Politically Exposed Persons (PEPs) in Canada: FINTRAC Requirements and Screening Rules

A politically exposed person (PEP) is someone who holds, or has held, a senior government, judicial, military or state-linked position, in Canada or abroad. Under the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA), reporting entities, including money services businesses (MSBs) and foreign money services businesses (FMSBs), must take reasonable measures to determine whether a person is a PEP, a head of an international organization (HIO), or a family member or close associate of one.

PEP status is a risk category. Holding a listed office does not mean a person is under investigation, has done anything improper or must be declined as a client. It changes the level of scrutiny a reporting entity applies and how that scrutiny is documented. Foreign PEPs are treated differently from domestic PEPs and HIOs: the risk treatment, how long the status lasts and whether the follow-up measures are mandatory or risk-based all differ. MSBs and FMSBs also have an extra trigger that many other sectors do not: certain large transactions require a determination even where no business relationship is involved. This article sets out what FINTRAC requires of an MSB, where its guidance stops and operational practice begins, and how to build a PEP process that can be tested in an examination.

What Is a Politically Exposed Person in Canada?

The PCMLTFA and its Regulations divide the topic into three categories, each with its own rules: domestic PEPs, foreign PEPs and heads of international organizations. FINTRAC's guidance treats them separately, and an MSB's procedures should too.

Domestic Politically Exposed Persons

A domestic PEP is a person who holds, or has held within the last five years, one of the following offices or positions in or on behalf of the federal government, a provincial or territorial government, or a municipal government:

• Governor General, lieutenant governor or head of government
• Member of the Senate, the House of Commons or a provincial or territorial legislature
• Deputy minister or equivalent rank
• Ambassador, or attaché or counsellor of an ambassador
• Military officer with the rank of general or above
• President of a corporation wholly owned directly by the Crown, federally or provincially
• Head of a government agency
• Judge of an appellate court in a province, the Federal Court of Appeal or the Supreme Court of Canada
• Leader or president of a political party represented in a legislature
• Mayor, reeve or similar chief officer of a municipal or local government, whatever the size of the municipality

A person stops being a domestic PEP five years after leaving the office or position, or five years after death.

Foreign Politically Exposed Persons

A foreign PEP is a person who holds, or has held, one of the following offices or positions in or on behalf of a foreign state, regardless of citizenship, residence or place of birth:

• Head of state or head of government
• Member of the executive council of government or member of a legislature
• Deputy minister or equivalent rank
• Ambassador, or attaché or counsellor of an ambassador
• Military officer with the rank of general or above
• President of a state-owned company or a state-owned bank
• Head of a government agency
• Judge of a supreme court, constitutional court or other court of last resort
• Leader or president of a political party represented in a legislature

Foreign PEP status does not expire. Once an MSB determines that a person is a foreign PEP, FINTRAC's guidance says the person remains one forever, including after death, and the MSB does not have to determine the status again. The same applies to a foreign PEP's family members.

Heads of International Organizations

A head of an international organization (HIO) is a separate category from a PEP. An HIO is a person who currently holds, or has held within the last five years, the position of head of an international organization established by the governments of states, an institution of such an organization, or an international sports organization. The head is the main leader, usually a president or chief executive officer.

FINTRAC looks at whether an organization was created by a formal agreement among the governments of more than one country, has its own legal status and operates across several countries. Its guidance gives examples including the United Nations, NATO, the International Monetary Fund, the World Bank and INTERPOL. HIO status ends five years after the person leaves the position, or five years after death, which matches the domestic PEP timeline and not the permanent foreign PEP timeline.

Who Counts as a PEP Family Member or Close Associate?

Family Members Under FINTRAC Rules

The family member definition in the Regulations is narrow. Only these relationships count:

• Spouse or common-law partner
• Biological or adoptive child
• Mother or father
• Mother or father of the spouse or common-law partner
• Child of the person's mother or father (a sibling)

An ex-spouse or ex-partner still counts as a family member, because they may keep access to the PEP's funds after the relationship ends. For a foreign PEP's ex-spouse, that status is permanent. For the ex-spouse of a domestic PEP or HIO, it lasts until the PEP or HIO status itself ends.

Stepchildren and step-siblings are not family members unless there has been a legal adoption. Nieces, nephews and other extended relatives are not family members either, although they may be close associates depending on the actual relationship.

What Makes Someone a Close Associate?

A close associate is a person connected to a PEP or HIO for personal or business reasons. FINTRAC's examples include business partners or people who beneficially own or control a business with the PEP, people in a romantic relationship with the PEP, parties to financial transactions with the PEP, prominent members of the same political party or union, fellow board members, people doing charitable work closely with the PEP, and joint policyholders where one holder is a PEP. The person remains a close associate until the connection ends, so the MSB has to document when it concluded the connection was over.

