Getting Ready for the June 1 FINTRAC Changes: Politically Exposed Persons - Part 1
CATEGORY: Practice Tips
TAGS: 2021 FINTRAC Changes Anti-Money Laundering FINTRAC Politically Exposed Persons
By: Adam Feldman, CAMS, CAMS-RM, CSC, Guest Contributor
What is a PEP?
If you've been following the regulatory changes that are coming into effect on June 1, 2021, you might be aware that, under circumstances described in the next section, brokerages will be required to determine if an individual is a PEP. But what is a PEP? Well, "PEP" refers to a politically exposed person. These are individuals that hold a senior position in a government, military, judiciary, or international organization. The senior nature of a PEP's position provides them with the potential to influence policy direction and/or the allocation of resources.
The specific roles and positions that qualify an individual as a PEP are defined in federal anti-money laundering legislation, but PEPs can essentially be categorized as:
- a foreign PEP,
- a domestic PEP,
- a head of an international organization (HIO), or
- a family member or a close associate of a foreign or domestic PEP or HIO.
It's worth mentioning that the mayor of a Canadian city, town, village, or rural or metropolitan municipality is also considered to be a domestic PEP, regardless of the size of the population.
Family members and close associates of a PEP or HIO hold the same status as the individuals to whom they're related or associated. For example, a parent of a foreign PEP would also be considered a foreign PEP. You can refer to FINTRAC's guidance for a complete list of who qualifies as a PEP/HIO, but for now, let's just keep it simple. For the rest of this post, unless otherwise specified, references to PEPs will include these subcategories.
So now that I know what a PEP is, what do I need to do?
Starting on June 1, certain activities, events or transactions will require brokerages to take reasonable measures to determine if the individuals they're dealing with are PEPs. These determinations will need to be made as a result of the following:
- Entering into a business relationship - Remember, as of June 1, brokerages will enter into a business relationship the first time they create an information record for a client. This will also trigger a requirement to determine if the client is a PEP.
- Ongoing monitoring - Once you've entered into a business relationship, FINTRAC expects you to periodically reassess your client's PEP status.
- Detecting a fact about a client that indicates they may be a PEP - You need to make a PEP determination if you identify a fact that indicates that a client might be a PEP; for example, if they mention that they formerly held a senior position in the government of a foreign country.
- Receiving $100,000 or more in cash or virtual currency - You're probably thinking this is pretty rare, but if you ever do receive $100,000 or more in cash or the equivalent value in virtual currency in a single transaction, you'll be required to make a PEP determination for the individual that you receive the cash or virtual currency from.
But how do I determine if a person is a PEP?
There are a few different methods that brokerages can use to determine if they're dealing with a PEP:
- Asking the individual - This is one of the most common PEP determination methods, and it requires a brokerage to provide the individual with the definition of who qualifies as a PEP and then asking them if the definition describes them or someone that they know. This method is easy to implement and it's also consistent with FINTRAC's description of reasonable measures. It's not very reliable, though, as you need to trust the individual to tell you the truth.
- Commercial databases - Many software vendors maintain extensive lists of known PEPs. A brokerage that holds a subscription with one of these vendors merely has to enter the individual's name and the system will identify whether the name matches that of any known PEPs. This is also a very common method of making a PEP determination and, in one sense, it's more reliable than asking the person, as the commercial databases are independently maintained. On the other hand, no database of known PEPs can be entirely complete. After all, how realistic is it to expect that a database will include every family member or close associate of every known PEP?
- Open-source research - As PEPs are public figures, there tends to be a fair amount of information about them in the public domain. Brokerages can determine if an individual is a PEP by doing some background research using social media and their favourite search engine. This method requires strong online research skills and often requires allocating dedicated resources to conduct these searches. However, open-source research can be quite reliable when conducted by a skilled researcher.
Whichever method or combination of methods that you use, your PEP determination process should be described in your brokerage policies and procedures.
What do I do if I determine that the individual is a PEP?
If you determine that an individual is a PEP, some specific measures need to be taken to evaluate and mitigate the risk associated with the individual. Stay tuned for next week's post to learn more!
Remember, brokerage really means real estate professional!
Although both brokerages and real estate professionals have obligations to comply with federal anti-money laundering regulations related to reporting suspicious transactions or the possession or control of terrorist property, the bulk of the compliance obligations, including the requirement to make a PEP determination, fall to the reporting entity. This is typically the brokerage. However, a brokerage often delegates certain compliance processes to their real estate professionals who help the brokerage remain compliant by conducting those processes in the manner specified by the legislation, regulations, and brokerage policies and procedures.
Be sure to check out the other blogs in this series at the links below:
- Getting Ready for the June 1 FINTRAC Changes: Business Relationships
- Getting Ready for the June 1 FINTRAC Changes: Beneficial Ownership
- Getting Ready for the June 1 FINTRAC Changes: Politically Exposed Persons - Part 2
- Getting Ready for the June 1 FINTRAC Changes: Virtual Currency Obligations
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