PEPs are a perennial and perplexing problem. Who they are, how long they stay like that for, and what to do about them anyway – headaches all along the line. But one aspect of PEPitude that has been exercising (perhaps even exorcising) me recently is the concept of the “close associate”. The FATF is uncharacteristically coy on the matter; their 2012 Recommendations define a PEP fairly carefully but then in Rec 12 add simply that “the requirements for all types of PEP should also apply to family members or close associates of such PEPs”. Turning instead to the draft Fourth Money Laundering Directive *cue weary chorus of “Why are we waiting?”* we read in Article 3, home of definitions and as such Rather Helpful, that, when it comes to PEPs, “’persons known to be close associates’ shall include (i) any natural person who is known to have joint beneficial ownership of legal entities or legal arrangements, or any other close business relations, with a [PEP], [and] (ii) any natural person who has sole beneficial ownership of a legal entity or legal arrangement which is known to have been set up for the benefit de facto of the [PEP]”.
At first glance that actually seems quite prescriptive (which can often be helpful, unless you’re applying a risk-based approach – oh, I see the problem). But actually there is a lot of wriggle room too, in the phrase “other close business relations”. The difficulty lies not in appreciating the dangers of close associates – after all, what self-respecting baddie goes anywhere without his henchmen – but in defining and discerning them. (In one of those extra-value moments for which you really read this blog, I can report that “henchman” comes from the Old English hengest, meaning horse – so the henchman was originally the groom. Of course now it means someone wider than he is tall, who wears sunglasses at all times and talks into his cuff. Threateningly.)
Actually, I’m being a bit unfair to the FATF, as in June 2013 they did publish a whole guidance document on PEPs. And in this they say that close associates are “closely connected to a PEP, either socially or professionally”, which adds that extra social dimension to it. After issuing the caveats that close association “depends to some extent on the social-economic and cultural structure of the country of the PEP” and “the number of persons who qualify as… close associates is fluid, and may change significantly over time”, the guidance goes into some detailed examples of who might qualify in this category: “(known) (sexual) partners outside the family unit (e.g. girlfriends, boyfriends, mistresses); prominent members of the same political party, civil organisation, labour or employee union as the PEP; business partners or associates, especially those that share (beneficial) ownership of legal entities with the PEP, or who are otherwise connected (e.g., through joint membership of a company board)”.
And just how is the diligent MLRO meant to find out about these connections? The FATF guidance points out that “unlike law enforcement and supervisors, financial institutions and DNFBPs have access to a valuable source of information: the customer. They should utilise this rather than relying on third party providers.” Perhaps MLROs should allow for subscriptions to Hello!, Vanity Fair and Tatler in their budgets – these glossies are packed with pics of the PEPs at play. And as for uncovering, so to speak, your PEP customer’s known sexual partners outside the family unit, well, I’d like to be a fly on the wall during those DD interviews.
I hate money laundering 