The foreign and domestic distinction applies here too. Close associates of a foreign PEP are always treated as high risk. For a domestic PEP or HIO, an MSB only has to look for close associates when it detects a fact, and the follow-up measures apply only where its risk assessment rates the risk as high.

When Must a Canadian Business Make a PEP or HIO Determination?

An MSB or FMSB must take reasonable measures to determine PEP, HIO, family member or close associate status at three points in a business relationship, and again at certain large transactions. FINTRAC defines reasonable measures as steps taken to achieve a desired outcome, even if they do not produce it. Examples include asking the client, running open-source searches, using information already on file and consulting commercially available information.

When a Business Relationship Begins

A determination is required when the MSB enters into a business relationship with a person. At this point the MSB looks for PEPs, HIOs, their family members and the close associates of foreign PEPs.

During Periodic Monitoring

The MSB must take reasonable measures to reassess existing clients when it carries out periodic monitoring of a business relationship. Businesses that screen only at onboarding miss this requirement.

When New Information Creates Grounds to Suspect PEP or HIO Status

FINTRAC calls this detecting a fact. It applies when the MSB, or any of its employees or officers, detects a fact that gives reasonable grounds to suspect that an existing client is a PEP, HIO, family member or close associate. The fact might come from the client, from monitoring, from news coverage or from a search of open-source or third-party data. A name match is a fact, but FINTRAC says it does not necessarily amount to reasonable grounds to suspect. As a best practice, it suggests applying additional criteria such as address, date of birth, age and transaction activity.

Transaction-Based PEP Checks for MSBs and FMSBs

MSBs and FMSBs also face a determination requirement tied to specific transactions, separate from the business relationship triggers. When an MSB or FMSB provides services to a person located in Canada, it must take reasonable measures to determine PEP, HIO, family member or close associate status for the following transactions, each measured at $100,000 CAD or more:

Requestor-side transactions

• Initiating an international electronic funds transfer of $100,000 or more
• Transferring an amount of virtual currency equivalent to $100,000 or more
• Transporting $100,000 or more in cash, money orders, traveller's cheques or similar negotiable instruments (not cheques payable to a named person or entity), or the equivalent in virtual currency

Beneficiary-side transactions

• Final receipt of an international electronic funds transfer of $100,000 or more for a beneficiary
• Receipt of virtual currency equivalent to $100,000 or more for remittance to a beneficiary

The determination for these transactions must be made within 30 days after the transaction. For domestic PEPs, HIOs and their family members or close associates, the follow-up measures apply only where the MSB's risk assessment rates the risk as high. One exception applies to all of these triggers: if the MSB has already determined that a person is a foreign PEP or a family member of a foreign PEP, it does not have to repeat the determination, because foreign PEP status does not expire.

PEP Determination Trigger Map for MSBs/FMSBs

The table below summarizes each point at which an MSB or FMSB must take reasonable measures to make a PEP or HIO determination.

Foreign PEP vs Domestic PEP: Why the Difference Matters

Once a determination is made, foreign and domestic treatment diverge in these areas:

• Duration. Foreign PEP status is permanent, including after death. Domestic PEP and HIO status ends five years after the person leaves office or dies.
• Risk classification. A foreign PEP, and a foreign PEP's family members and close associates, are always treated as high risk. A domestic PEP or HIO, and their family members and close associates, are high risk only where the MSB's risk assessment finds a high risk of a money laundering or terrorist financing offence.
• Source of wealth. Reasonable measures to establish source of wealth are required for every foreign PEP, family member and close associate. For domestic PEPs and HIOs, they are required where the risk assessment rates the risk as high.
• Enhanced measures. For foreign PEPs they apply as soon as the determination is made: additional measures to verify identity, enhanced ongoing monitoring and other measures to mitigate risk. For domestic PEPs and HIOs they apply where the risk assessment rates the risk as high.
• Senior management review. For the prescribed large transactions, a member of senior management must review the transaction where a PEP, HIO, family member or close associate is determined. For domestic PEPs and HIOs this applies where the risk is rated high.

A foreign PEP client therefore goes onto an enhanced track as soon as the determination is made. A domestic PEP or HIO client goes onto one only if the MSB's documented risk assessment says so. A program that applies the same treatment to both either over-controls domestic PEPs, which costs resources and adds client friction, or under-controls foreign PEPs, which is a compliance gap.

What Must an MSB Do After Identifying a PEP or HIO?

Establish the Source of Wealth

Source of wealth is the origin of a person's total assets. It can come from business activity, employment income, investments, real estate, inheritance or other sources. FINTRAC's examples of reasonable measures include asking the client and checking open-source information. The aim is a documented, defensible basis for believing the client's overall wealth is consistent with what is known about them.

After a business relationship is entered into or a fact is detected, the MSB has 30 days to take reasonable measures to establish source of wealth, where it applies. For transaction-based triggers, the 30 days run from the date of the transaction.

