AML Insights 1 – Politically Exposed Persons

Who qualifies as a Politically Exposed Person?

Politically exposed persons (or “PEPs”) are individuals who have been entrusted with a prominent public function. Regulation 2 of the Prevention of Money Laundering and Funding of Terrorism Regulations (“PMLFTR”) (Legal Notice 372 of 2017, as subsequently amended) includes a number of examples of roles which fall within the ambit of “prominent public function” which include heads of state, heads of government, ministers, parliamentary secretaries and members of parliaments.

The definition provided in Regulation 2 of the PMLFTR also allows for the definition to be widened to include any person entrusted with a prominent public function listed in an order issued by the Minister in terms of article 12(5) of the Prevention of Money Laundering Act, Chapter 373 of the laws of Malta.

How does the law define “prominent public function”?

The PMLFTR does not provide a definition of the term “prominent public function”. The Financial Intelligence Analysis Unit’s (“FIAU”) Implementing Procedures (Part I) notes that this lack of a definition stems from the fact that this function may vary due to a number of factors, such as the type, size, budget, powers and responsibilities associated with a particular public function, and the organizational framework of the government or international organisation concerned. The FIAU also notes that certain jurisdictional considerations need to be considered as well.

The Financial Action Task Force (“FATF”) has some guidance on PEPs and notes that in defining the term “politically exposed persons”, examples of prominent public functions are provided whereby more senior positions are included within these examples, such as senior politicians, senior government, judiciary, and senior executives of state-owned corporations. The FATF notes that middle-ranking or more junior individuals in these categories are explicitly excluded from the definition of a “politically exposed person”. The FATF does however highlight that such middle-ranking or more junior officials may act on behalf of the PEPs to circumvent Anti-Money Laundering/Combating the Financing of Terrorism controls. Despite these examples, there is no precise level of seniority established. The FATF also notes that what constitutes a prominent public function may vary due to a number of factors, such as the type, size, budget, powers and responsibilities associated with a particular public function, and the organizational framework of the government or international organisation concerned.

What money laundering and funding of terrorism risks do PEPs pose?

PEPs are considered high risk in terms of money laundering and funding of terrorism, due to their position in society and the influence they exercise. This risk emanates from their susceptibility to abuse of their public functions for their own private gain. Such abuse may include accepting bribes, being involved in corrupt practices, or misappropriating funds. Such practices would constitute criminal offences and will generate proceeds which may need to be laundered. There may also be instances where, in addition to this abuse, the PEP is also susceptible to involvement in funding of terrorism.

It should also be noted that family members and close associates of PEPs may, as a result of their relational proximity to the PEP, also benefit from or be used to

facilitate the abuse by the PEP of their position and influence, and therefore, are also considered to be high risk individuals. Due to these risks, enhanced due diligence measures, in terms of Regulation 11(5) and 11(6) of the PMLFTR, and the guidance provided in the FIAU’s Implementing Procedures, are to be applied to PEPs, their family members and their close associates.

What indicators may there be which may give rise to suspicion of money laundering and funding of terrorism?

While there are numerous indicators which may indicate a suspicion that a PEP may be involved in activities related to money laundering and funding of terrorism, the FATF provides a number of examples which may better assist subject persons in detecting abuse. Such indicators include:

1. PEPs attempting to shield their identity – this is often done because PEPs are aware that their status as a PEP may facilitate the detection of their illicit behaviour, and may attempt to hide their identity to prevent detection;
2. The PEP shows discomfort in disclosing information on source of wealth or source of funds; and
3. The PEP provides inconsistent information or inaccurate or incomplete information.

While the above may not necessarily indicate evidence of money laundering or terrorist financing, they may act as indicators for subject persons to be aware of when conducting their business.