In the realm of Anti-Money Laundering (AML) and Countering the Financing of Terrorism (CFT), collectively known as 'AML/CFT', the term Politically Exposed Persons ("PEPs") holds significant weight. Malaysia, like many other nations, recognises the potential risks associated with PEPs and has implemented stringent measures to address these concerns. This article aims to shed light on the definition of PEPs, the various types, applicable measures, and the cessation of PEP status, while emphasising the importance of an effective AML/CFT strategy.
Definition of PEPs:
Politically Exposed Persons, commonly referred to as PEPs, are individuals who are or have been entrusted with prominent public functions. These roles may include high-ranking government officials, senior executives of state-owned enterprises, and influential figures within international organisations.
PEPs are considered higher risk due to the potential for abuse of their positions for illicit financial activities.
Types of PEPs:
PEPs can be categorised into foreign and domestic, with the latter further divided into persons entrusted domestically with prominent public functions, as well as their family members and close associates.
Foreign PEPs typically involve individuals holding significant political positions in other countries, whereas domestic PEPs include those within the borders of Malaysia.
Examples of PEPs may range from ministers, judges and members of court and ambassadors to CEOs of state-owned enterprises, their family members (e.g., parents, siblings, spouse, children for both biological or non-biological relationships) and close associates.
Measures Applicable to PEPs:
To mitigate the risks associated with PEPs, financial institutions in Malaysia adopt enhanced due diligence ("EDD") measures. Foreign PEPs are consistently treated as high risk, requiring thorough scrutiny throughout the business relationship. Similar caution is applied to high-risk domestic PEPs and individuals associated with international organisations.
To effectively manage the risks associated with PEPs, financial institutions in Malaysia implement a series of measures:
1. Design a Comprehensive Policy:
Develop a robust AML/CFT policy that explicitly addresses PEPs. This policy should outline the specific procedures, due diligence requirements, and risk management strategies pertaining to PEPs.
2. Enhanced Due Diligence ("EDD"):
Implement EDD protocols, which involve a more thorough examination of the customer's background, transactions, and potential risk factors. Establishing the source of wealth and source of funds, respectively, becomes crucial in this process.
Read our article on the various types of customer due diligence here.
3. Senior Management Approval:
Obtain senior management approval for establishing or continuing business relationships with PEPs. This ensures a higher level of scrutiny and oversight, aligning with the institution's risk management framework.
4. Ongoing Monitoring:
Implement ongoing monitoring mechanisms with a higher frequency of due diligence reviews tailored to the unique parameters of customers falling under the PEP segment. This continuous assessment helps in promptly identifying and addressing any emerging risks.
5. Policy and Procedures for Cessation:
Develop clear policies and procedures for the cessation of PEP status. This includes guidelines for reclassifying individuals who were once PEPs and determining the appropriate level of risk mitigation measures. While the approach to the cessation of PEP status varies among institutions, some adopt a conservation stance, where "once a PEP, always a PEP". Others provide a grace period, typically five (5) years after the individual's PEP status ceases, before relaxing the stringent measures. The decisions hinges on the institution's risk appetite and internal policies.
Effectively managing the risks associated with Politically Exposed Persons (PEPs) is paramount in safeguarding the financial integrity of Malaysia's institutions.
By adopting comprehensive policies, EDD measures, and implementing ongoing monitoring, financial entities can strike a balance between facilitating legitimate financial activities and preventing illicit activities. As the landscape evolves, staying vigilant and adaptive in AML/CFT strategies remains crucial in addressing emerging challenges related to PEPs.
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