Businesses and assets of Ukrainian politicians and oligarchs abroad

Politically Exposed Persons & Related Laws

Politically Exposed Persons (PEP) is a term used by European Union and USA for use in the fight against the money laundering and funding of the terrorist activity.

The main organization that handles this work is FATF (Financial Action Task Force of Money Laundering) has stated in their famous 40 open recommendations that financial institutions and audit organizations have to be especially vigilant and apply additional verification measures when dealing with PEP.

Who is subjected to the PEP (politically exposed persons) category?

It is defined in directives of European Union (DIRECTIVE 2006/70/EC):

Politically exposed persons – natural persons who are or have been entrusted with prominent public functions’ shall include the following:

- heads of State, heads of government, ministers and deputy or assistant ministers;
- members of parliaments;
- members of supreme courts, of constitutional courts or of other high-level judicial bodies whose decisions are not subject to further appeal, except in exceptional circumstances;
- members of courts of auditors or of the boards of central banks;
- ambassadors, chargés d’affaires and high-ranking officers in the armed forces;
- members of the administrative, management or supervisory bodies of State-owned enterprises.

Immediate family members’ shall include the following:

- the spouse;
- any partner considered by national law as equivalent to the spouse;
- the children and their spouses or partners;
- the parents.

Persons known to be close associates’ shall include the following:

- any natural person who is known to have joint beneficial ownership of legal entities or legal arrangements, or any other close business relations
- any natural person who has sole beneficial ownership of a legal entity or legal arrangement which is known to have been set up for the benefit de facto of the person known as PEP

What action should financial institution such as banks and credit organizations take of their client is a politically significant person?

The actions are defined in directive of European Union (DIRECTIVE 2005/60/EC):

“There are cases where particularly rigorous customer identification and verification procedures are required. This is particularly true of business relationships with individuals holding, or having held, important public positions, particularly those from countries where corruption is widespread. Such relationships may expose the financial sector in particular to significant reputational and/or legal risks. The international effort to combat corruption also justifies the need to pay special attention to such cases and to apply the complete normal customer due diligence measures in respect of domestic politically exposed persons or enhanced customer due diligence measures in respect of politically exposed persons residing in another Member State or in a third country.

In respect of transactions or business relationships with politically exposed persons residing in another Member State or in a third country, Member States shall require those institutions and persons covered by this Directive to:

- have appropriate risk-based procedures to determine whether the customer is a politically exposed person;
- have senior management approval for establishing business relationships with such customers;
- take adequate measures to establish the source of wealth and source of funds that are involved in the business relationship or transaction;
- conduct enhanced ongoing monitoring of the business relationship.

In case of inability to verify the source of incoming funds of their PEP client, EC encourages to deny services to their client, and report suspicious transactions to the national financial intelligence agency. If authorities start investigation of a PEP, their accounts may be frozen.