Politically exposed persons (PEPs): Comments and recommendations by the NBB
In accordance with Article 41 of the Anti-Money Laundering Law, financial institutions should take enhanced due diligence measure when they carry out occasional transactions on behalf of or establish business relationships with politically exposed persons (PEPs), family members of such persons or persons known to be close associates of such persons. Included below are comments and recommendations made by the NBB regarding the persons referred to in this legal provision (see point 1), the implementation of the risk-based approach for PEPs (see point 2), the system to be implemented for identifying PEPs (see point 3), the enhanced due diligence measures to be taken (see point 4) and the internal control measures to be applied (see point 5).
1. Persons concerned
The enhanced due diligence provided for in Article 41 of the Anti-Money Laundering Law applies to three categories of persons: (i) PEPs, (ii) family members of PEPs, and (iii) persons known to be close associates of PEPs. The Anti-Money Laundering Law specifies criteria determining under what conditions a person should be considered a PEP because of the prominent public functions he/she holds or has held him-/herself, because he/she is a close relative of a person who holds or has held such functions, or because of the fact that he/she is known to be a close associate of a person who holds or has held such functions.
PEPs are persons who are exposed to particular risks because of the (political, judicial or administrative) prominent public functions they hold or have held. While the Law of 11 January 1993 limited the notion of PEPs to foreign residents, the Anti-Money Laundering Law also includes PEPs residing in Belgium. Thus, the distinction according to whether the PEP resides in Belgium, in an EEA Member State or in a third country is no longer made. It should also be noted that the notion of PEP refers to prominent public functions and not to middle-ranking or more junior functions.
More specifically, the term PEP is defined in Article 4, 28°, of the Anti-Money Laundering Law as a natural person who is or who has been entrusted with prominent public functions (not middle-ranking or more junior officials) and, in particular (non-exhaustive list):
- 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;
- members of supreme courts, of constitutional courts or of other high-level judicial bodies, including administrative judicial bodies, the decisions of which are not subject to further appeal, except in exceptional circumstances;
- members of courts of auditors or of the boards of central banks;
- ambassadors, consuls, chargés d’affaires and high-ranking officers in the armed forces;
- members of the administrative, management or supervisory bodies of State-owned enterprises;
- directors, deputy directors and members of the board or persons in an equivalent function of an international organisation. International organisations are defined in Article 4, 32°, of the Law as associations of means or interests established by means of an international agreement between States, with joint bodies if necessary, with legal personality and subject to a legal system which is different from the one of its members.
In order to facilitate the practical application of this definition and to enhance legal certainty with regard to the identification of politically exposed persons in the European Union, Directive 2015/849 also requires each EEA Member State (i) to issue and keep up to date a list indicating the exact functions which it considers to be prominent public functions in accordance with its national laws, regulations and administrative provisions, and (ii) to request each international organisation accredited on its territory to issue and keep up to date a list of prominent public functions at that international organisation. Those lists may be made public and must be sent to the European Commission, which will issue, based on the lists received from all the Member States and its own list, a single list of the functions concerned and make it public.
The list of the exact functions thus qualified by Belgium as prominent public functions is set out in Annex IV of the Anti-Money Laundering Law.
Pursuant to Article 41, § 4, of the Law, in conjunction with the definition in Article 4, 28°, the following persons in particular must therefore be considered as PEPs: natural persons who hold or have held one of the public functions:
- listed in Annex IV of the Anti-Money Laundering Law, and
- mentioned in the single list published by the European Commission (functions which qualify as prominent public functions in other Member States and international organisations).
The decision as to whether a customer, an agent of the customer or a beneficial owner of the customer is a politically exposed person in a third country should be based solely on the definition in Article 4, 28°, of the Law.
1.2. Persons holding comparable prominent public functions
In contrast to the Law of 11 January 1993, the list of public functions included in the new Anti-Money Laundering Law, although some of them are accurately listed in its Annex IV, is open-ended. For example, financial institutions could be led to conclude that persons holding prominent public functions comparable to those listed in Article 4, 28°, of the Money-Laundering Law or in Annex IV thereto should be considered PEPs. To that end, financial institutions should assess the risk level associated with these persons as a result of the functions that are effectively held by them and which present a degree of risk exposure comparable to that of the functions listed in Article 4, 28°, of the Law. For instance, although public functions performed at the regional or local level are not included in the legal listing of "important public functions”, it cannot be excluded that they generate comparable risks, particularly in view of the size of the regional or local entity within which these public functions are performed, of the prevalence of the corruption that is generally known to affect the jurisdiction concerned, of the inadequacy of the anti-corruption measures implemented in this jurisdiction, etc.
