Financial institutions (FIs), in the ordinary course of their businesses, establish business relationships with Politically Exposed Persons (PEPs) whom may be vulnerable to corruption which comes with reputational and financial crime risks to the FI.
PEPs pose a high risk of money laundering, financing of terrorism and proliferation financing(ML/ FT/PF) due to the possibility that individuals holding such positions may misuse their power and influence for personal gain or advantage to themselves, close family members and/or associates. Such individuals may also use their families or close associates to conceal illicit funds and assets.
In addition, they may also seek to use their power and influence to gain representation and/or access to, or control of, legal entities for similar purposes.
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Consequently, the Central Bank of Nigeria (CBN) mandates financial institutions (FIs) to comply with the provisions of the CBN Anti-Money Laundering, Combating Financing of Terrorism and Countering Financing of Proliferation of Weapons of Mass Destruction (AML/CFT/CPF) Regulations, 2022 to mitigate the potential risks posed by PEPs.
Amongst these obligations is the requirement to apply a risk-based approach to identifying Politically Exposed Persons (PEPs) and to apply appropriate Enhanced Due Diligence (EDD) measures when dealing with those that pose higher AML/CFT/CPF risks.
In view of the corruption levels in Nigeria, domestic PEPs are rated highly vulnerable to financial risks, therefore, by default, most domestic PEPs are considered high risk.
Foreign PEPs and PEPs with prominent functions in international organizations should be categorized based on the level of risk as assessed by financial institutions.
This is the basis for the CBN issuing the Guidance notes on PEPs in line with CBN AML/CFT/CPF Regulations 2022, FATF Recommendations, FATF Guidance on PEPs (2013) and Wolfsberg Guidance on PEPs (2017), to assist FIs in the identification and management of risks associated with PEPs.
This Guidance provides minimum standards for FIs in their relationships with PEPs and does not limit measures to be taken by FIs to meet their statutory obligations. The Guidance Notes will be revised from time to time, as necessary.
This article will be focused on the notable provisions of these guidance notes going forward.
What are the objectives of the CBN guidance notes on PEPs in Nigeria?
The objective of this Guidance is to assist FIs in the identification and management of risks associated with PEPs in the course of business relationships.
What is the applicability scope of the CBN guidance notes on PEPs?
This Guidance applies to FIs (Financial Institutions) under the regulatory purview of the Central Bank of Nigeria.
What are the definitions of terms referred to in the CBN guidance notes on PEPs?
–Politically Exposed Persons (PEPs): This is as defined in the CBN AML/CFT/CPF Regulations 2022.
-PEPs who are or have been entrusted with prominent public position in Nigeria are known as “Domestic PEPs”.
-PEPs who are or have been entrusted with prominent public position in any other foreign jurisdiction are known as “foreign PEPs”.
– PEPs who are or have been entrusted with the management or any prominent function within an international organization are known as “International Organizations PEPs”.
– Close associates of PEPS: are individuals who are closely connected to a PEP, either socially or professionally and include a PEP’s widely- and publicly known close personal friends, business colleagues, and personal advisors.
Close associates also include persons having joint or ownership right in a legal person or arrangement established in favour of a PEP.
– Family members of PEPS: include a PEP’s direct family members, their spouse, their children and their spouses, their parents, and the siblings.
–Prominent Public Function: This refers not only to the customer’s title, rank, grade or similar factors but includes the natural person’s power or influence over decisions, policy or how government/international organization funds are expended.
–Senior Management: refers to persons in authority who understand both the ML/TF/PF risks and their responsibility within the FI’s AML control environment.
The level of seniority should be directly proportionate to the nature of the FI and the money laundering risk posed by the PEP. For larger institutions (Banks and Development Financial Institutions) senior management may commence from AGM.
Senior management will commence from Assistant General Manager for regional and merchant banks; from General Manager grade for National and International banks and from Senior Manager for medium sized institutions (Other Financial Institutions).
What do the guidance notes say on Customer Due Diligence (CDD)?
-FIs are expected to carry out customer due diligence (CDD) measures proportionate to the risks posed by customers.
-When dealing with PEPs, their family members or known close associates, additional measures in the form of EDD are to be applied by the FIs to mitigate the higher ML/FT/PF risks.
