Guidance on PEPs

Handling of politically exposed persons (PEPs) is a big challenge in the Customer Due Diligence (CDD) process for AML. Recently the Industry Working Group on Prevention of Money Laundering and Terrorist Financing (IWG) has issued a guidance paper about PEPs (in a FAQ format) to banks. Though the practices recommended in the paper do not form part of the formal regulatory requirements, HKMA would consider that the adoption of these practices would strengthen a bank's systems and procedures for AML and CFT.

Certain points of this guidance paper are highlighted below with comments:

• Some jurisdictions and groups have put forward differing definitions of PEPs. Definitions in US and EU only refer to "foreign" individuals. (Comment: If HK banking industry generally follows this approach, even Donald Tsang or Joseph Yam would not be classified as a PEP.)
• While the focus tends to be on senior functions at the national level, individuals serving in a public capacity at more local levels can still be considered as PEPs if their position brings with it sufficient prominence and influence. A bank may adopt a risk based approach, taking into consideration the political environment and other relevant information. (Comment: Usually when an ambiguous answer is given, the term "risk based approach" would be used, which is effectively an empty term.)
• It is irrelevant whether the PEP is serving in an elected or appointed position.
• Individuals who have been entrusted with prominent public functions are also considered as PEPs. There is therefore no set time frame, but by using a risk based approach, a bank can make an informed decision. (Comment: The term "risk based approach" has been abused.)
• Any parties closely connected to PEPs, whether by blood or otherwise, could be considered as PEPs themselves. How broad this definition becomes depends on the specific risk factors of each PEP. (Comment: Ditto)
• The PEP process will also apply whenever a PEP has power of disposal over the assets of the individual or entity with which the bank is dealing. (Comment: How does a bank ascertain the existence of such "power"?)
• Political parties do not necessarily fall within the definition of PEPs.

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