Puzzlefox

June 2017

A politically exposed person (PEP) or the head of an international organization (HIO) is a person entrusted with a prominent position that typically comes with the opportunity to influence decisions and the ability to control resources. The influence and control a PEP or HIO has puts them in a position to impact policy decisions, institutions and rules of procedure in the allocation of resources and finances, which can make them vulnerable to corruption.

1. A politically exposed person (PEP) as an individual who is or has been entrusted with a prominent public function. Due to their position and influence, PEPs are at higher risk to be involved in money laundering and related predicate offences, including corruption and bribery.
2. A Politically Exposed Person (PEP), is an individual who is in a notable public position such as a President, Politician, Mayor, etc. Transactions involved with PEPs are considered as high-risk transactions, so businesses and companies need to be aware of the status of their clients to minimise this risk.
3. The terms politically exposed person and senior foreign political figure are often used interchangeably, particularly in international forums. Foreign official is a term for individuals deemed as government persons under the Foreign Corrupt Practices Act or FCPA, and although definitions are similar to PEP, there are quite a few differences.

Corruption is an international issue that impacts all countries, so the Financial Action Task Force (FATF) has recommended that all countries consider domestic as well as foreign politically exposed persons and heads of international organizations as part of the approach to combatting money laundering and the financing of terrorist activities. The FATF references the United Nations Convention against Corruption (UNCAC) which defines PEPs as 'individuals who are, or have been, entrusted with prominent public functions and their family members and close associates'.

Transparency International is an organization that operates internationally with a mandate to stop corruption and promote transparency. It can be a source of information to learn more about corruption and the potential vulnerability of persons who hold prominent positions.

A Politically Exposed Person (PEP), is an individual who is in a notable public position such as a President, Politician, Mayor, etc. Transactions involved with PEPs are considered as high-risk transactions, so businesses and companies need to be aware of. Politically exposed person The PEP database contains the most comprehensive list of Politically Exposed Persons (PEPs) from more than 240 territories of the world, as well as from international organizations and political and diplomatic representations with around 1 million relevant PEPs.

Corruption can be defined simply as the misuse of public power for private benefit. Internationally, as well as within Canada's own anti-money laundering and anti-terrorist financing legislation, it is important to understand that the possibility for corruption exists, and that politically exposed persons or heads of international organizations can be vulnerable to carrying out, or being used for, money laundering or terrorist activity financing offences.

Part of knowing your clients is determining whether a person is a foreign PEP, a domestic PEP, a HIO, or a family member or close associate of one of these people.

The reporting entities with these obligations include financial entities, securities dealers, money services businesses and life insurance companies. This guidance is for securities dealers who have to make a PEP or HIO determination in relation to account openings, the periodic review of existing accounts and the detection of a fact in relation to existing account holders.

For all of these activities, you must take reasonable measures to determine whether a person is a foreign PEP, or a family member or close associate of a foreign PEP. Foreign PEPs, their family members and their close associates must automatically be treated as high-risk clients.

You must take reasonable measures to determine whether a person is a domestic PEP or HIO, or is a family member of a domestic PEP or HIO, at account opening and during the periodic review of existing account holders. You must also determine if there is a close association to a domestic PEP or HIO if you detect a fact about an existing account holder.

Once you have determined that a person is a domestic PEP, a HIO, or the family member or close associate of a domestic PEP or HIO, you must assess to determine if that person poses a high risk for committing a money laundering or a terrorist activity financing offence. If you assess the risk to be high, then the person must be treated as a high-risk client.

All high risk clients are subject to your policies and procedures for high-risk clients, outlined as a requirement of the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA). For high-risk PEPs, HIOs, their family members and close associates, you have specific obligations to keep records, establish source of funds, and obtain senior management approval to keep the account open.

If you have already determined that a person is a foreign PEP or the family member of a foreign PEP, in accordance with the Proceeds of Crime (Money Laundering) and Terrorist Financing Regulations (PCMLTFR), you are not required to make this determination again. Furthermore, you are not required to assess all of your existing account holders immediately upon the coming into force date (June 17, 2017) of the PEP and HIO obligations. Rather, FINTRAC expects you to have, within your policies and procedures, a process by which existing account holders will be assessed over time. This process should be in line with your obligation to take reasonable measures on a periodic basis to determine whether an account holder is a foreign PEP, a domestic PEP, a HIO, the family member of one of these people, or a close associate of a foreign PEP.

What reasonable measures should I use to make the determination?

You must take reasonable measures to determine whether a person is a PEP, a HIO, their family member or their close associate. You must also take reasonable measures if you are required to establish the source of funds for any account for these persons.

Reasonable measures include, but are not limited to, one or more of the following actions:

1. asking the client;
2. conducting an open source search; or
3. consulting a source of commercially available information.

You may consider using more than one reasonable measure to make a determination.

How proactive or reactive your reasonable measures are is directly related to the specific obligation.

