How will the 5th Money Laundering Affect PEPs Checks?
There are several updates that differentiate 5th Money Laundering Directive (5MLD) from the 4MLD, one such difference is the definition of what actually constitutes as a Politically Exposed Person (PEP).
Previously, a PEP was open to a certain amount of interpretation – for example, while Sadiq Khan, the Mayor London is clearly a PEP, what about the Mayor of Reading? Or the Mayor of a remote village in Lithuania?
To achieve consistency, all EU member states will now need to maintain an up-to-date list of the exact functions that qualify as prominent public functions that regulated organisations (obliged entities) such as Financial Service Providers or Estate Agents, can then use to develop their Due Diligence procedures.
The European Commission aims to compile a single list of all prominent public functions, which will be made public.
If you are a regulated firm, significant consideration will be required regarding the accuracy and completeness of such lists, including how up to date they are. While this change is a step in the right direction, there are still challenges, which are largely due to the inconsistent definitions of these functions, especially across all the different EU member states.
PEP lists should be accurate and conform to FATF guidelines, to ensure consistency with member states. Regulated organisations need to understand the criteria their PEP list provider is using to compile the list; how it is kept up to date; and the extent to which secondary identifiers are available to help reduce false positives.
These lists are also only relevant to the EU region and not for states outside of the EU, as such lists may not even exist.
Our recommendation would be that despite the appeal of doing direct checks on the new database, PEP and Sanctions providers put a considerable amount of effort into designing algorithms that will match the correct person even where there is a change in algorithm used, and we would recommend using an established PEP and sanctions specialist as part of your AML check.