-FIs are, however, not to turn away a prospective customer or close a business relationship simply on the basis that the customer, or beneficial owner, is a PEP (or a family member or person known to be their close associate).
-When considering whether to establish or continue a business relationship with a PEP, the focus should be on the level of ML/TF/PF risk posed by the PEP, and whether the FI has adequate controls in place to mitigate such risks. This is in order to prevent the FI from being used for illicit purposes should the PEP be involved in criminal activities.
What the recognized sources of information under the guidance notes for the determination of PEPs, their family members and close associates?
There are several sources of information that can be used by FIs in determining whether a customer is a PEP. In determining whether the customer or a beneficial owner is a PEP, FI may consider the following:
–Periodic review of customer database
FIs are required to ensure that CDD information is up-to-date as provided by the CBN AML/CFT/CPF Regulations.
Existing customers may become PEPs after they enter a business relationship, so it is essential that FIs monitor non-PEP accounts for a change in the PEP status, customer profile or account activity and update customer information. Such ongoing monitoring should be on a risk basis.
–Conduct internet and media searches
FIs may use the internet and media as sources of information for the determination, monitoring,verification of information in relation to PEPs, although it should be noted that such information may not be comprehensive or reliable.
–Conduct searches using commercial databases
There are a variety of commercial databases available which may assist in the detection of PEPs, FIs may acquire access to such databases.
The use of these databases should never replace traditional CDD processes as contained in the CBN AML/CFT/CPF Regulations 2022. FIs using such databases as a support tool should ensure that they are fit for the purpose and are not simply outsourcing their risk assessment.
FIs should also determine whether the use of commercial databases, to confirm the information provided by the customer, is necessary. Prior to making use of any commercial databases, FIs should understand how commercial databases are populated and how these are able to detect and flag PEPs, family members and persons known to be close associates of PEPs.
–Create in-house databases and share information within financial groups or countries
FIs may choose to develop in-house databases as tools to assist in determining PEPs, and such database should be kept up to date.
In line with provisions of the CBN AML/CFT/CPF Regulations, Financial Groups are required to implement procedures for sharing information with the Group for AML/CFT/CPF purposes. In relation to foreign PEPs, it is best practice for institutions within Financial Groups to share information on PEPs for AML purposes.
–Customer questionnaires & self-declarations
Information obtained directly from the customer may be obtained in response to questionnaires and/or on-boarding forms. FIs may develop questionnaires with specific reference to criteria that identify PEPs including family members and pe-rsons known to be close associates of the PEP.
Such a questionnaire would be required to be completed and signed by the customer and the beneficial owner, where applicable.
Information obtained directly from the customer may be obtained in response to the questionnaire and/or on-boarding form.
Information sharing by competent authorities
FIs may rely on the information shared by competent authorities which is helpful in determining whether a particular customer is a PEP or the PEP is trying to abuse the financial system (e.g., the level of corruption in the country, the level of income for certain types of positions, etcetera) or specific information about particular persons which would facilitate the detection of foreign PEPs.
Both general information concerning the country from which a foreign PEP originates and more specific information (e.g., about particular persons) are useful tools for verifying CDD information.
What are the provisions of the guidance notes on PEP screening?
-The conduct of PEP screening in each FI will depend on the size and complexity of each institution and the inherent risk of PEPs using the FI’s products and services to launder the proceeds of crime.
– An FI should conduct onboarding screening and ongoing screening on all customers. Where appropriate, PEP screening should be automated.
– However, manual screening may be acceptable depending on the size of the institution and the materiality of the inherent risk posed by PEPs. PEP screening should be carried out in accordance with FI’s risk appetite while applying RBA and take place at least:
- a) During onboarding process;
- b) at periodic customer review;
- c) when there is a trigger event which warrants a customer due diligence review;
- d) Upon notification/tip-off from reliable sources.
It should be noted that, in many instances, PEP screening is not the primary control for identifying PEPs
What are the provisions of the guidance notes on PEPs for customer risk assessment?
-FIs should understand their customer’s risk profiles in order to apply appropriate procedures and processes to manage and mitigate risk.
