State Bank of Pakistan (SBP) requires banks to maintain accounts of politically-exposed persons (PEPs) and their close family members and non-compliance would result in imposition of counter measures including disconnection from the international financial system. This was disclosed by SBP in a recent meeting of Senate Standing Committee on Finance while briefing on PEPs.
Pakistan being member of the Asia/Pacific group on Money Laundering (APG) is required to follow Financial Action Task Force (FATF) Standards and non compliance would consequently lead to the imposition of counter measures including disconnection from the international financial system such as what happened in the case of Iran and North Korea.
Pakistan has undergone two mutual assessments by FATF/APG. During mutual evaluation of the country in 2009, APG raised serious concerns about regulatory requirements related to PEPs. APG declared Pakistan’s compliance insufficiently effective and pointed out that SBP does not define PEPs, and does not extend the enhanced due diligence requirements to family members or associates. The recommended actions also included to “define PEPs, and require banks to conduct enhanced on-going due diligence on PEPs, and their family members and associates”.
As per SBP regulations “PEPs means individuals who are entrusted with prominent public functions either domestically or by a foreign country, or in an international organisation, for example Heads of State or of government, senior politicians, senior government, judicial or military officials, senior executives of state owned departments, corporations and autonomous bodies. This does not intend to cover middle ranking or more junior individuals in the foregoing categories. SBP requires banks take various measures to open and maintain accounts of PEPs and their close associates or family members. These measures include (a) to implement appropriate internal policies, procedures and controls to determine if a customer or beneficial owner is a PEP; (b) to obtain approval from the bank’s senior management to establish or continue business relations where the customer or a beneficial owner is a PEP or subsequently becomes a PEP; (c) to establish, by appropriate means, the sources of wealth or beneficial ownership of funds, as appropriate including bank/DFIs’ own assessment to this effect; and (d) to conduct during the course of business relations enhanced monitoring of business relations with the customer. The SBP further informed the committee that the purpose of these instructions is to ensure necessary safeguards as per international norms and by no means refusal of banking services to above category of customers. The meeting was also informed that the FATF, an inter-governmental body of G-7 countries (France, West Germany, Italy, Japan, the UK, the US, and European Commission) is a Paris-based body with current membership of 34 countries along with Associate membership of bodies like the IMF, the World Bank, Asian Development Bank and APG.
The objectives of the FATF are to set standards and promote effective implementation of legal, regulatory and operational measures for combating money laundering, terrorist financing and other related threats to the integrity of the international financial system and its recommendations are followed in 80 countries of the world.
According to FATF’s recommendations, PEPs are individuals who are or have been entrusted with prominent public functions by a foreign country or domestically, for example Heads of State or of government, senior politicians, senior government, judicial or military officials, senior executives of state owned corporations, important political party officials.
The FATF requires member countries and its financial institutions to take measures relating to business relations/transactions with politically exposed persons. FATF recommendation requires that the requirements should also apply to family members or close associates of such PEPs.
Senate Standing Committee was further informed that other countries of the world follow requirements related to PEPs in line with FATF recommendations include Bangladesh, India, Malaysia, Singapore, Hong Kong, Indonesia, New Zealand, Sri Lanka, the UK and USA.