RBI gives clarity to 'politically exposed persons' term to meet FATF norms

PEPs are individuals entrusted with prominent public functions by a foreign country, including the heads of states/governments, senior politicians, senior government or judicial or military officers, senior executives of state-owned corporations and important political party officials, said the RBI.

This change is expected to provide more clarity to undertake Customer Due Diligence (CDD), said the RBI in a communication to REs.

REs have the option of establishing a relationship with PEPs (whether as customer or beneficial owner).

REs have to perform the regular customer due diligence and also follow additional conditions prescribed by the RBI to transact with PEPs.

Some additional conditions include establishing an appropriate risk management system to determine whether the customer or the beneficial owner is a PEP.

REs have to take reasonable measures for establishing the source of funds/ wealth.

They also need to get approval from senior management to open an account for a PEP.

Defining PEP is seen as a move to comply with the FATF’s recommendations, as the term was not mentioned in the Prevention of Money Laundering Act, 2002.

This would have been seen as a regulatory gap from the FATF country review perspective.

FATF defines PEP as an individual who is or has been entrusted with a prominent function.

Many such individuals hold positions that can be abused for the purpose of laundering illicit funds or other predicate offences such as corruption or bribery.

“Because of the risks associated with PEPs, the FATF Recommendations require the application of additional AML/CFT measures to business relationships with PEPs.

"These requirements are preventive (not criminal) in nature, and should not be interpreted as meaning that all PEPs are involved in criminal activity,” said the FATF website.