You must take reasonable measures to determine if a person is a foreign PEP or their family member or close associate at account opening, on a periodic basis for existing account holders, and if a fact is detected about an existing account holder.

You must also take reasonable measures to determine if a person is a domestic PEP, a HIO or their family member at account opening, and on a periodic basis for existing account holders. In addition to this, you must use reasonable measures to determine if a person is a close associate of a domestic PEP or HIO if you detect a fact about an existing account holder.

In most cases a reasonable measures effort is proactive in that you must have a process in place to make the determination. For example, you may have a proactive process where, on a periodic basis, you run your list of account holders against an open source or a commercially available database. In this case, your reasonable measures parameters would need to be looking at whether an existing account holder is a foreign PEP, a domestic PEP, a HIO, the family member of any one of these or a close associate of a foreign PEP.

However, it is acceptable to have a reactive approach if you detect a fact outside of your normal periodic review that leads you to suspect a person is a PEP, a HIO, or their family member or close associate. You are not required to have policies and procedures in place to proactively seek out details about an existing account holder outside of your periodic basis. However, if a fact is detected, you must act on it. A detected fact could be one that constitutes reasonable grounds to suspect that an existing account holder is a foreign PEP, a domestic PEP, a HIO, or the family member or close associate of any of these.

For example, if your entity has media monitoring activities in place, and a fact is detected through these, it must be acted upon. There is no requirement, however, to have media monitoring activities in place for the purpose of detecting facts.

Who is a foreign PEP?

A foreign PEP is a person who holds or has held one of the following offices or positions in or on behalf of a foreign state:

• head of state or head of government;
• member of the executive council of government or member of a legislature;
• deputy minister or equivalent rank;
• ambassador, or attaché or counsellor of an ambassador;
• military officer with a rank of general or above;
• president of a state-owned company or a state-owned bank;
• head of a government agency;
• judge of a supreme court, constitutional court or other court of last resort; or
• leader or president of a political party represented in a legislature.

These persons are foreign PEPs regardless of citizenship, residence status or birth place.

A person determined to be a foreign PEP, is forever a foreign PEP.

Who is a domestic PEP?

A domestic PEP is a person who holds — or has held within the last 5 years — a specific office or position in or on behalf of the Canadian federal government, a Canadian provincial government, or a Canadian municipal government:

• Governor General, lieutenant governor or head of government;
• member of the Senate or House of Commons or member of a legislature;
• deputy minister or equivalent rank;
• ambassador, or attaché or counsellor of an ambassador;
• military officer with a rank of general or above;
• president of a corporation that is wholly owned directly by Her Majesty in right of Canada or a province;
• head of a government agency;
• judge of an appellate court in a province, the Federal Court of Appeal or the Supreme Court of Canada;
• leader or president of a political party represented in a legislature; or
• mayor*.

* In line with legislation across Canada, municipal governments include cities, towns, villages and rural (county) or metropolitan municipalities. As such, a mayor is the head of a city, town, village, or rural or metropolitan municipality, regardless of the size of the population.

A person ceases to be a domestic PEP 5 years after they have left office.

Who is the head of an international organization?

The head of an international organization is a person who is either:

1. the head of an international organization established by the governments of states; or
2. the head of an institution established by an international organization.

When we refer to the head of an international organization or the head of an institution established by an international organization we are referring to the primary person who leads that organization, for example a president or CEO.

There is no requirement for an institution established by an international organization to operate internationally. It is possible that an institution that has been established by an international organization only operates domestically, or in one jurisdiction.

You need to use reasonable measures to determine if the person is the head of an international organization or the head of an institution set up by an international organization.

Once a person is no longer the head of the international organization, or the head of the institution established by an international organization, that person is no longer a HIO.

What is an international organization?

An international organization is an organization set up by the governments of more than one country. The key to determining whether you are dealing with a HIO is to determine how the organization was established. If the organization was established by means of a formally signed agreement between the governments of more than one country, then the head of that organization is a HIO. The existence of these organizations is recognized by law in their member countries but the organizations are not seen to be resident organizations of any one member country.

Certain organizations clearly meet this definition, but others may take more research before coming to a determination. Examples of international organizations, and institutions established by international organizations, can be found in Annex A of this guidance.

Why is it important to consider the family member or close associate of a PEP or HIO?

It is critical to consider family members or close associates of PEPs and HIOs as part of your PCMLTFA obligations. It is an established trend that criminals carrying out, or directing, criminal activity will distance themselves from the proceeds of that crime as much as possible until they have laundered the money. FINTRAC has observed that many criminals rely on family members or other personal relationships to conduct transactions on their behalf in order to create this distance until they can establish a safe way to spend these assets.

You may, therefore, not see joint accounts with, or financial transactions conducted between, a PEP or HIO and their family members or close associates. This is because the purpose of laundering funds is to protect the identity of the criminals and they may avoid a direct link with the individuals involved in conducting any transaction on their behalf. This is why FINTRAC'S guidance references other types of associations to consider, beyond transactions or shared accounts, when making a close associate or family member determination.

