Politically exposed persons (PEPs) are individuals in prominent public roles who pose a higher risk for financial misconduct, such as money laundering related to bribery or corruption. For law firms, these risks carry serious implications—not just for regulatory compliance but also for reputation management. 

When interacting with PEPs, firms must comply with the Money Laundering Regulations (MLR) while adopting a proportionate, risk-based approach to their due diligence measures. Recent amendments to UK regulations now distinguish between domestic and non-domestic PEPs, highlighting the importance of tailoring compliance practices accordingly.

The good news? PEP compliance doesn’t have to be overwhelming. With the right tools and processes in place, law firms can address these challenges efficiently. In this guide, we’ll break down what PEPs are, the risks they pose, and actionable strategies for managing them effectively.

What is a Politically Exposed Person?

A politically exposed person is someone in a significant public role/prominent public function. For example, such as a:

• Head of state
• Senior government official
• Minister
• Central banks ambassadors

The definition of a PEP extends beyond the individual to include their immediate family members (e.g., spouses, children, and parents) and close associates, such as business partners. 

Non-domestic PEPs present unique challenges as their influence may not be immediately clear to firms operating outside their jurisdiction. Domestic PEPs, meanwhile, are now treated as lower risk according to the UK's Money Laundering and Terrorist Financing (Amendment) Regulations 2023.

Identifying PEPs

Law firms must identify any individuals who fall within the definition of a PEP according to the MLR. This involves tailoring the level of scrutiny to the client’s risk profile, as outlined in the UK's recent 2023 regulatory updates. 

Managing PEP Risks

According to Regulation 33(1)(d) of the MLR, firms must apply enhanced due diligence (EDD) measures when dealing with a client that is a PEP, family member or close associate of one. 

Having confirmed that a client is a PEP, Regulation 35 then requires firms to:

• Obtain senior management approval before continuing the business relationship
• Take appropriate measures to establish the client’s source of wealth and source of funds
• Closely monitor the business relationship on an ongoing basis

It's worth noting that the Financial Conduct Authority (FCA) advises against unfairly treating or excluding domestic PEPs from services. For PEPs with links to high-risk jurisdictions or industries, firms should prioritise stronger monitoring processes.

Best Practices for Law Firms Working with PEPs

When working with PEPs, law firms should follow these 4 best practices:

1. Provide ongoing staff training: Ensure all team members receive regular training on the latest regulations, including updates to UK guidance on domestic PEPs. Educating staff on the nuances of identifying and managing PEPs helps minimise errors and ensures a consistent approach across the firm.
2. Use technology to enhance risk assessments: Adopt platforms that dynamically adjust risk assessments based on jurisdiction-specific laws and client updates. This allows the firm to stay responsive to changes in client circumstances while maintaining compliance with both local and international regulations.
3. Maintain transparency in client communication: Clearly explain the need for PEP screenings during client interactions. Providing a transparent rationale for these processes helps build trust and ensures clients understand how compliance requirements protect both parties.
4. Conduct regular internal audits: Periodically review your PEP screening processes to verify compliance with updated UK and international standards. Internal audits are a vital safeguard, ensuring the firm’s procedures remain robust and effective in managing risks.

How Legl Supports Law Firms in Managing PEP Compliance

Legl provides law firms with the tools they need to navigate the complexities of PEP compliance efficiently and effectively. By automating key processes and integrating with existing systems, Legl ensures firms can meet regulatory requirements while minimising the administrative burden.

Automated PEP Screening

Legl’s platform streamlines the PEP screening process. It uses identity information collected during due diligence and AI to differentiate between domestic versus non-domestic PEPs. This ensures firms adopt the correct risk-based approach and speeds up the onboarding process. 

Enhanced Due Diligence (EDD)

Legl makes it easy for firms to apply EDD measures once they've identified a client as a PEP. These include obtaining senior management approval, verifying the client’s source of wealth and funds, and conducting ongoing monitoring throughout the business relationship.

Ongoing Monitoring

Legl supports continuous monitoring of clients, providing real-time alerts for any changes in PEP status, sanctions, or adverse media. This functionality ensures that law firms are immediately informed if a previously cleared client becomes a PEP or faces sanctions, enabling prompt action to maintain compliance and reduce risk.

Comprehensive Audit Trails

The platform maintains detailed records of all screenings, risk assessments, and decisions at both an individual and a corporate level (should your client be onboarded through a corporate entity), offering a clear audit trail. This documentation is essential for demonstrating compliance during regulatory reviews or audits, protecting the firm from potential penalties or scrutiny. It also gives your firm complete oversight into all levels of risk management. 

Seamless Integration

Legl integrates effortlessly with existing practice management systems, such as Actionstep, ensuring compliance processes are centralised and efficient. This integration streamlines client onboarding and compliance workflows, giving firms better oversight and improving operational efficiency.

Conclusion

Managing PEPs is a critical responsibility for law firms, requiring a proactive and proportionate approach to compliance.

Adopting best practices, such as leveraging automated tools, maintaining clear documentation, and staying updated on regulatory changes, ensures law firms can navigate the complexities of PEP compliance effectively. Platforms like Legl provide the support firms need to streamline these processes, reduce administrative burdens, and maintain full regulatory compliance.

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