The intricacies of money laundering and the financial operations of politically exposed persons (PEPs) have long been a focal point within regulatory compliance. However, the landscape has shifted with a recent amendment to the Money Laundering, Terrorist Financing and Transfer of Funds Regulations.
As of January 10, 2024, new changes have been announced changes in the treatment of UK-based PEPs that are set to redefine the protocols for assessing their risk. This is likely to affect the due diligence processes required of financial institutions and law firms.
New Amendments to PEP Regulations
Shared across the SRA website, the amendments to the MLR 2017 regulations signal a turning point for financial institutions and legal sector workers dealing with PEP relationships. With domestic PEPs now mandated as lower risk in comparison to their overseas counterparts, unless additional risk factors are present, firms are compelled to analyse the risk assessment frameworks that underpin their anti-money laundering (AML) practices.
The amendments reflect a nuanced approach that acknowledges the diversity of risk profiles among PEPs. Specifically, the update to the MLRs emphasises that for assessments under regulation 35(3), where the customer is a domestic PEP, a family member, or a known close associate of a domestic PEP, the default judgment should favor a lower level of risk.
This stipulation comes with the added condition that unless elevated risk factors are identified, enhanced customer due diligence measures must be less stringent than those applied to non-domestic PEPs.
What This Means for Law Firms
Firms now face the important task of updating their AML policies and procedures to align with the legislation’s more tailored risk assessment framework. This adjustment mandates a deeper understanding of what constitutes a ‘lower level of risk’ and the accompanying reduction in enhanced due diligence measures for domestic PEPs.
They must tread very carefully with the new legislations in place. Though domestic PEPs are to be treated as lower risk by default, the amendments underscore the importance of remaining vigilant for any additional factors that could elevate the risk profile, keeping the elements of distribution and effectiveness at the core of their due diligence strategies.
Looking Ahead: Navigating the Evolving Regulatory Currents
The evolution of AML regulations, particularly those pertaining to PEPs, reflects a concerted effort to remain at the forefront of tackling financial crime. As firms navigate these amendments, they must do so with an eye toward compliance that is both responsive and resilient.
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Verify 365 CEO Rudi Kesic offered his thoughts on the latest PEP changes, “The amendments mark a significant shift in PEP regulation, and the impact cannot be overstated. This change marries prudence with pragmatism, offering a more subtle approach to risk that will redefine the compliance landscape for PEPs. Institutions must be attuned to these amendments and adapt their procedures accordingly.”
The changes will have an impact on how firms deal with PEPs moving forwards. These subtle changes emphasise the SRA’s determination to crack down on financial crime and AML but also law firms need to regularly assessing their processes and ensuring they are compliant within the new guidelines.