Who is considered to be the family member of a PEP or a HIO?

If a person is a foreign PEP, domestic PEP or HIO, then certain family members must also be regarded as PEPs or HIOs. These family members are:

• their spouse or common-law partner;
• their child;
• their mother or father;
• the mother or father of their spouse or common-law partner; and
• a child of their mother or father (sibling).

Is the niece of a PEP considered a family member?

No. A person is a PEP or HIO because of the position that they hold or have held. The family members of the PEP or HIO that are specifically listed in this guideline are also regarded as PEPs or HIOs. If John is a PEP, then John's brother, Sam, is considered a PEP. But Sam's daughter (John's niece) is not determined to be a PEP under the PCMLTFA.

Is the step-child of a PEP or the step-child of a PEP's mother or father considered a family member?

A step-family relationship does not fall under the definition of a family member unless they were legally adopted. For example, if Helen is a domestic PEP, and she has legally adopted Sarah, her step-daughter through marriage, then Sarah is the child of a domestic PEP.

Similarly, if a marriage includes step-siblings the siblings are not considered family members if they were not legally adopted by the step-parent. For example, Angela marries a foreign PEP, and each has a daughter from a previous marriage. Neither Angela, nor the foreign PEP, adopts the other's daughter, so the two daughters are not considered as siblings to each other. Only Angela (legal spouse) and the foreign PEP's biological daughter need to be considered as family members of a foreign PEP.

Who is considered to be a close associate of a PEP or a HIO?

Certain activities will trigger your obligation to take reasonable measures to determine whether a person is a close associate of a foreign PEP, domestic PEP or HIO. A close associate can be an individual who is closely connected to a PEP or HIO for personal or business reasons. The term 'close associate' is not intended to capture every person who has been associated with a PEP or HIO.

As a securities dealer, you are required to take reasonable measures to determine if you are dealing with a close associate of a foreign PEP:

• at account opening;
• during your periodic review of existing account holders;
• if you detect a fact, outside of your periodic review, about an existing account holder.

You are required to take reasonable measures determine if you are dealing with a close associate of a domestic PEP or HIO if you detect a fact, outside of your periodic review, about an existing account holder.

Your obligation to take reasonable measures to make a close associate determination exists regardless of whether the PEP or HIO also holds an account with you. For example, the PEP or HIO may hold an account at Securities Dealer ABC, while you hold the account of a person who is determined to be a close associate of the PEP or HIO.

A person determined to be a close associate of a foreign PEP must be treated as a high-risk client.

However if you determine that a person is a close associate of a domestic PEP or HIO, you must conduct a risk assessment of that close associate. If you determine that the close associate is high risk for a money laundering or terrorist activity financing offence, then you must treat that person as a high-risk client.

Some examples of a close association for personal or business reasons include a person who is:

• business partners with, or who beneficially owns or controls a business with, a PEP or HIO;
• in a romantic relationship with a PEP or HIO, such as a boyfriend, girlfriend or mistress;
• involved in financial transactions with a PEP or a HIO;
• a prominent member of the same political party or union as a PEP or HIO;
• serving as a member of the same board as a PEP or HIO; or
• closely carrying out charitable works with a PEP or HIO.

The examples provided are only a sample of considerations to assist you in identifying close associates. Because a close associate is not meant to be every person associated to a PEP or HIO, you will need to have a means to determine if this is a close association you need to identify and treat as such.

You need to use reasonable measures to determine if a person is a close associate of a PEP or HIO. However, securities dealers that have actual knowledge of a close association must act on this, even if such association is not otherwise widely or publicly known.

The reasonable measures you take to identify a close association may include processes you already have in place for other purposes such as media monitoring; the ongoing monitoring of your business relationships; questions you ask of your clients; access to a database that outlines associations; or a third party credible source that identifies these connections between a PEP or HIO and your client.

When do I make the determination?

As a securities dealer, there are three instances that will trigger your overall PEP and HIO obligations:

• account opening
• on a periodic basis for existing account holders
• if you detect a fact about an existing account holder

Account-related determination

Account opening

When you open a new account for a person, you must take reasonable measures to determine if that person is a foreign PEP, a domestic PEP, a HIO, a family member of one of these people, or a close associate of a foreign PEP.

What do I do once the determination is made?

1. If you determine that the person is a foreign PEP, or a family member or close associate of a foreign PEP, you must take reasonable measures to establish the source of the funds deposited or expected to be deposited into the account and obtain senior management approval to keep the account open. As a high-risk client, the person must be subject to your policies and procedures for high-risk clients.

   Within 30 days after the day the account is opened, you must take the reasonable measures to determine whether the person is a foreign PEP, or a family member or close associate of a foreign PEP and establish the source of funds, as well as obtain the approval of a member of senior management to keep the account open.

