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Answers for law firms
What is a PEP check for law firms?
A PEP check finds out whether a client, or a beneficial owner of a client, is a politically exposed person (PEP), a family member of one or a known close associate. Under regulation 35 of the Money Laundering Regulations 2017 a law firm in the regulated sector must have risk-based systems to identify PEPs, and must apply enhanced due diligence when it acts for one.
| Question | Answer |
|---|---|
| The law | Money Laundering Regulations 2017, regulation 35 |
| Who is a PEP | Someone entrusted with a prominent public function, other than a middle-ranking or more junior official |
| Who else is covered | Family members and known close associates |
| What the firm must do | Senior management approval, source of wealth and source of funds, enhanced ongoing monitoring |
| Domestic PEPs | Lower starting risk than non-domestic PEPs since 10 January 2024 (regulation 35(3A)) |
| After leaving office | Measures continue for at least 12 months (regulation 35(9)) |
Who counts as a PEP?
Regulation 35(14) lists the prominent public functions. They include
- heads of state, heads of government, ministers and deputy or assistant ministers
- members of parliament or similar legislative bodies
- members of the governing bodies of political parties
- members of supreme courts, constitutional courts and other high-level courts
- members of courts of auditors and the boards of central banks
- ambassadors, chargés d’affaires and high-ranking officers in the armed forces
- members of the boards of state-owned enterprises
- directors and board members of international organisations.
Family members include a spouse or civil partner, children and their spouses or civil partners, and parents. Known close associates include people with joint beneficial ownership of an entity with a PEP, or other close business relations with one (regulation 35(12)).
How does a firm identify a PEP?
The regulations require appropriate risk-management systems and procedures (regulation 35(1)), sized to the firm’s own risk assessment. Firms that often act for PEPs usually screen every client and beneficial owner against a commercial PEP database. Where PEPs are rare, the legal sector guidance accepts simpler steps, such as asking the client, searching online and reviewing what the client provides.
What must the firm do if a client is a PEP?
Being a PEP is not a reason to refuse a client. It changes the checks. Regulation 35(5) requires the firm, on top of its other enhanced due diligence, to
- get senior management approval before establishing or continuing the relationship
- take adequate measures to establish the source of wealth and the source of funds involved
- carry out enhanced ongoing monitoring of the relationship.
Senior management means someone with enough knowledge of the firm’s money laundering risk and enough authority to decide. In a law firm that may be a senior or managing partner, a head of department, or the MLRO. See How should a law firm check source of funds?
How are domestic PEPs treated?
Since 10 January 2024, regulation 35(3A) says the starting point for a UK PEP, or their family member or close associate, is a lower level of risk than for a non-domestic PEP. If no enhanced risk factors are present, the firm applies less enhanced due diligence than it would for a non-domestic PEP. The change was made by the Money Laundering and Terrorist Financing (Amendment) (No. 2) Regulations 2023.
Is a PEP check the same as sanctions screening?
No. A PEP check decides how much due diligence to apply. Sanctions screening checks whether a person is subject to financial sanctions, which is a separate legal regime. If a client is sanctioned, the firm generally cannot deal with their funds at all without a licence. Firms usually run both checks together. See What are AML checks for law firms?
What firms typically do
- Ask every client about PEP status at onboarding, and screen in proportion to how often the firm acts for PEPs.
- Check each screening hit against the statutory list before treating it as a PEP. Commercial databases often include people below the threshold.
- Classify the match. A PEP in their own right, a family member or a close associate, and domestic or non-domestic.
- Name the approvers in the firm’s procedures, record the approval on file, and tell whoever monitors firm-wide risk that a PEP relationship has started.
- Keep a list of current PEP relationships and review them on a set date and whenever something changes, such as a new matter or the person leaving office.
- Watch for indicators that no screening tool catches, such as funds that come from a government source.
Common mistakes
- Treating every screening hit as a PEP, or every PEP as a reason to refuse.
- Applying the same depth of checks to a UK PEP as to a foreign one, when no enhanced risk factors are present.
- Screening the client but not the beneficial owners of a company client.
- Dropping the measures the day a PEP leaves office, instead of after at least 12 months.
- Getting approval by email and never putting it on the client file.
A worked example
The adult son of a serving UK MP instructs a firm on a flat purchase, funded by a mortgage and his savings. Screening flags him. He is a family member of a domestic PEP, so the starting point is lower risk.
With no enhanced risk factors, the firm still gets a partner’s approval, checks the deposit against his bank statements, records a short source of wealth summary, and monitors the matter more closely. If the money had come from an unexplained gift or from overseas, it would ask for more. Once his parent leaves office, the PEP measures no longer apply to him.
Questions firms ask
What does PEP stand for?
Politically exposed person.
How long does someone stay a PEP?
The enhanced measures continue for at least 12 months after the person leaves the public function, or longer if the firm judges the risk calls for it (regulation 35(9)). Once the PEP has left office, the measures stop applying to their family members and close associates (regulation 35(11)).
Are local councillors PEPs?
Local councillors are not in the list of prominent public functions in regulation 35(14). Middle-ranking and more junior officials are excluded from the definition.
Can a firm refuse a client because they are a PEP?
PEP status alone should not bar a client from legal services. The firm applies the enhanced checks and decides on the risk.
What records should the firm keep?
The PEP check result, the senior management approval, the source of wealth and source of funds evidence, and the enhanced monitoring, kept with the rest of the client due diligence.
Kord runs PEP and sanctions screening alongside ID verification and ongoing monitoring in its app. See AML checks for solicitors.