Importance of PEP Identification and Management
Effective identification and management of Politically Exposed Persons (PEPs) is a cornerstone of robust Anti-Money Laundering (AML) frameworks for financial institutions. PEPs, due to their prominent positions or influence, may pose a higher risk of involvement in bribery, corruption or money laundering. Properly identifying and applying Enhanced Due Diligence (EDD) to PEPs helps firms mitigate these risks, protect against financial crime, maintain regulatory compliance and safeguard their reputation. By implementing proportionate and risk-based measures, firms can balance compliance obligations with fair treatment of customers, ensuring trust and operational integrity in the financial sector.
The FCA’s Stance
The Financial Conduct Authority (FCA) has underscored the importance of risk-based PEP identification and management under the Money Laundering Regulations 2017 (MLRs). The FCA’s Finalised Guidance FG25/3, published in July 2025, clarifies that firms should not automatically classify non-executive board members of UK civil service departments as PEPs. This clarification aligns with the MLRs’ definition of PEPs, which focuses on individuals with significant public functions, such as heads of state, government ministers, or senior judicial officials, and does not extend to non-executive roles without decision-making authority.
The FCA expects firms to adopt a proportionate approach, applying EDD only where there is a genuine risk of money laundering or terrorist financing, and to avoid overly cautious classifications that could unfairly impact customers.
Key Areas for Effective PEP Compliance
The FCA’s FG25/3 guidance outlines several key areas for firms to ensure effective PEP compliance:
- Risk-Based Identification: Firms must establish clear processes to identify PEPs, using reliable data sources to determine whether an individual holds a prominent public function, while excluding non-executive board members of UK civil service departments unless other risk factors apply.
- EDD: Upon identification of a PEP, firms should apply EDD measures, such as veryfing the source of funds and wealth, monitoring transactions, and assessing relationships with family members or close associates.
- Proportionality: EDD measures must be proportionate to the actual risk posed. Blanket policies that automatically treat low-risk individuals as high-risk are discouraged.
- Record-Keeping: Firms must maintain comprehensive records of PEP identification, risk assessments, and EDD actions to evidence compliance with regulatory expectations.
- Training and Awareness: Staff should be trained to understand PEP definitions, the updated FG25/3 guidance, and the firm’s AML policies to ensure consistent application.
- Ongoing Monitoring: Firms must continuously monitor PEP relationships to detect suspicious activities and update risk assessments as circumstances evolve.
- Regulatory Reporting: Under Principle 11 of the FCA Handbook, firms must report any material AML compliance issues, including failures in PEP identification or EDD processes, to the FCA.
These measures support the strengthening of AML frameworks, while ensuring customers are treated fairly and in accordance with the FCA’s emphasis on risk-based, proportionate compliance.
How Complyport can help
Complyport provides expert AML compliance solutions tailored to help firms meet FCA expectations for the identification and treatment of PEPs. Our services are designed to ensure your AML framework is proportionate, effective and fully aligned with the latest regulatory guidance, including FG25/3 and the Money Laundering Regulations 2017 (MLRs).
Our support includes:
- PEP Risk Assessments: Identifying and categorising PEPs using a risk-based methodology, including treatment of close associates and family members.
- Enhanced Due Diligence Implementation: Developing and applying proportionate EDD measures, including ongoing monitoring protocols.
- Policy and Procedure Development: Drafting or updating AML/CTF policies and procedures to reflect current FCA expectations.
- Training Programmes: Delivering tailored training sessions to ensure staff understand the definition of PEPs, application of FG25/3, and internal AML policies.
- AML Framework Audits: Conducting comprehensive reviews to identify weaknesses in current systems and provide practical recommendations for remediation.
- Ongoing Compliance Support: Offering outsourced compliance services or on-demand advice from experienced consultants.
Book a meeting with a Subject Matter Expert
Whether you are reviewing your current AML framework or seeking guidance on FG25/3 compliance, our SMEs are here to help. Contact us today to arrange a consultation tailored to your firm’s needs.
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