The Reserve Bank of India (RBI) has recently revised the Know Your Customer (KYC) guidelines pertaining to politically exposed persons (PEPs) engaged in transactions with regulated entities (REs). This adjustment aligns with the recommendations of the Financial Action Task Force (FATF), an intergovernmental organization.
PEPs, as defined by the RBI, encompass individuals entrusted with significant public responsibilities in foreign countries, including heads of states/governments, senior politicians, high-ranking government, judicial, or military officials, senior executives of state-owned corporations, and influential political party officials.
The updated norms aim to enhance clarity in executing Customer Due Diligence (CDD), as communicated by the RBI to REs. Under the new guidelines, REs have the option to establish relationships with PEPs, either as customers or beneficial owners. However, REs must conduct standard customer due diligence procedures, along with adhering to additional conditions specified by the RBI for transactions involving PEPs.
Some of the additional conditions include implementing a robust risk management system to identify whether the customer or beneficial owner is a PEP, taking reasonable measures to ascertain the source of funds/wealth, and obtaining approval from senior management to open an account for a PEP.
The introduction of the term PEP in the guidelines is viewed as a step towards complying with FATF recommendations, as the term was not explicitly mentioned in the Prevention of Money Laundering Act, 2002. Addressing this omission is crucial to avoid regulatory gaps from the FATF country review perspective.
FATF defines a PEP as an individual who currently or previously held a significant public function, with the potential for abuse in facilitating money laundering or other illicit activities such as corruption or bribery. The FATF emphasizes that the additional Anti-Money Laundering/Countering the Financing of Terrorism (AML/CFT) measures prescribed for PEPs are preventive in nature and should not be construed as implicating all PEPs in criminal activities, according to information available on the FATF website.