Establish the Source of Funds or Virtual Currency When Required

Source of funds, or source of virtual currency, is narrower than source of wealth. It concerns the origin of the specific funds or virtual currency used in a transaction. It applies to the transaction-based triggers above, alongside source of wealth, and follows the same 30-day timing measured from the transaction date.

Apply Enhanced Measures Where Required

Where enhanced measures apply, they include additional measures to verify the person's identity, enhanced ongoing monitoring of the business relationship, and any other measures that mitigate the risk the person presents. What that means in practice depends on the client's transaction pattern, the jurisdictions involved and the products used. A written procedure should describe in operational terms what enhanced monitoring involves.

Obtain Senior Management Review Where Required

For the prescribed large transactions, a member of senior management must review the transaction where a PEP, HIO, family member or close associate has been determined. For an MSB, the review falls within the same 30-day period after the transaction. Under FINTRAC's guidance, a senior manager has authority to make management decisions about the transaction and is accountable for them, is aware of the ML/TF risks the business is exposed to, and understands its obligations regarding PEPs, HIOs and their family members and close associates. A sole proprietor with no employees or authorized agents is the senior manager. The reviewer's name and the review date go in the transaction record, as described below.

The requirement to approve keeping an account open applies to account-based sectors such as banks. It does not apply to MSBs, which are non-account-based reporting entities.

Consider Suspicious Transaction Reporting Separately

PEP status does not by itself require a suspicious transaction report (STR), does not mean the client is under investigation and does not require ending the relationship. An STR depends on reasonable grounds to suspect that a transaction or attempted transaction is related to the commission or attempted commission of a money laundering or terrorist activity financing offence. That is assessed on the facts of the transaction. A PEP determination can feed into that assessment, especially where the explanation of the source of funds or wealth does not fit what is known about the client, but the two decisions are separate and should be documented separately.

PEP Screening in Canada: A Defensible Workflow for MSBs and FMSBs

Running a name through a database does not meet the requirement on its own. Automated screening is a starting point. A name match from a screening tool is a possible match, and it becomes a determination only after a compliance officer has reviewed the surrounding facts and recorded a conclusion. That record, whatever the conclusion, is what the file needs in an examination.

A practical sequence for MSBs and FMSBs:

• Collect enough identifying information about the client at the relevant trigger point.
• Run the PEP and HIO determination against current, reliable data.
• Resolve potential name matches using supporting identifiers such as date of birth, address, occupation and transaction history.
• Establish whether the person is the PEP or HIO, a family member or a close associate, and on what basis.
• Record the evidence reviewed and the reasoning for the conclusion.
• Apply the risk outcome: always high risk for foreign PEPs and their family members and close associates, and risk-based for domestic PEPs and HIOs.
• Establish source of wealth, and source of funds or virtual currency where the trigger requires it.
• Obtain the senior management review for the prescribed transactions and record the reviewer and the date.
• Apply enhanced ongoing monitoring in proportion to the risk.
• Reassess at periodic monitoring or when new facts emerge.

Screening software can prompt the right questions, flag potential matches and structure the record, but a person still has to make the determination. A cleared screening hit with no recorded reasoning looks, on paper, the same as a hit that was never reviewed.

What Records Must Be Kept for PEP and HIO Determinations?

FINTRAC's guidance for non-account-based reporting entities, which covers MSBs and FMSBs, sets out two kinds of record with different content and different retention periods.

Business relationship records

When a determination is made at onboarding, during periodic monitoring or after a detected fact, the MSB must keep a record of the person's office or position and the name of the organization or institution, the date of the determination, and the source of the person's wealth, if known. These records are kept for at least five years after the day they were created.

Transaction records

Where a PEP or HIO determination is made for one of the prescribed large transactions, the record must include the office or position and the organization, the date of the determination, the source of the funds or virtual currency used in the transaction (if known), the source of the person's wealth (if known), the name of the senior manager who reviewed the transaction and the date of that review. For MSBs, these records are kept for at least five years from the day the last business transaction with that person was conducted. That is a different starting point from the five years from creation that applies to business relationship records.

For family members and close associates, we also recommend recording the nature of the relationship to the PEP or HIO. This is a practice recommendation, and FINTRAC does not state it as a requirement.

For the evidence standards examiners look for across all client files, including PEP files, see ComplyFactor's FINTRAC Examination Readiness Checklist.

