Politically exposed entities: how to tailor PEP requirements to PEP owned legal entities
| Pages | 359-372 |
| Published date | 07 May 2019 |
| Date | 07 May 2019 |
| DOI | https://doi.org/10.1108/JMLC-06-2018-0042 |
| Author | Daniele Canestri |
| Subject Matter | Financial risk/company failure,Financial compliance/regulation,Financial crime |
Politically exposed entities: how
to tailor PEP requirements to PEP
owned legal entities
Daniele Canestri
Univeristy of Essex, London, UK
Abstract
Purpose –This paper aims to address the money laundering risk posed by politically exposed person’s
(PEP’s) controlled legal entities. International standards and national legislation require enhanced due
diligence of political office holdersbut no specific requirements exist on entities controlled by PEPs. While
regulators expectthe stringent AML risk mitigation regarding this type of entities,financial institutions have
no guidelines to follow. This gap produces inconsistent due diligence measures applied to entities with
significantPEPs’connection.
Design/methodology/approach –The paper uses comparative analysis to identify discrepancies
between legal requirements and their interpretation. Moreover, an empirical approach results in a
standardisedsolution to address these discrepancies.
Findings –The paper defines the concept of politically exposed entities and the applicable due diligence
framework. Anticipating legislative measures, it proposes to introduce this concept via best practices of
financialinstitutions and private banking initiativessuch as the Wolfsberg Group.
Research limitations/implications –The research addresses the topic from a legal point of view.
However, the implementation of proposedideas depends on decisions which are political by nature and are
not within the scope of this paper.
Practical implications –The paper aims at stimulatinga debate in both the private andpublic sector to
form a consistentapproach to AML due diligence of legal entities associatedto PEPs.
Originality/value –This paper responds to an identified need to study how legal entities connected to
PEPs should be definedand monitored.
Keywords Money Laundering, AML
Paper type Research paper
The recent months were characterised by increased attention to the due diligence
requirements for politically exposed persons (PEP). The Wolfsberg Group and the British
Financial Conduct Authority(FCA) issued two reports providing guidance, whichpromoted
a risk-based approach and started referring to legal entities owned by PEPs. Conversely,
national legislators,in their transposition of the EU Forth Anti Money LaunderingDirective
(4
th
AMLD)[1], still called for enhancing due diligence on the relationshipbetween financial
institutions and PEPs (who may be the beneficial owners of legal entities-clients) without
giving any consideration to the requirements that may be applicable to PEP-controlled
companies. Moreover, the latest EU Directive on AML requires EU Member States to
indicate the public roles which are “qualified as prominent public functions[2]”but avoids
referring to legal entities controlled by PEPs. Several publications have also already
addressed the need to mitigatethe money laundering risks of PEPs, but, so far, very limited
attention has been given to the level of duediligence on legal entities controlled by political
officeholders (or by persons associated to PEPs). After having briefly identified how the
concept of PEP was created and transposedinto international and national instruments, this
Politically
exposed
entities
359
Journalof Money Laundering
Control
Vol.22 No. 2, 2019
pp. 359-372
© Emerald Publishing Limited
1368-5201
DOI 10.1108/JMLC-06-2018-0042
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