Although it seems like yesterday, it has been around two years since I issued a reminder about financial sanctions and politically exposed persons (PEPs). For those of you who have been members of the network for long enough, you will recall that I started off talking about the Carnival of Venice and finished the article asking you to have particular procedures in place for dealing with sanctions and PEPs.

Well a lot has changed in the last couple of years. In addition to the growth of the network, there have also been alterations to the politically exposed person and the financial sanctions requirements. You will therefore find below updated guidance from the network in both of these areas:

In March 2017, the FCA consulted on a guidance paper in connection with politically exposed persons. This consultation targeted feedback from a wide range of stakeholders who represented both the mortgage industry and consumers. What follows are the key points from their finalised guidance which was issued in July of last year. But first, let us consider what constitutes a PEP.

PEPs are defined as individuals entrusted with prominent public functions, including:

  • 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
  • Judges of the Supreme Court
  • Members of courts of auditors or of the boards of central banks
  • Ambassadors, charges d’affaires (an ambassador’s deputy) and high-ranking officers in the armed forces
  • Members of the administrative, management or supervisory bodies of state-owned enterprises – the FCA considers that this only applies to for profit enterprises where the state has ownership of greater than 50%
  • Directors, deputy directors and members of the board or equivalent function of an international [public] organisation

There is more detail on these categories of individual in the FCA’s finalised guidance.

PEPs (as well as their families and persons known to be close associates) are required to be subject to enhanced scrutiny by firms subject to the PEP Regulations. This is because international standards issued by the Financial Action Taskforce (FATF) recognise that a PEP may be in a position to abuse their public office for private gain and a PEP may use the financial system to launder the proceeds of this abuse of office.

Likewise, a PEP’s family or close associates may also benefit from, or be used to facilitate, abuse of public funds by the PEP. It is as a result of this connection that family and known close associates are required to be subject to greater scrutiny. Family and close associates are not themselves PEPs, however, they must be subject to consideration and scrutiny on the basis of their connection to the PEP.

Family members of a PEP are defined by the FCA as including:

  • Spouse, or civil partner
  • Children and their spouse or civil partner
  • Parents
  • Siblings

A ‘known close associate’ of a PEP is defined as including:

  • An individual known to have joint beneficial ownership of a legal entity or a legal arrangement or any other close business relationship with a politically exposed person
  • An individual who has sole beneficial ownership of a legal entity or a legal arrangement that is known to have been set up for the benefit of a PEP

If you have any doubts as to whether the individual with whom you are dealing is indeed a PEP, please consult the MLRO (Ben Allen).

No. The potential for risk of corruption is proportionate to the role and its seniority, therefore each potential PEP must be risk assessed on its own merit.

UK officials are now included, but are generally considered to be a lower risk.

The Regulations require firms to have in place appropriate risk-management systems and procedures to determine whether a customer is a PEP (or a family member or a known close associate of a PEP) and to manage the risks arising from the firm’s relationship with those customers. This includes where a PEP, family member or close associate is operating via an intermediary or introducer (this may include others in the regulated sector such as banking staff, lawyers, estate agents etc.). There are many legitimate reasons for doing so (e.g. a solicitor acting in a property transaction). In these situations, and in line with FATF guidance, the FCA expect firms to understand as part of their due diligence why a PEP, family member or close associate is using such an arrangement and use that as part of their assessment of risk.

Effectively, your obligation is to identify a PEP (or a family member or a known close associate of a PEP) and then to ensure that you have robust systems for dealing with them so that you do not inadvertently carry out business without appropriate safeguards in place.

Consider the following when making your risk assessment:

  • Geographical location of the PEP – UK based PEPs are thought by the FCA to represent a lower risk
  • The product itself; is it one which you have assessed as being a lower risk and therefore has simplified due diligence measures
  • A PEP may be considered lower risk if their role is already subject to specific due diligence and checks
  • Whether the role undertaken by the PEP carries a lower level of power, responsibility or decision making
  • An PEP may be classed as higher risk if there is potential that their position could be open to misuse, abuse or even money laundering
  • There may have been credible allegations of impropriety against the PEP in the past
  • Their position of the PEP may have a great deal of power and influence
  • The lifestyle or personal wealth of the PEP could also be an indicator (particularly when you consider from a money laundering point of view)

The FCA expects firms:

  • To take appropriate but proportionate measures in meeting their financial crime obligations; including taking a risk sensitive approach and applying enhanced due diligence measures
  • To enhance due diligence to identify the risk of dealing with a politically exposed person
  • To apply more stringent approaches where the customer is assessed as having a greater risk. In those circumstances firms will need to take further steps to verify information about the customer and the proposed business relationship. This is in line with the FCA’s financial crime guidance
  • To conduct an assessment of the risk of dealing with a PEP, the family of a PEP or a known associate. This is expected to be a ‘case by case’ assessment, not an automatic assessment that is applied
  • To make use of information that is reasonably available to them in identifying PEPs, family members or known close associates. Typically this will mean using public domain information, such as government websites or referring to reliable public registers. Alternatively, firms may choose to use commercial databases that contain lists of PEPs, family members and known close associates
  • Not to decline or close a business relationship with a person merely because that person meets the definition of a PEP (or of a family member or known close associate of a PEP). A firm may, after collecting appropriate information and completing its assessment, conclude the risks posed by a customer are higher than they can effectively mitigate; only in such cases will it be appropriate to decline or close that relationship
  • To comply with their own enhanced due diligence measures in line with their own assessment of the risk posed by a PEP (or of a family member or known close associate of a PEP)
  • Conduct enhanced ongoing monitoring of the business relationship once the business relationship is entered into with that person. The nature and extent of this monitoring will depend on the risk assessment

The FCA expects that you should:

  • Not seek to make enquiries of a PEP’s family or known close associates except those necessary to establish whether such a relationship does exist
  • Take less intrusive and less exhaustive steps to establish the source of wealth and source of funds of PEPs, family members or known close associates of a PEP
  • Seek information on the source of wealth
  • A business relationship with a PEP or a PEP’s family and close associates is subject to less frequent formal review than if was considered high risk(for example, only where it is necessary to update customer due diligence information or where the customer requests a new service or product)

The FCA expects that you should:

  • Take more intrusive and exhaustive steps to establish the source of wealth and source of funds of PEPs, family members or known close associates of a PEP
  • Ensure that oversight and approval of the relationship takes place at a senior level of management
  • Conduct more frequent and thorough formal reviews regarding whether the business relationship should be maintained

We expect firms to:

  • Establish which clients are classed as a PEP (or of a family member or known close associate of a PEP)
  • Make use of a commercial database to screen customers and potential customers (further details in summary section)
  • Consider what enhanced due diligence measures should be put in place
  • Report any potential PEP (or a family member or known close associate of a PEP) along with your risk assessment, enhanced due diligence proposals and your proposals for ongoing monitoring to the MLRO (Ben Allen) for approval – in writing/email

No. Firms that provide a customer with a contract of long-term insurance are required to have reasonable measures to determine whether the beneficiaries of the insurance policy or the beneficial owner of a beneficiary of such an insurance policy are a PEP or family members/known close associates of a PEP. This needs to be done before any payment is made under the insurance policy whether the benefit of the insurance policy is assigned in whole or in part from a PEP or a family member or known close associate of a PEP to another person (and vice versa).

Financial sanctions are imposed by the government and may apply to individuals, entities and governments, who may be resident in the UK or abroad.

The FCA has a list of government imposed financial sanctions that prevent a firm (such as yours or ours) carrying out transactions with persons they deem unfit. Carrying out business with someone who is on the Financial Sanctions list (as well as people from certain countries or businesses) is a criminal offence. The FCA therefore expect you to comply with the sanctions list and carry out appropriate checks.

The most common types are:

  • Asset freezes which prohibit you from:
    • Dealing with a sanctioned person’s assets, including funds and property
    • Making funds or goods available – directly or indirectly – to a sanctioned person
  • Restrictions on access to financial services and markets

Financial sanctions are imposed on individuals, organisations, businesses and countries to:

  • Coerce them into changing their actions
  • Deny access to finance and other economic resources that would allow them to finance these actions
  • Signal disapproval, stigmatise and potentially isolate them
  • Send broader political messages nationally and internationally
  • Protect assets that have been misappropriated until they can be returned

The UK implements all financial sanctions imposed by the United Nations and the European Union. It can also impose its own domestic financial sanctions in certain circumstances.

  • Review all the information you have about them
  • Check if they’re on the Office of Financial Sanctions Implementation’s (OFSI) consolidated list of designated persons (This list is regularly updated and can be accessed here
  • If you’re not sure, consider asking them for more information (Generally, they tend to know whether they are on the list and why)
  • If still unsure or if they match our list details, contact OFSI immediately

If you’re dealing with a designated person subject to an asset freeze, you must:

  • Notify the network immediately and not transact business with them until directed to do so

You may be able to apply for a licence (where there are licensing grounds) and we will assist with that where feel it is appropriate. We will contact the OFSI on your behalf.

Please note that licences cannot be issued retrospectively. Breaching financial sanctions is an offence and can lead to criminal prosecution or a monetary penalty.