2. If you determine that the person is a domestic PEP, a HIO or a family member of adomestic PEP or HIO, you must perform a risk assessment of that client to determine if the individual is a high risk for a money laundering or terrorist activity financing offence. If yes, you must take reasonable measures to establish the source of the funds deposited or expected to be deposited into the account and obtain senior management approval to keep the account open. As a high-risk client, the person must be subject to your policies and procedures for high-risk clients.

   Within 30 days after the day the account was opened, you must take the reasonable measures to determine whether the person is a domestic PEP, a HIO, or a family member of a domestic PEP or HIO, as well as conduct the risk assessment, and, if necessary based on the risk assessment, take reasonable measures to establish the source of funds and obtain senior management approval to keep the account open.

Existing accounts holders

On a periodic basis you must take reasonable measures to determine if an existing account holder is a foreign PEP, a domestic PEP, a HIO, a family member of one of these people, or a close associate of a foreign PEP.

What do I do once the determination is made?

1. If you determine that the person is a foreign PEP, or a family member or close associate of a foreign PEP, you must take reasonable measures to establish the source of the funds deposited or expected to be deposited into the account and obtain senior management approval to keep the account open. As a high-risk client the person must be subject to your policies and procedures for high-risk clients.
2. If you determine that the person is a domestic PEP, a HIO or a family member of a domestic PEP or HIO, you must perform a risk assessment of the person to determine if the individual is a high risk for a money laundering or terrorist activity financing offence. If yes, you must take reasonable measures to establish the source of the funds deposited or expected to be deposited into the account and obtain senior management approval to keep the account open. As a high-risk client, the person must be subject to your policies and procedures for high-risk clients.

Detect a fact about an existing account holder

It is possible that outside of your periodic process, you detect a fact that gives you reasonable grounds to suspect that an existing account holder is a foreign PEP, a domestic PEP, a HIO, or the family member or close associate of a foreign PEP, a domestic PEP or a HIO.

What does it mean to 'detect a fact'?

The detection of a fact occurs outside of your periodic review of existing account holders. This obligation puts in place the requirement that you act on information you may happen across at any point during your relationship with an account holder. While there is no requirement to have proactive processes in place to detect facts about existing account holders, if you do have actual information related to a PEP or HIO determination obligation you must act on that information.

The information you may detect must be a fact that constitutes reasonable grounds to suspect that an account holder is a PEP, a HIO, or a family member or close associate of a PEP or HIO. Detecting this fact could occur through a disclosure made by an existing account holder, or activities such as media monitoring efforts you may already have in place, knowledge of domestic and world events, or a search that is run against an open source or third party database. When you become aware of a fact that constitutes reasonable grounds to suspect that an account holder is a PEP, a HIO, or a family member or close associate of a PEP or HIO, you must act on it.

While a name match is a fact, it is not necessarily a fact that constitutes reasonable grounds to suspect that your existing account holder is a PEP, a HIO or a family member or close associate of one of these. FINTRAC's expectation is that you would apply other parameters (e.g., address, date of birth, age, transaction activities, etc.) to the name match that would bring that name match to a point where it would constitute reasonable grounds to suspect that the existing account holder is a PEP or a HIO, or a family member or close associate of one of these.

Once you have detected a fact that constitutes reasonable grounds to suspect that a person is a foreign PEP, or a family member or close associate of a foreign PEP, you have 30 days to take reasonable measures to determine whether that person is actually such a person, and, if yes, obtain senior management approval to keep the account open and establish the source of funds in the account.

Once you have detected a fact that constitutes reasonable grounds to suspect that a person is a domestic PEP, or HIO, or a family member or close associate of a domestic PEP or HIO, you have 30 days to take reasonable measures to determine whether that person is actually such a person and, if yes, assess the risk of that person. If the risk assessed is high, you must also obtain senior management approval to keep the account open and take reasonable measures to establish the source of funds in the account within those 30 days.

Examples of how you may detect facts:

• A provincial election in Ontario leads to the election of Members of Provincial Parliament (MPPs). Because of the election, you run your list of client names against a credible third party database and determine that the full name of an account holder is the same as one of the newly elected MPPs. In addition, the date of birth on the account matches that of the elected MPP and the address on the account is within that MPP's riding. This is now a detected fact that constitutes reasonable grounds to suspect that an account holder is a domestic PEP. You must use reasonable measures to determine if that account holder is in fact the elected MPP or a family member or close associate of the MPP.
• The media monitoring activities you may have in place pick up the name of a newly appointed military general that is identical to the full name of an existing account holder. You then proceed to research the military general and discover that her base is located in the same city as the account holder. With this fact detected, you now have to take reasonable measures to determine if that existing account holder is in fact the military general, or a family member of, or closely associated to the military general.
• An existing account holder mentions that his friend is the new director-general of the World Trade Organization (WTO) who is a HIO and they are both investing in similar products. Based on this detected fact, you must determine if your existing account holder may be closely associated to the director-general of the WTO.

What do I do once a fact is detected?