Financial institutions should therefore, on the one hand, specify in their AML/CFTP policy (customer acceptance section) how they interpret “comparable prominent public functions”, taking particular account of the nature and scale of the risks, notably the risk of money laundering of proceeds of corruption, that could be linked to the business relationships with the persons holding such functions. It should be noted, for example, that prominent public functions performed at the local or regional level are not included in the legal definition of PEPs, which means the function of mayor is not considered a prominent public function. However, depending on the size of the city concerned and of the budgets managed, the function of mayor of this city could present risks of the same nature and the same scale as the function of head of government. It could therefore be advisable to qualify such a prominent public function performed at the local level as a “comparable prominent public function”.
On the other hand, in the context of the individual risk assessment according to Article 19 of the Anti-Money Laundering Law (see the page “Individual risk assessment”), financial institutions should also assess the risks linked to the performance of these comparable functions on a case-by-case basis, to determine whether their risk level requires the enhanced due diligence measures listed in Article 41 of the Law to be implemented.
1.3. Family members of PEPs
“Family members” are defined in Article 4, 29°, of the Anti-Money Laundering Law as:
- the spouse or a person considered to be equivalent to a spouse;
- the children and their spouses, or persons considered to be equivalent to a spouse;
- the parents.
1.4. Persons known to be close associates of PEPs
“Persons known to be close associates” are defined in Article 4, 30°, of the Anti-Money Laundering Law as:
- natural persons who have joint beneficial ownership of a legal entity or legal arrangement with a PEP or who are known to have any other close business relations with such a person;
- natural persons who have sole beneficial ownership of a legal entity or legal arrangement which is known to have been set up for the de facto benefit of a PEP.
1.5. Cessation of a public function
Article 41, § 3, of the Anti-Money Laundering Law specifies that where a PEP is no longer entrusted with a prominent public function by an EEA Member State, a third country or an international organisation, financial institutions shall, for at least twelve months, take into account the continuing risk posed by that person and apply appropriate and risk-sensitive measures until such time as that person poses no further risk specific to PEPs. Whether this person poses no further risk should be determined through a new individual risk assessment performed by the financial institution in accordance with Article 19 of the Law. Thus, after the aforementioned twelve months have passed, there are several possible situations. For example, financial institutions may decide to stop applying enhanced PEP due diligence measures following this new assessment. Conversely, they may decide to continue to apply these enhanced due diligence measures in certain cases, even though the person has not held a public function for more than a year, if the ML/FT risk still seems high. In these cases, they can decide to perform a new individual risk assessment at a later moment, for example after another year or after six months.
2. Implementation of the risk-based approach for PEPs
The specific measures prescribed by Article 41 of the Anti-Money Laundering Law should be applied in conjunction with the general principle of the risk-based approach imposed by Articles 7, 16 and 19 of the Law.
A customer, his agent or one of his beneficial owners being identified as a PEP, as a family member of a PEP or as a person known to be a close associate of a PEP, as described in Article 41, does not exempt the financial institution from performing the individual risk assessment required by Article 19 of the Anti-Money Laundering Law or from taking this assessment into account to determine the appropriate due diligence measures to be implemented. It follows, in particular, that this individual risk assessment should also be taken into consideration to determine the intensity of the measures taken in accordance with Article 41 and, where appropriate, to supplement them when necessary to account for other identified risk factors.
3. System for determining whether the customer is a PEP
Article 41, § 1, of the Anti-Money Laundering Law stipulates that financial institutions should have “appropriate risk management systems, including adequate risk-based procedures, to determine whether the customer with whom they establish or have a business relationship or for whom they carry out an occasional transaction, an agent of the customer or a beneficial owner of the customer is or has become a politically exposed person […]”. To be able to fully implement the obligations laid down in § 2 of the same Article 41 of the Law as well, these systems should also enable life insurance companies to identify cases where a beneficiary of a life insurance policy and/or, where appropriate, a beneficial owner of the beneficiary of such a policy is a PEP.
As regards enhanced PEP due diligence, the primary obligation for financial institutions is to adopt a procedure and a system that enable them to detect transactions or business relationships in the context of which one or multiple persons meeting the criteria to be qualified as PEP are involved in one of the capacities listed above. This system must make it possible to detect such transactions or business relationships while occasional transactions are being carried out or at the start of a business relationship, but it should also allow to detect business relationships during which one or multiple persons involved in one of the capacities listed above obtained the status of PEP.
