Politically Exposed Persons and Important Public Functions – Articles 42 and 43 of the AMLR

We continue our blog series on the EU AMLR and now focus on Articles 42 and 43, which regulate the treatment of politically exposed persons (PEPs) and establish a system for identifying important public functions within the Union. These provisions raise key questions as to how customer due diligence measures are to be applied in situations where the customer’s politically exposed status in itself gives rise to an increased risk of corruption, abuse of influence and money laundering.

For obliged entities subject to the AMLR, it is important to have internal processes and guidelines in place to implement customer due diligence measures capable of ensuring sound customer knowledge. There are also certain situations that entail a higher risk, which in turn require enhanced customer due diligence measures, of which business relationships with PEPs are one example. Readers wishing to explore enhanced customer due diligence measures in situations involving geographical risk in more detail are referred to the previous instalment in our blog series, read here.

In practice, the application of the provisions relating to PEPs often requires an in-depth analysis in which legal assessment, risk evaluation and operational understanding must work together. In such contexts, access to qualified AML advisory services tailored to complex businesses is of material importance in ensuring correct, proportionate and supervisory-resilient compliance with the AMLR.

Taken together, Articles 42 and 43 demonstrate how the AMLR clarifies the boundary between standard risk and increased risk, and how the framework systematically builds on customer due diligence measures by introducing mandatory enhancements where specific risk indicators, such as political exposure, are present.

Standard customer due diligence measures as the starting point under the AMLR

A central principle of the AMLR is that customer due diligence measures must be risk-based and proportionate. Standard customer due diligence measures form the starting point of the framework and are to be applied where neither low risk nor increased risk can be established. These measures, which are set out in Article 20 and which we have addressed earlier in the blog series, include, among other things, identifying and verifying the customer’s identity, understanding the purpose and nature of the business relationship, and conducting ongoing monitoring of the business relationship.

Articles 42 and 43 make clear that certain customer categories cannot be managed solely through standard customer due diligence measures. Politically exposed persons are one such example. Even where a PEP in an individual case may otherwise present a low or moderate risk profile, the framework requires obliged entities to apply enhanced measures in order to manage potential risks.

Article 42 AMLR – Specific provisions for politically exposed persons

Article 42 of the AMLR governs the measures that obliged entities must take in relation to business relationships or occasional transactions involving politically exposed persons. PEPs are defined in Article 2(1)(34) and may, for example, include persons who hold, or have held, an important public function within the Union or internationally. This means that obliged entities must take additional measures beyond the standard customer due diligence measures laid down in Article 20. The framework also extends to family members of politically exposed persons and persons known to be close associates. The measures relating to PEPs must therefore also be applied to persons in their immediate sphere.

Under Article 42(1), obliged entities must apply the following three measures in relation to occasional transactions or business relationships with PEPs:

• Approval must be obtained from senior management in order to carry out occasional transactions or to enter into, or continue, business relationships with politically exposed persons.
• Obliged entities must also take appropriate measures to establish the source of the wealth and funds connected to the business relationship or the transaction.
• Business relationships with PEPs must also be subject to ongoing enhanced monitoring.

Article 42(2) provides that, no later than 10 July 2027, AMLA is to issue guidelines further specifying the application of the PEP framework. These guidelines are to include, among other things, criteria for identifying persons known to be close associates, as well as guidance on risk levels for different categories of PEPs, family members or known close associates. The guidelines are also to include guidance on how such risks are to be assessed where the person concerned no longer holds an important public function. This raises the question of how long a person should be regarded as a PEP and how the risk assessment should be adjusted over time.

Article 43 AMLR – List of important public functions

Article 43 complements Article 42 by establishing a structured and harmonised system for identifying which functions are to be regarded as important public functions for the purposes of the PEP definition in Article 2(1)(34). Each Member State must issue and continuously update a national list of such functions in accordance with national law. International organisations that are approved and operate within the territory of the Member States are also subject to a corresponding obligation to issue and update such a list. The lists must also include all functions that may be entrusted to representatives of third countries and international bodies approved by the Member State. These lists, as well as any amendments to them, must be notified by the Member States to the Commission and AMLA.

The Commission may, by means of an implementing act, determine the format for the preparation and submission of the lists of important public functions provided by the Member States. The Commission is also empowered to adopt delegated acts supplementing Article 2(1)(34) and establishing additional common categories of important public functions relevant to the Union as a whole. In the preparation of such delegated acts, the Commission is to consult AMLA.

In addition, the Commission is to prepare and update a consolidated Union list of important public functions, including all functions that may be entrusted to representatives of third countries, as well as international bodies approved at Union level. The consolidated list is to be published in the Official Journal of the European Union, and AMLA is also to make the list available on its website.

From standard customer due diligence to enhanced control – practical implications

Articles 42 and 43 make clear that standard customer due diligence measures constitute a necessary, but not sufficient, foundation when dealing with politically exposed persons. The framework clearly signals that political exposure is in itself a risk indicator requiring specific handling and enhanced measures. For obliged entities, this creates a need for internal processes for the identification, risk classification and follow-up of PEPs.

Morling Consulting supports businesses with qualified, operationally focused advice across the full AML framework, including complex issues relating to politically exposed persons. With deep legal expertise in the anti-money laundering regulatory framework and practical experience, our legal consultants support organisations in designing, implementing and reviewing processes for customer due diligence measures and ongoing monitoring.