1. If you detect a fact that gives you reasonable grounds to suspect that an existing account holder is a foreign PEP, or a family member or close associate of a foreign PEP, you must take reasonable measures to determine if the account holder is in fact such a person. If you determine that the account holder is in fact such a person, you must take reasonable measures to establish the source of the funds deposited or expected to be deposited into the account and obtain senior management approval to keep the account open. As a high-risk client, the person must be subject to your policies and procedures for high-risk clients.

   Within 30 days after the day on which you detect a fact that gives you reasonable grounds to suspect that the account holder is a foreign PEP, or their family member or close associate, you must determine whether the account holder is in fact such a person. If yes, then taking reasonable measures to establish the source of funds and obtaining senior management approval to keep the account open must also be completed within that same 30 days.

2. If you detect a fact that gives you reasonable grounds to suspect that an existing account holder is a domestic PEP, a HIO, their family member or close associate, you must take reasonable measures to determine if the account holder is in fact such a person. If you determine that the account holder is in fact such a person, you must perform a risk assessment of the person to determine if the individual is a high risk for a money laundering or terrorist activity financing offence. If yes, you must take reasonable measures to establish the source of the funds deposited or expected to be deposited into the account and obtain senior management approval to keep the account open. As a high-risk client, the person must be subject to your policies and procedures for high-risk clients.

   Within 30 days after the day on which you detect a fact that gives you reasonable grounds to suspect that the account holder is a domestic PEP, a HIO, their family member or close associate, you must determine whether the account holder is in fact such a person. If yes, you must perform the risk assessment, and, if necessary based on the risk assessment, take reasonable measures to establish the source of funds and obtain senior management approval to keep the account open, all within that same 30 days.

Risk assessment of a PEP, HIO, family member, or close associate

Politically Exposed Persons Check

If you determine that a person is a foreign PEP, or a family member of, or person closely associated with a foreign PEP, you must consider that person as high risk. As a high-risk client, you must proceed to establish the source of funds for the account, and have a member of senior management approve keeping the account open.

If you determine that a person is a domestic PEP, a HIO, or a family member or close associate of a domestic PEP or HIO, your risk assessment must determine if this person is a high risk for a money laundering or a terrorist activity financing offence.

In all cases where you determine that a domestic PEP, a HIO, or a family member or close associate of a domestic PEP or HIO is a high-risk client, you must take reasonable measures to establish the source of the funds for the account, and have senior management approve keeping the account open.

You must consider that:

• foreign PEPs, and their family members and close associates are always high-risk clients;
• the risk assessment of domestic PEP and HIO clients, and their family members and close associates is needed as part of your risk-based approach;
• the measures you put in place in respect of each client are based on the level of risk assigned.

What could make a domestic PEP, a HIO, their family member or close associates high-risk?

To determine the level of risk for a domestic PEP or HIO, or the family member or close associate of a domestic PEP or HIO, you should consider the same indicators you already use to assess all of your clients. However, additional indicators may include:

• the amount of time that has passed since the person held the position – after 5 years a person is no longer considered a domestic PEP, so you may consider the length of time that has passed since the person held the position as an indication of risk;
• the organization or institution where the person held the position – there may be certain organizations that you determine are higher risk based on previously reported vulnerabilities to corruption;
• if the person attempts to shield their identity to prevent detection;
• the person makes use of intermediaries and this does not match the normal business practice;
• if the person makes use of family members or close associates as legal owners for property or corporate vehicles in a way that does not fit their expected profile;
• use of corporate vehicles (legal entities and legal arrangements) to obscure ownership;
• the person seems uncomfortable providing information about source of wealth or source of funds;
• Transparency International identifies certain industries as more vulnerable to corruption;
• the type of transaction(s) conducted or expected to be conducted by your client;
• a change in the account activity following their PEP, HIO, family member, or close associate status change;
• the person provides information you find to be inaccurate or incomplete;
• the person does not reveal additional positions they hold elsewhere.

Should you determine that a domestic PEP, a HIO, their family member or close associate is not a high risk, FINTRAC's expectation is that you will document this assessment as it supports how you will consider that client going forward, as per your compliance program's risk-based approach.

The documenting of an assessment can be done on a case-by-case basis or you could bucket or group your clients into categories of risk and treat these clients accordingly. In the course of a FINTRAC examination, you may be asked to demonstrate why a client meets the criteria of a particular risk category, so as to explain the way you are treating that client.

How do I establish the source of funds?

The requirement to establish the source of funds is linked to PEP and HIO clients that are determined to be high-risk. However, you may have a need to ask about the source of funds in the context of other obligations.

With respect to your high-risk PEP and HIO obligations, you must use reasonable measures to establish the source of funds that have been, will be or expected to be deposited into the account. For example, you could ask the client about the transaction or deposit or refer to source information available about the transaction or deposit. If your periodic review reveals account activity that is not in line with the information you have about the source of funds, one of the measures you may use is to follow up with your client to determine if there are reasons for this. If the information remains inconsistent with what you know about your client, or you are not satisfied with your client’s response, and have reasonable grounds to suspect that the transaction is related to the commission or the attempted commission of a money laundering offence or of a terrorist activity offence, you must file a suspicious transaction report.

