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MFSA Issues Guidance Note on PEPs

The Malta Financial Services Authority has issued a Guidance Note on Politically Exposed Persons (PEPs) with a view to increasing the efficiency of Anti-Money Laundering (AML) measures to be applied by subject persons established in Malta.

Subject persons include notaries, real estate agents, banks, CSPs as well as other entities that, in view of their activities or their financial business are particularly exposed to clients intending to launder money.

The measures to be applied are contained in the Prevention of Money Laundering and Funding of Terrorism Regulations (PMLFTR), which transposed in the Maltese legal system the provisions of the 4th AML Directive.

This Guidance has been designed by the MFSA to assist subject persons in complying with the PMLFTR and the Implementing Procedures issued by the FIAU when dealing with PEPs.

Due to the hierarchical position that they occupy and the influence that they wield, PEPs entail a higher risk of money-laundering and/or financing of terrorism. To counteract this risk, when accepting a PEP as a client (the regulations use the word customer), subject persons must therefore carry out additional measures generally referred to as Enhanced Due Diligence (EDD).

Definition of a PEP

A PEP is defined as an individual entrusted with a prominent public function. Although the PMLFTR do not provide a precise explanation on the concept of a prominent public function, they give a non-exhaustive list of examples of people who must be considered as being entrusted with a prominent public function. The MFSA Guidance does not make any distinction between Maltese and foreign PEPs, nor does it distinguish between functions in a country and functions in an international organisation. However, it admits that the notion could be understood differently depending upon the country of the PEP: a given function might be a prominent public function in a country but not in another, depending on the type, the size, the budget, the powers and the responsibilities relating to the function. A PEP is therefore to be determined on a case-by-case basis.

In the non-exhaustive list of PEPs, we may find heads of states and members of legislative bodies and superior courts but also members of the governing bodies of political parties or of the management board of State-owned enterprises and high-ranking officers of the ministry of foreign affairs or the armed forces.

To determine whether a customer is a PEP, subject persons must rely on publicly available information, obtain information directly from the customer and use commercial databases. The subject person must therefore use a variety of different sources to arrive to this determination.

Additional obligations of subject persons when accepting a PEP

Application

In order to determine whether a potential or an existing customer is a PEP, subject persons must have in place risk management procedures aimed at assessing the different kinds of risks that they face with a customer (geographical risk, product/service/transaction risk, interface risk).

Once qualified as a PEP, subject persons must apply EDD measures as soon as and as long as the customer remains a PEP and for up to twelve months from the date when the customer stops being a PEP.

The EDD measures may also vary in intensity depending on the risk assessment undertaken. The risk may indeed vary from PEP to PEP. EDD measures must be proportionate to the risks incurred. If the risk carried by the customer is too high, the subject person should refuse the customer.

It is also important to note that EDD measures will not only have to be applied to the PEP himself/herself but also to his/her family members and his/her close associates. The term “family members” refers to the spouse or partner, the parents as well as the children and their spouses or partners. A close associate is someone who has a joint beneficial ownership with the PEP, but he/she may also be a person having a personal relationship with a PEP.

Content

This MFSA Guidance on PEPs also provides information on the content of these Enhanced Due Diligence measures, which mainly include:

  • obtaining senior management approval prior to providing services;
  • taking adequate measures to establish the source of wealth and source of funds of the PEP, his/her family members and his/her close associates; and
  • conducting more frequent and deeper ongoing monitoring by using specialist PEP databases and monitor any unusual or suspect transactions.

For more information on Company Incorporation and AML obligations or if you have any questions, please feel free to contact Dr Cherise Abela Grech on cabelagrech@gtgadvocates.com and Mr Samuel Gandin on sgandin@gtgadvocates.com

Disclaimer: This article is not intended to impart legal advice and readers are asked to seek verification of statements made before acting on them.