Politically exposed persons (PEP) screening under the AML/CTF Act

Who is a PEP

A politically exposed person (PEP) is defined in Chapter 1 of the AML/CTF Rules. The definition encompasses several categories of individuals based on their positions and connections.

Domestic PEPs hold prominent public positions within Australia, mirroring roles such as heads of state, senior politicians, senior judiciary, senior military, senior executives of state-owned enterprises, and senior political party officials. Foreign PEPs are individuals who have held or currently hold equivalent positions in a foreign country. Individuals holding equivalent senior positions in an international organisation are also classified as PEPs.

The definition extends beyond the PEP themselves to include their family members and close associates. This broader scope aims to mitigate the risk of illicit activity being conducted through these relationships.

When PEP screening is required

Chapter 4 of the AML/CTF Rules mandates that Part B procedures, also known as Applicable Customer Identification, are used to ascertain whether a customer or beneficial owner is a politically exposed person (PEP). This assessment must be undertaken before providing a designated service to a new customer.

Existing customers require assessment for PEP status as part of Ongoing customer due diligence (OCDD). This ensures that information remains current and any changes in PEP status are identified.

The determination of PEP status is typically performed using a commercial PEP screening database, often supplemented by customer self-declaration and adverse media checks.

Required treatment of PEPs

The AML/CTF Act requires specific treatment for Politically Exposed Persons (PEPs). Foreign PEPs must always be treated as high risk, and enhanced due diligence (EDDD) measures are mandatory. Domestic and international organisation PEPs are treated as high risk where the entity’s risk-based assessment determines this to be the case.

EDDD measures include obtaining senior management approval for establishing a business relationship, implementing reasonable measures to verify the source of wealth and source of funds, and undertaking enhanced ongoing monitoring. These measures are designed to mitigate the increased risk associated with PEPs.

For foreign PEPs, EDDD measures must continue for the life of the business relationship. Importantly, foreign PEP status is indefinite under the AML/CTF Rules; once identified as a foreign PEP, that classification persists for treatment purposes.

Recordkeeping and reporting

Records relating to PEP determinations must be retained for a minimum of 7 years. These records, which include the documentation of the PEP determination itself and the source of that determination, are to be maintained within the customer file. This recordkeeping obligation is mandated under section 113 of the AML/CTF Act.

If a customer identified as a PEP also raises suspicion of money laundering or terrorism financing, a suspicious matter report (SMR) must be submitted. This reporting obligation is separate from the PEP determination and recordkeeping requirements.

Failure to conduct appropriate PEP screening constitutes a contravention of the customer identification procedure obligations outlined in sections 32 and 36 of the AML/CTF Act. Such contraventions may attract civil penalties of up to 100,000 penalty units per instance.