Shading the shady

On 1 April 2015, updated AML legislation came into force in the Isle of Man.  (No, I don’t know why anyone would choose that particular day to bring anything into force.)  The 2015 version of the Code (as they have it in the IOM – we go for Regulations in the UK, while they like a juicy Order in Jersey) tidies up some earlier legislation, and also anticipates the Fourth Money Laundering Directive in various ways.  One of these is in its definition of what we are now calling domestic PEPs.

When the FATF started making noises about widening the definition of PEPs to include your own domestic ones as well as foreigners, several small jurisdictions pointed out that for them, if a “domestic PEP” is anyone in a position of public influence, and their family, and their close associates, you would end up with three seasonal workers and a stray dog who weren’t PEPs.  Rumblings started about the idea of risk assessing domestic PEPs – or, as I prefer to think of it, shading them.  So how to express this in clear legislative terms?

Well, here’s what they’ve done in the IOM’s new Code.  For a start, a domestic PEP is “a natural person who is or has been entrusted with prominent public functions in the Isle of Man and any family members or close associates of that person, regardless of the location of those family members or close associates”.  So only the PEP’s position has to be Manx – his family and friends can be scattered across the globe.  And then when it comes to how to treat a domestic PEP (which sounds like the start of a joke, but isn’t), it is more implied than stated.  In the section that talks about PEPs and their need for enhanced due diligence, the Code says: “A relevant person must maintain appropriate procedures and controls for requiring the approval of its senior management [and] take reasonable measures to establish the source of wealth [and] perform ongoing and effective enhanced monitoring of any business relationship with a domestic PEP who has been identified as posing a higher risk of ML/FT, or any foreign PEP” (my italics).  So the expectation is that all PEPs will be identified as such, and then domestic ones will be risk assessed in order to identify the ones that are higher risk and therefore should be subject to EDD.  It’s neat enough, but I would have preferred more clarity.

As I see it, the process is this:

  1. Put in place a system for spotting PEPs of any stripe.
  2. If they’re foreign, slap them with EDD.
  3. If they’re domestic, do a risk assessment. If they’re low or standard risk, job done – although surely monitoring will come into it, in case they grow dodgier with time (or in case your own jurisdiction does… heavens, I feel another blog post coming on).  If they’re high risk, see step 2.
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4 Responses to Shading the shady

  1. Lord Gidds says:

    Hi Susan, hope you’re enjoying the sunshine in Cambridge.

    I think that all domestic PEPs and RCAs are High Risk an should have EDD, but different levels of EDD!

    Best
    Nick

  2. Dear Nick
    I will admit that I wasn’t familiar with the acronym RCA, so I looked it up and it’s either “recurrent cytogenetic abnormalities” or “relatives and close associates” – I’m guessing the second is more apt! But why R rather than F (family) – was it to avoid FCA (which is already a regulator), I wonder?
    But either way, yes, I think you’re right: shaded EDD for domestic PEPs and those connected with them.
    Best wishes from Susan

  3. Pingback: The plank in your own eye | I hate money laundering

  4. I have this morning received an email from the FSC in the Isle of Man which, with their permission, I am reproducing here in full, as it provides very useful clarification of their expectations around the new IoM Code:

    Dear Susan

    I received your email below regarding the recent changes to the Isle of Man’s AML/CFT legislation. I work in the AML Unit at the FSC in the Isle of Man and am writing to correct some of the wording of this article.

    Firstly, the rationale for us including domestic PEPs in our legislation was the revisions to the FATF Recommendations in this area. Although we do keep abreast of developments in relation to the EU Directives we are not a member of the EU and therefore we do not have to implement the directives in our jurisdiction.

    I think there is some misunderstanding around the scenarios where enhanced due diligence is required and where there are additional PEP requirements. Also, the summarised process in your article reads as incorrect to me.

    Looking at the requirements of the Money Laundering and Terrorist Financing Code 2015 (“the Code”) I think it makes sense to begin with considering the customer risk assessment requirements at paragraph 7 which require that a risk assessment should be undertaken on ALL customers prior to the establishment of a business relationship.

    When deciding if a customer is high risk the assessment should consider a number of factors, some of which are listed in Paragraph 15 of the Code including considering if the customer is a PEP. However, as explained in our AML/CFT Handbook, if a customer is a PEP it does not automatically mean the relationship should be treated as high risk.

    If the customer is assessed as high risk the requirements of paragraph 15 of the Code (Enhanced customer due diligence) must be met which states that where a customer poses a higher risk of ML/FT as assessed by the customer risk assessment enhanced due diligence must be carried out. This paragraph makes no reference to PEP status.

    If the customer is assessed as being a PEP the requirements of paragraph 14 of the Code (Politically Exposed Persons) apply. There are additional requirements for higher risk domestic PEPs and all foreign PEPs (14 (2), (3) and (4))

    Just because the customer is identified as being a foreign PEP it does not necessarily mean that enhanced due diligence is required.

    In summary there could be the following scenarios:

    1. High risk domestic PEP – The customer is identified as a domestic PEP and this information, plus potentially other factors have resulted in the customer being assessed as high risk. In this case enhanced due diligence requirements (paragraph 15 of the Code) apply as the customer is high risk and also the full PEP requirements of paragraph 14 apply as it is a high risk domestic PEP.
    2. Standard risk domestic PEP – The customer is identified as a domestic PEP but has not been assessed as high risk. In this case the relevant PEP requirements of paragraph 14 apply. There is no need for enhanced due diligence as the customer is not high risk.
    3. High risk foreign PEP – The customer is identified as a foreign PEP and this information, plus potentially other factors have resulted in the customer being assessed as high risk. In this case both enhanced due diligence requirements (paragraph 15 of the Code) apply as the customer is high risk and also the full PEP requirements of paragraph 14 apply as it is a foreign PEP.
    4. Standard risk foreign PEP – The customer is identified a foreign PEP but has not been assessed as high risk. There are no enhanced due diligence requirements (as the customer is not high risk) but the full requirements in paragraph 14 of the Code (PEP requirements) will apply as the customer is a foreign PEP.

    The process as I see it is as follows:

    1. Risk assess all customers;
    2. Conduct EDD on any high risk customers (paragraph 15);
    3. Where a customer is identified as a PEP comply with paragraph 14, ensuring the additional requirements of the paragraph (sub-paragraphs 2,3 and 4) for all foreign PEPs and high risk domestic PEPs have been met.

    I think where there might be confusion is that in relation to all foreign PEPs and high risk domestic PEPs there are enhanced monitoring provisions (there are only enhanced due diligence requirements where the customer is high risk). Definitions which clarify the differences between enhanced monitoring and enhanced due diligence are set out in Part 4 of our AML/CFT Handbook.

    I appreciate there are a number of scenarios and I hope this clarifies the matter, if you have any questions please let me know.

    Regards

    Ashley
    Ashley Whyte A.C.I.S BA (Hons) ¦ Manager – Anti-Money Laundering ¦ Enforcement Division ¦ ashley.whyte@fsc.gov.im
    Financial Supervision Commission ¦ PO Box 58 ¦ Finch Hill House ¦ Bucks Road ¦ Douglas ¦ Isle of Man IM99 1DT Tel: (44) 1624 689377 ¦ Fax: (44) 1624 689399

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