Who can allow an account to stay open?

A member of senior management can allow an account to remain open. A member of senior management means an individual who has:

• authority to make and be held accountable for management decisions about accounts;
• awareness of the money laundering or terrorist financing risks to which securities dealers are exposed; and
• awareness and understanding of the concepts of PEP, HIO, family member, and close associate.

If you are a sole proprietor with no employees, agents or other individuals authorized to act on your behalf, you are considered the senior manager.

Do I need to keep a record about the PEP, HIO, family member, or close associate?

Yes. You must keep a record after you determine that a person is a foreign PEP, a high-risk domestic PEP, a high-risk HIO, or the high-risk family member or high-risk close associate of one of these, AND you obtain senior management approval to keep the account open. The information you have to record includes:

• the office or position of the PEP or HIO;
• the name of the organization or institution of the PEP or HIO;
• the source of the funds, if known, that were or that are expected to be deposited in the account;
• the date you determined the individual to be a PEP, HIO, their family member or close associate;
• the name of the member of senior management who approved keeping the account open; and
• the date the account was approved.

You may also want to include in the record, the nature of the relationship between your client and the PEP or HIO, as applicable.

Retention: You must keep PEP and HIO account records for at least five years from the day the account to which they relate is closed.

Reasonable measures record

The regulations have been revised so that any time you are required to take reasonable measures you must keep a record if the reasonable measure is unsuccessful. A reasonable measure is unsuccessful when you do not obtain a response, such as a yes or no, so you are unable to make a conclusive determination. The record you need to keep for an unsuccessful reasonable measure must include:

• the measure taken;
• the date on which the measure was taken; and
• the reason why the measure was unsuccessful.

Because the reasonable measures your organization takes must be outlined in your policies and procedures, this can form part of your unsuccessful reasonable measures record, or you could document, on a case-by-case basis, the measure taken in each record for unsuccessful reasonable measures.

For example you may document that you have an automated approach to run new or existing account holders against a commercial database that lists PEP, HIOs, their family members and their associations. Similarly, your policies and procedures may indicate that you ask questions of your account holders on a periodic basis in order to keep this and other account information up to date. Since the reasonable measures your entity takes must be documented in your policies and procedures, this can form part of the record of unsuccessful reasonable measures. You then must document the reason why any reasonable measure was unsuccessful, and the date the reasonable measure was taken.

Should you take a measure that is not included in your policies and procedures, you would have to include details of that measure taken in your record of unsuccessful reasonable measures.

This obligation to document unsuccessful reasonable measures, however, applies to other obligations as well, such as establishing the source of funds.

Examples of documenting unsuccessful reasonable measures:

1. If, during your periodic review of clients to determine PEP or HIO status, you called more than once and left a message for your client and the client did not call back, then your record would need to indicate the measure you took, the date you did this and the fact that the client did not respond.
2. If you ask a high-risk domestic PEP, about the source of the funds they plan to deposit to their account, and the person does not want to specify the source, your record must indicate that you asked your client for the source of funds information, the date you did this and that the person refused to provide the information.

You have 30 days from the account opening or the detection of a fact, to take and document your reasonable measures.

There are two scenarios where you may want to consider an approach that allows you to clearly demonstrate that you are considering your clients appropriately and in line with your compliance program's risk-based approach.

1. The record-keeping obligations apply to unsuccessful reasonable measures. There is no requirement to keep a record if you determine that a person is a domestic PEP, HIO, their family member or, if applicable, close associate, and assess that person as low risk. However, during a FINTRAC examination, you may be asked to demonstrate that you conducted the risk assessment for a domestic PEP and HIO in accordance with your risk-based approach.
2. If you receive a negative response to a reasonable measure taken to determine if a person is a PEP or HIO, or their family member or close associate, recording this response would show that determination was carried out. During a FINTRAC examination, FINTRAC may ask you to demonstrate how you applied your policies and procedures for PEP or HIO obligations.

Examples of records you may consider keeping:

1. If you asked your client at account opening if they were a domestic PEP or HIO, or family member of one, and your client responded 'yes', but you assessed the client as a low risk, then your record could indicate that you asked the person, and that you assessed the person is a low risk.
2. If you conducted an open source internet search and did not find any information to suggest that your client is a PEP or HIO, or a family member of one of these, then you could record the measure taken and that the results did not suggest a PEP or HIO status for the person.

Risk-based approach considerations

You are required to maintain up-to-date information about your existing account-based clients. This includes determining, on a periodic basis, if existing account holders are, or have become, PEPs, HIOs, family members of one of those persons, or persons who are closely associated with a foreign PEP.

