Close Associate of a PEP

A close associate of a PEP is an individual who is known to have a close business or personal relationship with a politically exposed person (PEP), that is, someone who holds or has held a prominent public function such as a head of state, minister, senior judge or senior official of a state-owned company. Anti-money laundering rules treat close associates in a similar way to PEPs themselves, requiring banks and other regulated firms to identify them and apply extra scrutiny.

The reason is practical: corrupt officials rarely hold illicit money in their own names. They often use business partners, advisers or trusted friends to own companies, open accounts or buy assets on their behalf. Close associates are therefore grouped with family members of a PEP as people whose accounts may be used to hide the proceeds of corruption or bribery. Standards for treating them come from the Financial Action Task Force and are written into national laws.

FATF Recommendation 12 requires countries to apply PEP measures to family members and close associates of PEPs, and FATF guidance describes close associates as people closely connected to a PEP either socially or professionally. Regional and national laws give more precise wording:

• European Union. The anti-money laundering directives define persons known to be close associates as individuals known to have joint beneficial ownership of legal entities or arrangements, or any other close business relations, with a PEP, and individuals who have sole beneficial ownership of a legal entity or arrangement known to have been set up for the benefit of a PEP.
• United Kingdom. The Money Laundering Regulations follow a similar definition, and the Financial Conduct Authority's guidance tells firms to apply it proportionately and not to treat every acquaintance as an associate.
• United States. Rules on private banking accounts for senior foreign political figures cover close associates, described as people widely and publicly known to have an unusually close relationship with the official and able to carry out substantial financial transactions on their behalf.

Definitions are deliberately linked to what is "known": firms are expected to act on information they hold or that is publicly available, not to investigate every contact a PEP has.

Typical examples include business partners who jointly own companies with a PEP, people who act as nominee or front owners of companies or trusts set up for a PEP's benefit, and individuals with a known close personal relationship, such as a long-standing adviser. Lawyers, accountants and staff who merely provide services to a PEP are not usually treated as close associates unless there is evidence of a closer connection. The use of a nominee owner or a shell company linked to a PEP is a common red flag.

When a customer is identified as a close associate of a foreign PEP, and in many countries also of a domestic PEP when the risk is higher, firms must apply enhanced due diligence. This normally includes:

• Senior management approval before establishing or continuing the relationship.
• Establishing the source of wealth and funds, through checks of source of wealth and the origin of the money involved.
• Enhanced ongoing monitoring of transactions and the relationship, including periodic reviews.

The level of scrutiny should reflect the risk: an associate of a minister from a country with high corruption risk warrants more attention than an associate of a local official in a low-risk country.

Firms identify close associates mainly through politically exposed person screening tools, which draw on commercial databases that list PEPs together with known relatives and associates. They also use beneficial ownership records, information supplied by the customer and adverse media screening. Because associate data is less complete and harder to verify than data on PEPs themselves, firms rely on judgement and document their reasoning in each case.

Rules on how long the status lasts vary. In the EU and UK, firms must continue to treat a former PEP as presenting higher risk for at least twelve months after leaving office, and longer where the risk persists; requirements for associates are usually tied to the PEP's status. In practice, many firms keep enhanced measures for associates for as long as the underlying relationship and risk continue.

Critics say the category is vague and can lead firms to refuse or close accounts of people simply because they know a politician, contributing to de-risking. Others argue that the real danger lies precisely in such hidden relationships, and that weak identification of associates has allowed large corruption cases to go undetected. Supervisors therefore call for a risk-based approach that focuses on meaningful connections and on unexplained wealth.

• Financial Action Task Force