JFSC's PEP thematic examinations starting in January 2024

The Jersey Financial Services Commission’s first area of focus for the 2024 thematic examination programme will be politically exposed persons (PEPs). The thematic reviews will be conducted in Q1 and Q2 2024. 

a) Article 15A(3) of the Money Laundering (Jersey) Order (2008) (the Order) sets out that a PEP is an individual who is, or has been, entrusted with a prominent public function including, but not limited to -

• Heads of state, heads of government, senior politicians;
• Senior government, judicial or military officials;
• Senior executives of state-owned corporations; or
• Important political party officials.

The definition of a PEP includes immediate family members and close associates of these persons.

PEPs hold positions that can potentially be abused and corrupted for the purpose of -

• Money laundering and related predicate offences.
• Bribery and corruption.
• Conducting activity related to terrorist financing.
• Serious crime, such as theft and fraud.

b) Article 15A(2) of the Money Laundering (Jersey) Order (2008) sets out that supervised persons can declassify PEPs subject to certain conditions once a duration of time has passed. The thematic examination will include consideration of the extent to which supervised persons are incorporating these new provisions in their business (risk assessment, policies, and procedures, testing etc).

c) In 2023, the Government of Jersey published its -

• Update on the National Risk Assessment: Money Laundering - September 2023
• Legal Persons / Legal Arrangements National Risk Assessment - July 2023
• Update on the Terrorist Financing: National Risk Assessment - May 2023

These publications continue to highlight Jersey’s exposure to PEPs and both the industry and the Island’s authorities need to remain alive to the associated risk. 

• Business risk - has PEP risk been comprehensively evaluated as part of the supervised person’s business risk assessment (BRA)?
• Policies and procedures (P&P) - are they adequate and do they enable staff to mitigate risks associated with PEP customers?
• Customer risk assessment / Enhanced customer due diligence - are relevant factors considered in the customer risk assessment (holistic risk assessment), and are relevant and proportionate due diligence measures applied?
• Screening - are measures to identify PEPs effective and is the assessment of any risks identified appropriately evaluated?
• Enhanced ongoing monitoring - what monitoring is undertaken in relation to PEP relationships and is it commensurate with risk?
• Compliance monitoring programme - what testing is undertaken to assess the effectiveness of the supervised person’s systems and controls which are designed to mitigate PEP risk?
• Training - are staff provided with adequate training to identify and manage PEP risk?
• Declassification of PEPs - in line with the latest changes of the MLO, how have they been reflected in the supervised person’s BRA, P&P, processes, and control environment? Have they been applied in the correct way?
• Board reporting – is the MLCO report comprehensive, and does it clearly highlight potential risks and/or areas of focus? Do Board meeting minutes provide sufficient detail to reflect matters discussed, challenge of key items and decisions reached?

To further assist regulated entities in their preparation for this thematic, they may wish to consider the previous JFSC’s findings in relation to PEPs and also the latest publication of the Isle of Man Financial Services Authority (IOMFSA) and their findings of their Foreign PEP Thematic Report. 

• PEPs were either not identified or incorrectly assessed as not having PEP status.
• Enhanced client due diligence measures were not undertaken regarding PEPs.
• Relevant persons definitions of PEPs did not include the need to consider the risks posed by individuals that were close associates of a PEP.
• Policies and procedures did not distinguish between foreign and domestic PEPs.
• Policies and procedures did not include the risk that a client may subsequently acquire PEP status in all cases. 

The IOMFSA report highlights a range of good practices identified within some inspected entities in addition to a number of recurring issues. Good practices noted included:

• Clear and easy to follow procedures and controls.
• Comprehensive, tailored and regularly updated BRAs clearly addressing specific risks presented by PEPs.
• Robust CRAs with detailed commentary and clear articulation and explanation of the assigned risk rating.
• Thorough testing of source of wealth.
• Good ongoing monitoring measures, including a combination of automated screening systems and manual review.

Conversely, common areas of weakness included:

• Unclear or overly complicated procedures and controls that did not appear to take into account IOMFSA guidance.
• Failure to apply existing procedures in practice.
• Insufficiently tailored or outdated BRAs which did not consider all required risk areas and did not take into account information from CRAs, such as the regulated entity’s exposure to PEPs.
• Lack of robust, well-evidenced, regularly updated CRAs, including lack of critical analysis of PEP-related risk factors.
• Failure to identify PEPs accurately or on a timely basis.
• Lack of appropriate escalation of decision making in the acceptance of prospective PEP customers.
• Lack of appropriate consideration or documentation of source of wealth for PEP customers.
• Lack of regular and comprehensive monitoring of PEPs.
• Deferral of undertaking enhanced measures in circumstances where no EDD has been collected previously or where a higher risk has been identified.
• Insufficient monitoring of backlogs in respect of the ongoing monitoring of PEPs.
• Lack of PEP-specific training.