard.

Other businesses need to make sure they inform staff of the changes and raise awareness about the new PCPs through training.

Revisit your risk assessments

All businesses regulated for AML need to conduct risk assessments to identify potential PEP exposure in their client base.

The questions asked should reflect the regulation’s update. AMLCC users will see this revised wording when they next conduct a new risk assessment or update their existing ones.

If you need help with AML compliance, take a look at this AML guidance for the legal sector.