Banks prodded on due diligence of 'politically exposed persons'

The Bangko Sentral ng Pilipinas (BSP) is reminding all supervised financial institutions (BSFIs) to conduct the appropriate customer due diligence (CDD) on clients that are deemed “politically exposed persons” (PEP).

PEP as defined by the Anti Money Laundering Council (AMLC), is an individual “who is or has been entrusted with prominent public position” and has “substantial authority over policy, operations or the use or allocation of government-owned resources” in the Philippines, in a foreign state or in an international organization.

In a memo (BSP Memorandum No. M-2023-029) signed on Oct. 10, BSP Deputy Governor Chuchi G. Fonacier reminded BSFIs of the risk-based procedures for the different PEP categories.

To facilitate the identification of PEPs, BSFIs will adopt its database on PEPs which should be regularly updated and consistent with the BSFI’s risk and context.

Fonacier said BSFIs “may enumerate the positions that are considered as PEPs or list the persons occupying such positions, or a combination of both methodologies.”

As a further reminder, the BSP official said that “in dealing with their customers, BSFIs should adopt a clear and reasonable communication strategy to explain the account opening process and procedures to the customers and avoid discriminatory practices. This should include informing the customers of the applicable requirements and corresponding approval process within a reasonable time.”

The memo clarified BSP’s CDD measures and PEP definition. AMLC defines CDD as the procedure of identifying and verifying the true identity of customers and their agents and beneficial owners, including understanding and monitoring of their transactions and activities.

As part of CDD, covered persons will have to establish and record the true and full identity of PEPs, as well as their immediate family members and close relationships or associates.

According to the BSP, for domestic and international organization PEPs, the onboarding procedures is the same as those applied to other customers, such as customer identification and verification.

“Unlike foreign PEPs, domestic and international organization PEPs are not automatically considered as high risk,” said Fonacier. The applicable and appropriate CDD will then be determined by the results of the BSFI’s risk profiling of the PEP customers based on its adopted methodology, she added.

This methodology will have several criteria such as: the nature of the service or product to be availed of; the purpose of the account or transaction; the source of funds and source of wealth; the nature of the business and/or employment; existence of suspicious transaction indicators; and other relevant factors as the covered persons may deem reasonable or necessary in assessing the risk of a customer.

Fonacier said that in cases when there is a higher risk business relationship for domestic and international organization PEPs, BSFIs should do the following: obtain senior management approval before establishing or, for existing customers, continuing, such business relationships; take reasonable measures to establish the source of wealth and the source of funds of customers and beneficial owners identified as PEPs; and conduct enhanced ongoing monitoring on that relationship.

In the case of foreign PEPs, these require the application of enhanced due diligence (EDD) measures equivalent to those posing higher risk.

“The decision to engage or maintain the business relationship with the foreign PEP customer should not be taken at the ordinary level of the hierarchy but at the level of senior management,” said Fonacier.

“This should further lead to more proactive steps, in particular, to increase the monitoring of the business relationship, in order to determine whether those transactions or activities appear unusual or suspicious,” she added.

Meanwhile, the memo reminded BSFIs that in implementing the CDD procedures for PEPs, they should implement customer-centric onboarding procedures to: identify PEPs and implement appropriate riskbased measures on PEPs, recognizing that not all domestic PEPs pose higher risk; and in cases of customers assessed as posing higher risk relationship, adopt a reasonable turnaround time in the conduct of onboarding EDD procedures and approval process.

“BSFIs are, therefore, enjoined to receive the account opening applications of customers, including domestic PEPs, inform them of the applicable requirements and approval process, and provide feedback within the defined turnaround time,” said Fonacier.

The BSP is also implementing continuing assessment and regular PEP status updating as well as identification and assessment of a customer as a PEP.

“BSFIs should be guided by the definition of PEPs in the regulations to identify and assess whether the prospective customer qualifies as a PEP, including the determination of past and present PEPs,” said Fonancier.

In addition, she emphasized that BSFIs should not do what she called “wholesale” concept of a PEP or that “Once a PEP, always a PEP” because this is not consistent with the risk-based approach.

The BSP is advising BSFIs to use risk-based assessment to determine whether there are “any residual risks or significant influences” in a customer or past PEP.

In declassifying a former PEP, there are relevant factors that can be considered, said Fonacier.

This include the position held and if it is susceptible to corruption or misappropriation of state funds or assets, and the length of time in office and the possibility of returning to the same office in the future is another factor.

She also stated the level of transparency about the source of wealth and origin of funds -- “in particular, those funds generated as a consequence of office held, and how politically connected they remain once they have left office.”

BSP leads the AMLC, the government's financial intelligence unit, and implements the country’s anti money laundering laws.