RBI Norms for Politically-Exposed Persons (PEPs)

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The Reserve Bank of India (RBI) recently updated Know Your Customer (KYC) norms for politically exposed persons (PEPs) who transact with regulated entities (REs), seeking to comply with the recommendations of the Financial Action Task Force (FATF).

New RBI Norms for Politically-Exposed Persons (PEPs)

  • Who are PEPs? In the amended KYC master direction, the central bank defines PEPs as "individuals who are or have been entrusted with prominent public functions by a foreign country, including the heads of states/governments, senior politicians, senior government or judicial or military officers, senior executives of state-owned corporations, and important political party officials".
  • REs have the option of establishing a relationship with PEPs (whether as customers or beneficial owners). 
  • REs have to perform regular customer due diligence and also follow additional conditions prescribed by the RBI to transact with PEPs.
  • Some additional conditions include establishing an appropriate risk management system to determine whether the customer or the beneficial owner is a PEP.
  • REs have to take reasonable measures to establish the source of funds/ wealth.
  • They also need to get approval from senior management to open an account for a PEP.

Key Facts about Financial Action Task Force (FATF)

  • FATF is an inter-governmental policy-making and standard-setting body dedicated to combating money laundering and terrorist financing.
  • It was established in 1989 during the G7 Summit in Paris to develop policies against money laundering.
  • In 2001 its mandate expanded to include terrorism financing.
  • Headquarters: Paris, France.
  • FATF members include 39 countries, including the United States, India, China, Saudi Arabia, Britain, Germany, France, and the EU as such.
  • India became a member of FATF in 2010.
  • What are FATF 'grey list' and 'blacklist'? FATF has 2 types of lists:
    • Black List: Countries knowns as Non-Cooperative Countries or Territories (NCCTs) are put on the blacklist. These countries support terror funding and money laundering activities. 
    • Grey List: Countries that are considered a safe haven for supporting terror funding and money laundering are put on the FATF grey list. This inclusion serves as a warning to the country that it may enter the blacklist.
  • Three countries North Korea, Iran, and Myanmar are currently on FATF’s blacklist.
  • Consequences of being on the FATF blacklist:
    • No financial aid is given to them by the International Monetary Fund (IMF), the World Bank, the Asian Development Bank (ADB), and the European Union (EU).
    • They also face a number of international economic and financial restrictions and sanctions.

Q1) What is Know Your Customer (KYC) in banking?

KYC means Know Your Customer and sometimes Know Your Client. KYC or KYC check is the mandatory process of identifying and verifying the client's identity when opening an account and periodically over time. In other words, banks must ensure that their clients are genuinely who they claim to be. Banks may refuse to open an account or halt a business relationship if the client fails to meet minimum KYC requirements. 

Source: RBI gives clarity to 'politically exposed persons' term to meet FATF norms