The Reserve Bank of India (RBI) has revised the definition of politically-exposed persons (PEPs) for the purpose of Know Your Customer (KYC) norms. The new definition is based on the recommendations of the Financial Action Task Force (FATF), an inter-governmental body that sets standards for combating money laundering and terrorist financing.

Who are PEPs?

According to the RBI, PEPs are individuals who are or have been entrusted with prominent public functions, either in India or abroad. Examples of prominent public functions include:

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

Why are PEPs important for KYC?

PEPs are considered to be higher-risk customers for banks and other financial institutions, as they may abuse their position and influence for personal gain or for the benefit of third parties. PEPs may also be vulnerable to corruption, bribery, extortion, or other illicit activities that may generate proceeds of crime.

Therefore, banks and other financial institutions are required to apply enhanced due diligence measures while dealing with PEPs, such as:

• Obtaining senior management approval for establishing business relationships with PEPs
• Taking reasonable measures to establish the source of wealth and source of funds of PEPs
• Conducting enhanced ongoing monitoring of the business relationships with PEPs

What has changed in the new definition?

The RBI has made two major changes in the definition of PEPs:

• The earlier definition was limited to individuals holding prominent public functions in a foreign country. The new definition includes individuals holding prominent public functions in India as well.
• The earlier definition did not specify any time period for which an individual would be considered as a PEP after leaving the public office. The new definition states that an individual would be considered as a PEP at least for one year from the date of cessation of his/her public function.

What are the implications of the new definition?

The new definition will widen the scope of KYC norms and bring more customers under the ambit of enhanced due diligence. Banks and other financial institutions will have to identify and verify the PEP status of their existing and prospective customers, and apply appropriate risk mitigation measures.

The new definition will also align India’s KYC norms with the international best practices and standards set by the FATF. This will help India in strengthening its anti-money laundering and combating financing of terrorism framework and enhancing its credibility in the global financial system.