How to ensure the continuity of PEP status monitoring?

You have already familiarized yourself with the definition of the obligated institution (in UK: Relevant person) and their detailed list, which is precisely indicated by the second article of the AML passed on March 1, 2018. More information on this topic can be easily found in this post.

Since we already know what entities can be considered as obligated institutions, who can be considered a politically exposed person (PEP), for what purpose the fourth AML directive was created and what duties it imposes on the Member States, it is time to learn about the duties that obligated institutions (IOs) should perform regarding the care and control of economic relations.

What responsibilities does the Relevant Person have in the context of monitoring economic relations?

Simplifying the long text of the fourth AML Directive – in the circumstances accompanying the establishment of commercial/business relations, we have – as a Relevant person (an obligated institution in AML UE nomenclature) :

• check if the person/client is in a politically exposed position
  
• obtain the official permission of the senior management or board of directors to establish or continue such a relationship
  
• take appropriate measures to determine the source of assets and finance entities related to such persons
  
• carry out intensified and – which is extremely important – continuous monitoring of these economic relations

 

Which law requires continuous monitoring of PEP status and why is it so important?

The article 20 of the fourth AML directive clearly refers to the necessity of regular verification of the status of a person taking part in the economic relationship. This is a very important aspect, one of many that is designed to facilitate the proper functioning of the entire financial system and prevent the targeting of funds for criminal – terrorist purposes. We will read about it in the fifth point of the introduction to the IV AML directive:

(5) Furthermore, the misuse of the financial system to channel illicit or even lawful money into terrorist purposes
poses a clear risk to the integrity, proper functioning, reputation and stability of the financial system.
Accordingly, the preventive measures laid down in this Directive should address the manipulation of money
derived from serious crime and the collection of money or property for terrorist purposes.

 

Why, then, is it so important to constantly check whether a person has a prominent political position?

It would be good to explain all the details about this issue with a simple example. We can imagine the situation of establishing a business relationship with due diligence. It was checked – with the help of the most accurate and at the same time easy to use tools or systems, whether a given person occupies a prominent political position. The operation was performed only once. For the purposes of this article, it can be determined that a hypothetical person has been verified and is not PEP as at the check date.

After 3 months, the situation could change dramatically, because the person becomes the head of the tax office. The persona described did not inform the supervisory authority about this fact and we have no certainty that she did not do it on purpose, although she probably forgot about the plethora of daily duties (of course mainly due to the change of position). It is worth noting that the said entity was not obliged to inform the entity about this fact. In principle, it could not be completely aware that such information would be very important for a given entity.

At this point, the stories indicate nothing, the sequence of events will begin to follow the unwanted direction. The person has been checked, so that theoretically purely control bodies could consider that due diligence has been observed. At this stage, no one is even interested in the given name, because nothing happened that would attract attention to them.

But the next quarter and the hero of our short history are passing – as a result of accidental (or not – that we may never know) the sequence of events becomes involved in a very serious matter concerning huge financial embezzlement. In addition, it turns out that his connections are extremely dangerous and reach the levels of international organizations that have embezzled large sums of money through massive illegal activities.

Does the FCA and other entities that are investigating the whole – criminal, of course, publicized and at the inter-state level – can consider the case that the relevant person performed acted with due diligence?

No.

Can they – and rightly so – recognize that institution or specific persons (eg board members) are therefore involved in the whole case?

Absolutely yes.

Although it does not sound like that – it is a very probable story and one can confidently say that it is good to exercise extreme caution in such situations. That is why the fourth AML directive was created and for this purpose, politically exposed persons were defined and a number of entities were obliged to constantly verify them.

Why, then, the PEP statement – although admissible – is not recommended?

One of the reasons is explained in the previous paragraphs. Although the statement is a trace that will testify compliance with the fourth AML directive, it will not be a fully valuable document that can ensure safety and peace in the event of unusual and non-standard events.

High-profile cases regarding money laundering and terrorist financing are more and more frequent in the media – not just mainstream ones. Therefore, we can be sure that people who are involved in the aforementioned procedure will look for more and more “creative”, sophisticated ways to hide it.

We can certainly expect that such people will be at all costs to cover up and mask such moves, that is why all possible actions should be taken to ensure maximum security and have documents or a register that, if a crime is detected, will fully complete all procedures necessary in this topic.

At this point, it should also be mentioned that the fourth AML directive not only applies to the use of due diligence to new customers, but also to the current ones. We can read about it in article 13, point 5 of the directive, which I publish below:

Article 14 of the 4th AML Directive:

5. Member States shall require that obliged entities apply the customer due diligence measures not only to all new
customers but also at appropriate times to existing customers on a risk-sensitive basis, including at times when the
relevant circumstances of a customer change.

Continuous control is required explicitly, as discussed in article 20, point b) III:

With respect to transactions or business relationships with politically exposed persons, Member States shall, in addition
to the customer due diligence measures laid down in Article 13, require obliged entities to

(…)

(iii) conduct enhanced, ongoing monitoring of those business relationships.

Faster, more convenient and more accurate – that is why the IT system for PEP verification will be better?

The effective and simple calculation of time and costs – comes with the conclusion – that if the revelat person uses PEP statements method – it could be problematic.

Why not use a solution that will make your job easier?

It is also necessary to mention that the supervisory authorities may at any time request the relevant documents. We can read about it, for example in Article 30, point 2 IV of the AML directive:

Member States shall require that the information referred to in paragraph 1 can be accessed in a timely manner by
competent authorities and FIUs.

For this reason, an appropriate IT system will be the most appropriate and the most convenient way to easily share information.

The AML platform with the implementation of an appropriate module enabling the person to be checked in terms of the exposed political position is a great tool that:

1. It will save time to prepare and sign a paper version of the PEP statement
2. It will ensure data security and quality – digital version is much more reliable than paper version of the PEP status statement.
3. It will provide the opportunity to quickly check and recheck customers who are already in a business relationship (please imagine how problematic and embarrassing it would be to draw up and sign statements for thousands, hundreds, and even dozens of regular customers)
4. It is the only reliable basis for confirming actions aimed at maintaining due diligence and will provide strong and hard evidence that the entity has used all possible means to carry out activities in accordance with the Directive

It is also worth mentioning that platforms offer many other solutions, aimed not only at helping to secure these issues. They also support completely different areas in the financial industry.

It will be a good idea to choose solutions that do not require long and cumbersome installations, but operate in a service-based model. These solutions offer an interface in the form of an application / website and, additionally, enable integration through network services. Web-Service.

The systems / platforms that do not require subscription fees are noteworthy, but they are able to purchase specific modules and packages – eg quantitative packages of existing records checking for a position. We can thus gain full control over the costs we incur in connection with the use of such tools.