-FIs should be consistent with a risk-based approach, the level and type of CDD should be commensurate with the risks presented by the customer relationship.
– FIs must have appropriate risk-based procedures for conducting ongoing CDD to understand the nature and purpose of customer relationships, and to develop a customer risk profile. It must be consistent with a risk-based approach for conducting ongoing CDD, FI should obtain more customer information for those customers with higher risk profile and ensure ongoing monitoring.
What are the provisions of the guidance notes on approvals for relationships with PEPs?
FIs are required to obtain senior management approval for establishing (or continuing, for existing customers) business relationships with PEPs as provided by the CBN AML/CFT/CPF Regulations.
What are the provisions for enhanced monitoring for PEP relationships/accounts?
Higher risk PEPs require enhanced ongoing monitoring of the business relationship.
FIs should implement electronic and/or manual monitoring systems to constantly monitor the business relationship and detect unusual and potential suspicious transactions and activities. This process should include:
-Understanding and documenting the customer’s source of funds and source of wealth (e.g. salary and compensation from official duties and wealth derived from other sources).
– When the due diligence on an immediate family member or close associate of a PEP indicates that the source of funds originates from the PEP, the FI should determine and document the PEP’s sources of funds and wealth.
– Conduct searches including internet and media searches to screen customers for adverse reports/news.
What do the guidance notes say regarding time limits for PEP status?
-Despite the statement that once a PEP will always remain a PEP, however the handling of a client who is no longer entrusted with a prominent public function should be based on an assessment of risk and not on prescribed time limits.
-The risk-based approach requires that FIs assess the ML/TF risk of a PEP who is no longer entrusted with a prominent public function or has lost such power and influence (such as the case of deceased) and take effective action to mitigate this risk.
-However, where the corruption risk remains even if a PEP has been out of office for a certain time, the FI may continue to treat a customer as a PEP. Possible factors to consider in determining whether the customer is no longer a PEP include:
– The level of (formal and informal) influence or control that the individual could still exercise; the seniority of the position that the individual held as a PEP; or whether the individual’s previous and current function are linked in any way (e.g., formally by appointment of the PEPs successor, or informally by the fact that the PEP continues to deal with the same substantive matters).
-The corruption risks or links to any industries that are high risk for corruption.
-How politically connected they remain once they have left office.
What do the guidance notes say on PEPs as beneficial owners?
A customer or the beneficial owner of a legal entity or legal arrangement, that is a client, may be a PEP.
There is a risk that PEPs could circumvent AML/CFT/CPF and anti-corruption safeguards by opening accounts, establishing business relationships or conducting transactions using third parties, such as intermediaries, legal entities or legal arrangements.
-When conducting CDD, FIs are required to identify the beneficial owner and take reasonable measures to verify the identity of the beneficial owner. If there are reasonable grounds to believe that a beneficial owner is a PEP EDD shall be mandatory.
What do the guidance notes say on domestic/international organisation PEPs when not higher risk?
When the risk assessment established that the business relationship with a domestic or international organization PEP does not present a higher risk, the PEP in question can be treated like any other normal customer, i.e. the FI should apply normal customer due diligence measures and monitoring as required under the CBN AML/CFT/CPF Regulations.
What are the provisions of the guidance notes on periodic reviews for PEP customers?
-CDD should continue after establishing a relationship with the customer. On a regular basis, transactions and account activities should be monitored and scrutinized for ML/TF/PF risks.
-The behavior of the customer, transactions and accounts should be in line with the expected level of activity. Ongoing monitoring is crucial as a customer risk profile may change over time.
-PEP accounts should be subject to periodic reviews as may be determined by the FI in line with risk assessment. Frequency of the periodic reviews should be determined by the risk of the customer and documented appropriately. FIs should also review their PEP database frequently.
What are the provisions of the guidance notes on regulatory reporting requirements?
-FIs should closely monitor the transactions of all foreign PEPs and high-risk domestic or international organization PEPs.
– If there is a suspicion that a transaction involves funds linked to any form of criminal activity, a suspicious transaction/activity report (STR) must be filed with the NFIU.
-FIs are required to render monthly returns on all transactions with PEPs to the CBN and NFIU in line with provisions of the CBN AML/CFT/CPF Regulations 2022.