RBI defines a “Politically Exposed Person”

News Excerpt:

The Reserve Bank of India (RBI) has announced an amendment to the Master Direction (MD) on Know Your Customer (KYC) guidelines, aiming to redefine and provide clearer parameters for identifying Politically Exposed Persons (PEPs).

New definition:

For KYC purposes, politically exposed persons (PEPs) are individuals who are or have been entrusted with prominent public functions by a foreign country, including heads of states/governments, senior politicians, senior government or judicial or military officers, senior executives of state-owned corporations and important political party officials.

Why did the need arise?

  • In 2023, the Government of India amended the Prevention of Money Laundering Act rules to incorporate more disclosures on non-government organizations and PEPs by reporting entities.
  • The open-ended term “PEP” was creating confusion among the banks. 
  • The parliamentarians and other legislators had complained about the difficulty in obtaining loans or opening bank accounts for themselves as well as their close kin.
  • If a bank or any regulated entity does business with a PEP, the institution must undertake customer due diligence. In such cases, the decision to open the account has to be made at a senior level.
  • Notably, screening for a politically exposed person (PEP) is a vital component of the Know Your Customer (KYC) process due to an increase in potential risks.
    • The heightened risks are a result of several factors associated with their positions and potential vulnerabilities to financial crimes.
    • Many PEPs hold positions that can be abused to launder illicit funds or other predicate offenses such as corruption or bribery.

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