Further Obligations

  • You have a legal responsibility to share information you may have available, or have obtained regarding a financial sanctions target (you would do this via TRM)
  • You must report any suspected breach to the OFSI and to the network (you would do this via TRM)
  • You must obtain a licence prior to dealing with anyone on the sanctions list (you would do this via TRM)
  • You must be familiar with sanctions guidance and any changes – available here

  • You have a legal responsibility to share information you may have available, or have obtained regarding a financial sanctions target.
  • You must report any suspected breach to the OFSI and to the network (if it applies to a network member or affiliate).
  • You must obtain a licence prior to dealing with anyone on the sanctions list.
  • You must be familiar with sanctions guidance and any changes – available here

The Policing and Crime act (2017) created powers for HM treasury to impose monetary penalties for breaches of financial sanctions; additionally, the act increased the maximum allowable prison sentence to 7 years.

The Treasury may impose a monetary penalty on a person if it is satisfied, on the balance of probabilities, that:

  • The person has breached a prohibition, or failed to comply with an obligation, that is imposed by or under financial sanctions legislation
  • The person knew, or had reasonable cause to suspect, that the person was in breach of the prohibition or (as the case may be) had failed to comply with the obligation

The Treasury are able to determine the monetary penalty, but may not exceed the maximum stated below.

In a case where the breach or failure relates to particular funds or economic resources and it is possible to estimate the value of the funds or economic resources, the permitted maximum is the greater of:

  • £1,000,000
  • 50% of the estimated value of the funds or resources

In any other case, the permitted maximum is £1,000,000.

  • Standard anti-money laundering checks do not screen clients against the HM Treasury (HMT) list. Firms should not confuse HMT’s financial sanctions regime with anti-money laundering procedures.
  • Financial sanctions apply to all transactions, there is no minimum financial limit.
  • Politically Exposed Persons (PEPs) are not necessarily financial sanction targets.
  • Most listed individuals and entities are aware that they are on the HMT list, which is publicly available. The issue of ‘tipping off’ (as set out in the Proceeds of Crime Act 2002) should therefore not generally arise.
  • HMT’s financial sanction regime is not the same as our enforcement action. HMT is responsible for implementing, administering and enforcing compliance with the financial sanctions regime.

It is good practice to check:

  • Your existing clients against HMT’s list – you should therefore consider screening your client bank regularly
  • All new customers prior to providing any services or transactions
  • Any updates to the HMT list
  • Any changes to your client’s details

If you suspect that a breach of financial sanctions has occurred, you need to contact The Right Mortgage immediately and we will notify the Office of Financial Sanctions Implementation [OFSI] at the earliest opportunity thereafter.

All relevant institutions (which includes the FS industry), businesses and professions are required, under UK law, to report information about designated persons, frozen assets or suspected breaches to OFSI if the information on which the knowledge or suspicion is based came to it in the course of carrying on its business. These reports are essential to help OFSI detect and address illegal activity.

A copy of the compliance reporting form required to be used when reporting to the OFSI is available here

The Compliance Reporting Form provides details on what information is required for each section. Information provided as part of this disclosure may be disclosed to third parties for the purpose of facilitating or ensuring compliance with the relevant EU Regulation and in compliance with data protection legislation. Please email this form, including any associated documents, to compliance@therightmortgage.co.uk. You should include “Suspected breach”, “Suspected designated person” or “Frozen assets” in the subject line of your email, whichever is most applicable.

So the all-important question is… how much will it cost me to avoid fines and to stay out of prison?

The good news is, not a lot. In fact, if you were to increase your customer fee by just five pounds, you would be making money!

Here is the breakdown:

Initial Screening (PEPs, Sanctions and ID)                             £1.90 + VAT

Ongoing (day to day) PEP Screening                                        £2.00 + VAT (negotiable based on volume)

These figures are proposed here. Please feel free to call them to discuss your needs further.

You are probably wondering why you would pay for ongoing screening when most of our business is transactional in nature. Well one thing to consider is that as soon as you conduct the PEP search, it is out of date, therefore if the business you are writing completes the next day, you could, unwittingly, be transacting business with someone on the PEP or Sanctions list. So, £2.40 is the price you pay for peace of mind.

As you can see, politically exposed persons, and persons against which financial sanctions have been extended are of serious concern to the network and advisers alike, particularly when you consider the potential fines, regulatory sanctions and even imprisonment that may result from unwittingly transacting business with an individual that falls under the descriptions detailed within this article.

We therefore recommend that all firms screen their client banks to establish whether an existing client, or a potential client, could be constituted a PEP or Sanctions risk. We also request that in the event that any such client is identified, guidance is sought from your Compliance Manager or via compliance@therightmortgage.co.uk.

As you can see, ignorance is no defence, therefore, we recommend the use of software that allows you to screen against both the PEP and Sanctions lists to protect you from unwittingly engaging with such an individual.

As you will already be aware, we have conducted due diligence on Sanctions Search (a trading style of Professional Office) who can assist you in all areas of Sanctions, PEP, Anti-money laundering and electronic ID searches for a reasonable cost – for further details please see their website: www.sanctionssearch.com