3.1. Detection at the start of the relationship
The NBB expects financial institutions:
- to lay down, in their AML/CFTP policy (customer acceptance section), the main principles of the methodology to be applied to determine whether a customer, his agent, the beneficiary of a life insurance policy or a beneficial owner is a PEP (see the page “Policies, procedures, processes and internal control measures”);
- to determine whether their customers meet the definition of PEP by comparing their data with reliable sources of information, by using their forms for requesting the execution of a transaction or the establishment of a relationship or, in the case of life insurance, by using the precontractual documents to be completed by customers, or by any other means. In this regard, they may provide that customers should be asked contractually at the start of a business relationship to identify themselves as a PEP or ask questions to ensure that the person in question is not a PEP (direct questions to obtain a spontaneous identification as PEP and/or indirect questions when there is no such spontaneous identification). However, these questions must proportionate to the purposes of the Anti-Money Laundering Law and the information received may only be used for the sole purpose of implementing the Law, to avoid having this information gathering constitute an excessive intrusion into customers’ private lives. In particular, any use of this data for commercial purposes is prohibited (see Article 41, § 4, third paragraph, of the Anti-Money Laundering Law); and
- to define, in their procedure relating to customer and transaction due diligence measures (section “identification and verification of the identity of customers, agents and beneficial owners), the special rules to be followed, depending on the level of ML/FT risks associated with the products or services for which they were called on by the customer, with the distribution channel used and with the geographical areas concerned, to check the information provided by the customer against certain reliable sources of information and ensure that the customer does not belong to the category of PEPs. In this respect, financial institutions are expected to take all information available to them into account in their analysis and to state in their procedures that customers should be asked specific additional questions when the sources of information consulted seem to indicate, contrary to the information provided by the customers, that they themselves or another person involved in the transaction or business relationship has the status of PEP.
3.2. Detection during the business relationship
The NBB draws the attention of the financial institutions to the fact that the enhanced due diligence obligations listed in Article 41 of the Anti-Money Laundering Law also apply when a customer, his agent, the beneficiary of a life insurance policy or a beneficial owner obtains the status of PEP during the business relationship. Moreover, these obligations also apply to existing business relationships (which were established before the entry into force of the Anti-Money Laundering Law), in this respect also considering the expansion of the notion of PEPs, particularly to include persons residing in Belgium.
For example, in the framework of updating the information they hold about their customers, their agents, the beneficiaries of life insurance policies and the beneficial owners (see the page “Due diligence on business relationships and occasional transactions and detection of atypical facts and transactions”), financial institutions are expected to implement risk-proportionate measures that enable them to identify which of their customers have become PEPs, either because they hold new public functions or because the legal definition of PEPs has been modified, and which of them have become family members of PEPs or persons known to be close associates of them.
When a PEP is identified as such during the business relationship, the financial institution’s internal procedures should stipulate that the decision to maintain the business relationship should be made by the management committee or by the person authorised to do so (see below). It this decision is positive, the other enhanced due diligence measures described hereinafter apply (see Article 35, § 1, third paragraph, of the Anti-Money Laundering Law).
4. Enhanced due diligence measures
In addition to the system for identifying PEPs, Article 41 of the Anti-Money Laundering Law provides for three specific enhanced due diligence measures. These measures apply as soon the financial institution establishes business relationships with or carries out occasional transactions on behalf of PEPs, family members of PEPs or persons known to be close associates of PEPs in whatever capacity (customer, agent, beneficial owner, etc.).
Financial institutions should specifically:
- obtain senior management approval for establishing or continuing business relationships with PEPs or carrying out an occasional transaction on behalf of a PEP;
- take adequate measures to establish the source of the wealth and of the funds that are involved in the business relationship or transaction with such persons;
- subject the business relationship to enhanced scrutiny.
Article 41, § 2, of the Anti-Money Laundering Law addresses the particular case in which the beneficiaries of a life insurance policy and/or, where appropriate, the beneficial owner of the beneficiary of such a policy are or have become PEPs, family members of PEPs or persons known to be close associates of PEPs. In this case, obliged entities should, at the latest at the time of the payment of benefits or at the time of the partial or total transfer of the insurance policy in addition to implementing ordinary customer due diligence measures:
- inform senior management before pay-out of insurance benefits;
- subject the entire business relationship with the policyholder to ongoing enhanced scrutiny.
4.1. Senior management approval for establishing or continuing a business relationship with PEPs or carrying out an occasional transaction on behalf of a PEP
In accordance with Article 41 of the Anti-Money Laundering Law, when a PEP has been identified, financial institutions should provide for measures that make it possible to obtain senior management approval to establish or continue this business relationship with or to perform an occasional transaction on behalf of this PEP.
In practice, the NBB expects financial institutions:
- to lay down, in their AML/CFTP policy (customer acceptance section) the main principles to be followed with regard to the hierarchical level required for approval for establishing or continuing a business relationship with PEPs or carrying out occasional transactions on behalf of PEPs; and
- to define, in their procedure for customer and transaction due diligence measures (section on identification and verification of the identity of customers, agents and beneficial owners), the criteria to determine the specific hierarchical level which is competent to decide to establish or continue a business relationship with PEPs or to accept to carry out an occasional transaction on behalf of a PEP. These criteria may be based on a combination of risk factors associated with the profile of the PEP concerned and the risk factors inherent to the nature of the business relationship or the transaction to be concluded.