Given that this determination must be made on a periodic basis, you may consider timing this obligation with your existing requirements to conduct ongoing monitoring of your business relationships for the purpose of updating client identification, beneficial ownership information and the purpose and intended nature of the business relationship.

To determine if existing account holders have become PEPs, HIOs, family members of one of those persons, or persons who are closely associated with a foreign PEP, you could ask your account-based clients to confirm the information you have on record. Alternatively, you may choose to run your list of clients against a credible open or third party information source, on a pre-determined schedule.

You are already required to assess any potential threats and vulnerabilities to money laundering and terrorist financing to which your business is exposed.

As part of the overall assessment of client-risk you may want to consider offices or positions that are not prescribed to be those of a foreign or domestic PEP because you may deem these other offices or positions to also be vulnerable to being used for money laundering or the financing of terrorist activities.

You may also want to consider other international organizations, for example, organizations operating across multiple jurisdictions but not necessarily created by governments, if you think they could also be vulnerable to being used for money laundering or the financing of terrorist activities. Similarly, you are required to determine the head of an international organization, the primary person who leads that organization, but part of your risk assessment may indicate there are additional senior positions that you may want to consider because they also have the ability to make financial or contractual decisions for the entity.

As part your risk assessment processes, you may determine that some individuals not prescribed as family members could be considered as close associates of a PEP or HIO.

All of these considerations may impact the risk assessment of your client and serve to elevate the level of risk associated to that client.

What do you mean by enhanced ongoing monitoring?

Ongoing monitoring means that you have to monitor your client on a periodic basis. This requirement to conduct ongoing monitoring applies to more than just PEPs and HIOs and can consist of the same activities for PEPs and HIOs as it does for other clients. With a high-risk client, you have to conduct enhanced ongoing monitoring, which is monitoring on a more frequent basis and incorporates different monitoring activities.

You could consider the following measures to monitor high-risk clients:

• reviewing transactions on a schedule to identify those that management must approve;
• preparing reports or performing more frequent reviews of reports that identify high-risk transactions;
• flagging unusual activities and elevating your concerns as necessary;
• setting business limits or parameters regarding accounts or transactions that would trigger early warning signals and require mandatory review;
• reviewing transactions more frequently against suspicious transaction indicators relevant to the relationship.

There are additional measures you can take to mitigate the risk of all high-risk clients, which can include:

• obtaining additional information on the client (e.g., occupation, assets, information available through public databases, Internet, etc.);
• obtaining information on the source of funds or source of wealth of the client;
• obtaining information on the reasons for intended or conducted transactions;
• obtaining the approval of senior management to enter into or maintain the business relationship;
• identifying patterns of transactions that need further examination;
• increased monitoring of transactions of higher-risk products, services and channels;
• establishing more stringent thresholds for ascertaining identification;
• gathering additional documents, data or information, or taking additional steps to verify the documents obtained;
• establishing transaction limits;
• increasing awareness of high-risk activities and transactions;
• increasing internal controls of high-risk business relationships;
• obtaining the approval of senior management at the transaction level for products and services that are new for that client.

Table 1 – Summary of PEP and HIO obligations

Triggering Activities	Determination	How a determination is made	Obligations	Record Keeping
Account opening Periodic monitoring of existing account holders Detect a fact for existing account holders	Foreign PEP	Take reasonable measures for all the triggering activities to determine if the person is a foreign PEP or a family member or close associate of a foreign PEP. If the determination is yes, you must carry out the associated obligations.	Action to take if a determination is made: Take reasonable measures to establish the source of the funds that have been, will be or are expected to be deposited into the account. Ensure that a member of senior management approves keeping the account open. Apply policies and procedures for high-risk clients. Part of that includes enhanced ongoing monitoring of the account activities to detect suspicious transactions that must be reported.	You must record: the office or position of the PEP or HIO; the name of the organization or institution of the PEP or HIO; the source of the funds, if known, that have been, will be or are expected to be deposited into the account; the date you determined the individual to be a PEP, HIO, their family member or close associate; the name of the member of senior management who approved keeping the account open; and, the date the account was approved to stay open. You may want to include the nature of the relationship between your client and the PEP or HIO, as applicable.
	Domestic PEP or HIO	Take reasonable measures at account opening, or as part of your periodic review, to determine if a person is a domestic PEP, a HIO, or a family member of one of those persons. A determination is made because a fact is detected that identifies an existing account holder as a domestic PEP, a HIO, or their family member or close associate. If the determination is yes, AND you assess the client as a high risk for a money laundering or terrorist financing offence, you must carry out the associated obligations.

Note: If you have made a successful determination for a PEP, HIO or their family member or close associate, you must complete the associated obligations within 30 days after the day of the account opening or from the detection of a fact.

Note: A person determined to be a foreign PEP is forever a foreign PEP. A person ceases to be a domestic PEP 5 years after they have left the office. Once a person is no longer the head of an international organization, that person is no longer a HIO.

