FATF Recommendation 12: Politically Exposed Persons

The Financial Action Task Force — FATF — is an intergovernmental organization whose mission is to set standards and guidelines for preventing money laundering and terrorist financing. As part of its work, the FATF has developed a set of 40 Recommendations that form the backbone of systems for controlling and supervising efforts to prevent money laundering and terrorist financing.

FATF Recommendation 12 establishes the need for financial institutions to implement additional control measures for politically exposed persons (PEPs). Broadly speaking, PEPs are individuals who hold or have held prominent public positions. As a general rule, each country, based on its administrative and organizational context, defines its own concept of a politically exposed person.

For example, in the case of Spain, mayors of certain types of municipalities are considered PEPs, while in neighboring France, mayors do not hold such status.

The FATF sets out a series of measures that must complement normal due diligence procedures, including:

1. Implementing risk management systems to determine whether a person — or beneficial owner — is a politically exposed person.
2. Obtaining senior management approval before establishing or continuing business relationships with identified PEPs.
3. Taking reasonable measures to determine the source of wealth and funds of the politically exposed person.
4. Conducting enhanced and ongoing monitoring of the business relationship.

These measures also apply to the family members and close associates of politically exposed persons. As with the PEP definition, the FATF notes in its FATF Guidance: Politically Exposed Persons — Recommendations 12 and 22 that each country is responsible for defining what constitutes a family member, as this “depends to some extent on the country’s socioeconomic and cultural structure.” However, for close associates, the FATF provides non-exhaustive examples such as partners outside the immediate family, members of the same political party, union, or organization, or business associates sharing ownership or positions with the PEP.

For example, in Italy, family members include “parents, the spouse or a person linked to the politically exposed person by civil union or equivalent, children and their spouses, as well as persons linked to the children by civil union or equivalent.” In Venezuela, close associates are defined as “a person commonly known for their close relationship with a politically exposed person and includes those in a position to conduct financial transactions on their behalf.”

These controls are specifically applied to such individuals because of the power they wield. The FATF points out that their public prominence places them in a position that could potentially be abused to commit money laundering or other financial crimes.

Finally, Recommendation 12 includes an interpretive note focusing on life insurance. It states that obliged entities must determine whether the beneficiaries of a life insurance policy or, where applicable, the beneficial owner of the beneficiary — that is, the natural person who ultimately owns or controls the beneficiary — are politically exposed persons.