The NBB considers that the terms of the decision-making process for accepting or continuing a business relationship with a PEP should be determined on the basis of the individual risk assessment performed in accordance with Article 19 of the Anti-Money Laundering Law. These terms should in particular provide for the designation of the person or the body empowered with decision-making authority and organise the participation of the AMLCO in the decision-making process.
When the individual risk assessment leads to the identification of particularly high risks, in particular due to the fact that the status of PEP is combined with other factors indicative of high risk (for example because of links between the PEP concerned and countries with high ML/FT risks or a high risk of corruption), the nature of the ML/FT risks incurred by the financial institutions fully justifies having the management committee or, where appropriate, the senior management of the financial institution validate the establishment of a business relationship with or the performance of an occasional transaction on behalf of the PEP concerned. When the risks identified are less high, the internal procedures can allocate decision-making authority to persons or bodies of a lower hierarchical level. However, the financial institution must be able to justify this hierarchical level based on the ML/FT risk level assessed. In any case, this hierarchical level must be higher than that of the persons with decision-making authority regarding customers without PEP status.
For risk management purposes, the NBB also recommends that financial institutions provide, in their internal procedures, that the AMLCO and/or of the person responsible for the compliance function must be involved in the process for accepting or continuing a business relationship with a PEP or for accepting an occasional transaction on behalf of a PEP. This involvement may also be determined on the basis of the individual risk assessment performed pursuant to Article 19 of the Anti-Money Laundering Law. The NBB will take particular care to ensure that financial institutions at least provide that the AMLCO should participate actively and play a determining role in the decision-making process when the risks identified are particularly high, notably because of the presence of other factors indicative of high risk.
Moreover, where the financial institution belongs to a financial group, an exchange of information is required when necessary to implement the group policy. Taking the sensitivity of information on personal data into account, the flow of information on these customers within the group should take place at an appropriate hierarchical level and include the AMLCOs and the persons responsible for the compliance functions of the relevant entities of the group. The NBB considers that, among the information to be shared within a group, it is useful to include information on the customers identified as PEPs, in order to enable the financial institutions’ management bodies to have suitable insight into all business relationships of these PEP customers.
4.2. Determining the source of the wealth and the funds involved
In accordance with Article 41 of the Anti-Money Laundering Law, financial institutions having business relationships with PEPs should take appropriate measures to establish the source of these customers’ wealth and of the funds involved in the business relationship with or transaction on behalf of such persons.
To be able to determine the source of the wealth and funds involved in the business relationship with PEPs, financial institutions must either obtain information directly from the customer, especially evidence that can be used to determine the source of the wealth and the funds, or have access to information that is publicly available, in particular on the internet, and that can be considered reliable.
The NBB recommends determining the intensity of the due diligence measures to be implemented depending on whether there are other factors indicative of high risk associated with the transaction or business relationship, in accordance with the individual risk assessment required by Article 19 of the Anti-Money Laundering Law (see the page “Individual risk assessment”). To that end, all characteristics of the transaction or business relationship should be taken into consideration, particularly its nature and purpose and the amounts involved. In this respect, the risk factors associated with the geographical areas concerned are of particular importance. For example, financial institutions must pay particular attention to well-known cases of corruption or organised crime in the country where the public function is performed, and to countries publicly known to have widespread corruption based on information published by credible governmental or non-governmental organisations or by major national or international media outlets.
In this regard, the NBB expects financial institutions to specify, in their customer and transaction due diligence procedures (section “identification and verification of the identity of customers, agents and beneficial owners” and section “due diligence on occasional facts and transactions), which measures are required to determine the source of the wealth and funds involved in the business relationship, properly taking into account all risk factors determining the customer’s profile as well as the business relationship or transaction to be concluded.
4.3. Enhanced scrutiny of the business relationship
In accordance with Article 41 of the Anti-Money Laundering Law, financial institutions having business relationships with PEPs should subject these relationships to enhanced scrutiny. For the specific measures required to scrutinise the customer’s transactions, please refer to the page “General commentary on cases of enhanced due diligence”.
As with the measures needed to determine the source of the customer’s wealth and of the funds involved in the transaction or business relationship (see above), the intensity of the enhanced due diligence measures with regard to the customer’s transactions should be established on the basis of the individual risk assessment, taking into consideration all risk factors determining the customer’s risk profile.
5. Internal control measures
Financial institutions are expected to periodically and permanently monitor the adequacy of the organisational measures implemented to comply with the identity and enhanced due diligence obligations with regard to PEPs. In this respect, the NBB expects the internal audit function in particular to pay specific attention to the adequacy of the measures for identifying PEPs and to the effectiveness of the enhanced due diligence measures implemented by the financial institutions.