Politically exposed persons (PEPs)* constitute a unique group of clients, particularly vulnerable to corruption and exploitation in criminal activities. While PEP status in no way indicates a connection to a criminal environment, business relationships with them should undoubtedly be subject to specific preventative measures.

PEP definition

The term "politically exposed person" was first used in the revised Anti-Money Laundering Guidelines for the Financial Sector, developed by the Jersey Financial Conduct Authority in September 2001**. In this document, the term "potentates" was also used as a proxy for PEPs, which refers to senior political figures and their immediate family and close associates***.

Over the years, the definition of a PEP has been incorporated into numerous international and domestic legal systems. It can be found in, among others, the Third, Fourth, and Fifth AML Directives and the Act on Counteracting Money Laundering and Terrorist Financing of 1 March 2018 (hereinafter referred to as the AML Act).

Politically exposed persons, in accordance with Article 2, paragraph 2, point 11 of the AML Act, as amended on March 30, 2021, shall be understood as persons holding significant public positions or performing significant public functions, excluding groups of middle and lower-level positions, including:

a) heads of state, heads of government, ministers, deputy ministers and secretaries of state,

b) members of parliament or similar legislative bodies,

c) members of the governing bodies of political parties,

d) members of supreme courts, constitutional tribunals and other high-level judicial bodies whose decisions are not subject to appeal, except in extraordinary procedures,

e) members of courts of auditors or boards of central banks,

f) ambassadors, chargés d'affaires and senior officers of the armed forces,

g) members of administrative, management or supervisory bodies of state-owned enterprises, companies with State Treasury shareholding, in which more than half of the shares or stocks belong to the State Treasury or other state legal entities,

h) directors, deputy directors and members of bodies of international organisations or persons performing equivalent functions in these organisations,

i) directors general in the offices of the highest and central state bodies and directors general of voivodeship offices,

j) other persons holding public positions or performing public functions in state bodies or central government administration bodies.

It is worth noting that, compared to the legal status prior to the amendment, "heads of local offices of special government administration bodies" were stripped of their PEP status. This change, as stated in the justification for the bill, results from an in-depth analysis of the provisions of the AML Act. It was concluded that including the aforementioned category of officials in the definition of a politically exposed person constituted unnecessary "overregulation" in relation to the provisions of Directive 2015/849, which clearly state that the definition of "PEP" does not include mid-level or lower-level officials.

At the same time, the Act defines a group of individuals known as close associates of politically exposed persons. Pursuant to Article 2, Section 2, Item 3 of the AML Act, the term "family members of a politically exposed person" means:

a) a spouse or a person cohabiting with a person holding a politically exposed position,

b) a child of a politically exposed person and his or her spouse or cohabiting person,

c) parents of a politically exposed person;

In addition, Article 2, Section 2, Item 12 of the AML Act includes a definition of "persons known as close associates of a politically exposed person", which are:

a) natural persons who are beneficial owners of legal persons, organizational units without legal personality or trusts together with a person holding a politically exposed position or maintaining other close relationships with such a person related to the conducted business activity,

b) natural persons who are the sole beneficial owner of legal persons, organisational units without legal personality or trusts that are known to have been established for the purpose of obtaining an actual benefit by a politically exposed person.

Establishing a PEP

Under the AML Act, determining whether a customer or beneficial owner is a PEP, a family member of persons with PEP status, or a close associate of persons with PEP status is one of the obligations of the obligated institution, which can be fulfilled by implementing procedures based on risk analysis, consisting primarily of:

• identifying the client himself and his identity, by checking whether a given person has PEP status, determining the source of his wealth,
• ongoing analysis and monitoring of its economic relations.

This obligation is most often fulfilled by receiving declarations from clients, in written or documentary form, confirming whether or not they hold PEP status. Such declarations include a clause about the awareness of criminal liability for making a false declaration. This clause replaces the warning about criminal liability for making a false declaration (Article 46, Section 1 of the AML Act).

Pursuant to Article 46, Section 1, Item 3 of the AML Act, identifying a person with PEP status requires the application of appropriate financial security measures. If the client refuses to submit the aforementioned declaration, the obligated institution should not enter into business relations with such entity and should terminate any existing ones.

Furthermore, pursuant to Article 46(2) of the AML Act, in the case of a business relationship with a politically exposed person, obligated institutions shall apply appropriate measures to determine the source of the client's wealth and the source of assets held by the client as part of the business relationship or transaction, and shall intensify the application of financial security measures to continuously monitor the business relationship with the client. They shall also obtain approval from senior management for establishing or continuing a business relationship with a politically exposed person.

The above provisions shall apply accordingly to family members of a politically exposed person and persons known to be close associates of a politically exposed person.

Obligated institutions may have difficulty fulfilling the obligation imposed by the AML Act, as the definitions used therein are ambiguous. Verifying the status of politically exposed persons (PEPs) independently is time-consuming and requires a thorough knowledge of the law, particularly the AML Act. Identifying close associates of individuals with PEP status, as defined in Article 2, Section 2, Item 12 of the AML Act, can be particularly challenging. Verifying the veracity of submitted declarations is also challenging. The individuals themselves often lack knowledge or are mistakenly convinced that they are PEPs.

Proper implementation of AML obligations is facilitated by using appropriate PEP lists, created by commercial companies and available online. It's advisable to only use trusted, well-known portals that contain up-to-date, verified profiles of individuals with PEP status and close PEP associates. When verifying PEP status, I also encourage seeking the assistance of professionals who professionally implement AML procedures.

*PEP is an acronym for Politically Exposed Person, which refers to a person occupying a politically exposed position.

**Jersey Financial Services Commission, Anti-Money Laundering Notes for the Finance Sector, July 1999.

***W. Jasiński, Politically Exposed Persons. Counteracting Corruption and Money Laundering, Warsaw 2012, p. 24.

This alert is for informational purposes only and does not constitute legal advice.

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