Pep Search

Annex A: Examples of International Organizations and Institutions established by International Organizations

African Development Bank Group (Established by the Agreement Establishing the African Development Bank)

Arctic Council (Established by the Declaration on the Establishment of the Arctic Council)

Asian Development Bank (Established by the Agreement Establishing the Asian Development Bank – ADB Charter)

Association of Southeast Asian Nations (ASEAN) (Established by the Asean Declaration)

Bank for International Settlements (Established by the Constituent Charter of the Bank for International Settlements)

Basel Committee on Banking Supervision (Established by the Basel Committee on Banking Supervision Charter)

Caribbean Development Bank (Established by the Agreement Establishing the Caribbean Development Bank)

Commonwealth (Established by the Balfour Declaration, Statute of Westminster and London Declaration)

Community of Democracies (Warsaw Declaration)

Council of Europe (Established by the European Convention on Human Rights)

European Bank for Reconstruction and Development (Established by the Agreement Establishing the European Bank for Reconstruction and Development)

European Free Trade Association Secretariat (Established by the European Free Trade Agreement Convention)

European Space Agency (Established by the Convention for the establishment of a European Space Agency)

Inter-American Development Bank (IDB) (Established by the Agreement Establishing the Inter-American Development Bank)

International Criminal Court (Established by the Rome Statute of the International Criminal Court)

International Commission of Missing Persons (Established by the Agreement on the status and functions of the International Commission on Missing Persons)

International Criminal Police Organization (Established by the Constitution of the ICPO-INTERPOL)

International Energy Agency (Established by the Agreement on an International Energy Program)

International Energy Forum (Established by the International Energy Forum Charter)

International Joint Commission (Established by the Boundary Waters Treaty)

International Mobile Satellite Organization (Established by the Convention on the International Maritime Satellite Organization)

International Organization for Migration (Established by the Constitution of the Intergovernmental Committee for European Migration)

Ofac Pep List

International Seabed Authority (Established by the United Nations Convention on the Law of the Sea)

International Telecommunications Satellite Organization (Established by the Agreement relating to the International Telecommunications Satellite Organization)

International Union for Conservation of Nature (Established by the formal act of 1948 constituting the International Union for Protection of Nature)

La Francophonie (Established by the l'Agence de Coopération Culturelle et Technique (ACCT) Convention)

North Atlantic Treaty Organization (NATO) (Established by the North Atlantic Treaty)

Organization for Economic Co-operation and Development (Established by the Organisation for Economic Co-operation and Development Convention)

Organization for Security and Co-operation in Europe (Established by the Helsinki Final Act)

Organization of American States (Established by the Charter of the Organization of American States)

Permanent Court of Arbitration (Established under Article 20 of the 1899 Hague Convention for the Pacific Settlement of International Disputes)

World Customs Organization (Established by the Convention establishing a Customs Co-operation Council)

Examples of institutions established by international organizations

United Nations (Established by the Charter of the United Nations)

• Food and Agriculture Organization of the United Nations (Established by the Constitution of the Food and Agriculture Organization)
• International Civil Aviation Organization (Established by the Convention on International Civil Aviation)
• International Labour Organization (Established by International Labour Organization Constitution)
• International Maritime Organization (Established by the Convention on the International Maritime Organization)
• International Monetary Fund (Established by the Articles of Agreement of the International Monetary Fund)
• International Telecommunication Union (Established by the International Telegraph Convention. However, in 1934 the International Telegraph Convention of 1865 was then combined with the International Radiotelegraph Convention of 1906 to form the International Telecommunication Convention.)
• United Nations Educational, Scientific and Cultural Organization (UNESCO) (Established by the Constitution of UNESCO)
• World Bank Group (Established by the Bretton Woods agreements)
• World Health Organization (Established by the constitution of the World Health Organization)
• World Intellectual Property Organization (Established by the Convention Establishing the World Intellectual Property Organization)
• World Meteorological Organization (Established by the World Meteorological Convention)
• World Tourism Organization (Established by the Statutes of the World Tourism Organization)
• Preparatory Commission for the Comprehensive Nuclear-Test-Ban Treaty Organization (Established by the Comprehensive Nuclear-Test-Ban Treaty)
• International Atomic Energy Agency (Established by the Statute of the International Atomic Energy Agency)
• Organisation for the Prohibition of Chemical Weapons (Established by the Chemical Weapons Convention)
• World Trade Organization (Established by the Marrakesh Agreement)

The Association of Southeast Asian Nations (ASEAN) established the:

• Economic Research Institute for ASEAN and East Asia (ERIA) established by the adoption of the formal statement agreed to at the 3^rd East Asia Summit in Singapore

The North Atlantic Treaty Organization (NATO) established the:

• NATO Communication and Information Agency (NCI Agency) established by the NCIO Charter, which transferred and amalgamated the functions of various agencies into the NCI Agency
• NATO Support and Procurement Organization (NSPO) established by the NSPO Charter, which merged the names and roles of two NATO agencies into NSPO.

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