Common PEP Compliance Mistakes Canadian MSBs Should Avoid

• Screening only at onboarding and skipping periodic monitoring, which is a separate FINTRAC trigger
• Treating every PEP determination as evidence of suspicious activity instead of a risk classification
• Applying the same treatment to foreign and domestic PEPs, when the always-high-risk versus risk-based distinction changes what is required
• Overlooking family members, particularly the in-law and sibling relationships that the definition expressly includes
• Not applying high-risk treatment to close associates of foreign PEPs
• Accepting a screening-tool hit as a confirmed determination without a documented human review
• Not keeping a note of the reasonable measures taken when source of wealth or source of funds information could not be obtained
• Accepting thin or unverified source of wealth explanations that do not match what is otherwise known about the client
• Missing senior management review evidence, or recording that a review took place without naming the reviewer and the date
• Writing a PEP policy with no operational workflow for frontline and compliance staff
• Failing to update enhanced monitoring when a client's risk profile changes after the first determination
• Not keeping the reasoning for why a potential match was cleared

These are operational weaknesses common to compliance programs generally. They are not documented FINTRAC enforcement findings. For a specific enforcement action, check FINTRAC's published administrative monetary penalty notices.

How PEP Controls Should Fit Into an AML Compliance Program

A PEP procedure that sits apart from the rest of the compliance program tends to be applied inconsistently. It should connect to customer onboarding and the client risk rating, so a PEP determination feeds the same risk score used elsewhere in the file. It should trigger the existing enhanced due diligence and transaction monitoring procedures instead of duplicating them, and it should have a clear escalation path into suspicious transaction reporting when the facts call for it. Source of wealth and source of funds procedures, senior management review, training and record keeping should all refer to the same PEP policy, and the PEP files should be something an independent effectiveness review can test.

A full program build, including how PEP procedures link to risk assessment and training, is covered in ComplyFactor's AML compliance program service.

To confirm PEP files hold up under the two-year effectiveness review requirement, see ComplyFactor's independent AML audit service.

PEP Compliance Checklist for Canadian MSBs and FMSBs

Use this checklist to test whether an existing PEP program operates in practice as well as on paper.

• Do written procedures treat domestic PEPs, foreign PEPs and HIOs as separate categories with separate treatment?
• Are the family-member relationships FINTRAC recognizes documented and understood by the staff who make determinations?
• Are the close-associate criteria documented, including the foreign and domestic distinction?
• Are all three business relationship triggers mapped: onboarding, periodic monitoring and detected facts?
• Are the MSB and FMSB transaction triggers configured in your systems with the $100,000 CAD threshold?
• Is a foreign PEP determination flagged so the client is not screened again for the same purpose?
• Is screening evidence, including the facts reviewed for a potential match, kept in the file?
• Are cleared-match decisions documented with the reasoning as well as the outcome?
• Is source of wealth evidence kept, and does it show that reasonable measures were taken?
• For applicable transactions, is source of funds or virtual currency evidence kept separately from source of wealth?
• Is senior management review documented with a named reviewer and a review date?
• Does enhanced ongoing monitoring for PEP and HIO clients differ visibly from monitoring of standard clients?
• Are the two retention periods tracked correctly: five years from creation for relationship records, and five years from the last business transaction for MSB transaction records?
• Can a sampled PEP file show the full chain of reasoning an examiner would expect to see?

How ComplyFactor Can Help With PEP and High-Risk Client Controls

A policy paragraph that repeats the definitions does not make a PEP program. ComplyFactor works with Canadian MSBs, FMSBs and other reporting entities to turn PEP and HIO requirements into working files: determination workflows staff can follow, documentation standards for source of wealth and source of funds, senior management review templates, and record keeping that matches FINTRAC's retention rules for relationship and transaction records.

Where a program already has PEP procedures, an independent AML audit tests whether they produce sound files in practice by sampling determinations, source of wealth evidence and senior management sign-off. Where a program needs to be built or corrected, ComplyFactor's AML advisory and AML compliance program services design the PEP workflow alongside the rest of the risk-based program. A fractional compliance officer engagement can take day-to-day ownership of PEP determinations, senior management review and ongoing monitoring for businesses without that function in-house.

Frequently Asked Questions

What is a politically exposed person in Canada?

A politically exposed person is someone who holds, or has held, a senior government, judicial, military or state-linked office, in Canada (a domestic PEP) or abroad (a foreign PEP). FINTRAC also recognizes a separate category, heads of international organizations (HIOs), and requires reporting entities such as MSBs to take reasonable measures to determine whether a person falls into any of these categories.

What is the difference between a domestic and foreign PEP?

A domestic PEP holds, or within the last five years held, a listed Canadian federal, provincial or municipal office. A foreign PEP holds, or has held, an equivalent office for a foreign state. Foreign PEP status never expires and is always treated as high risk. Domestic PEP status ends five years after the person leaves office, and high-risk treatment applies only where the entity's own risk assessment finds a high risk.

How long does someone remain a politically exposed person in Canada?

A foreign PEP remains one permanently, including after death. A domestic PEP or HIO stops being one five years after leaving the position or five years after death.

Are family members of a PEP also subject to FINTRAC requirements?

Yes, for a specific list of relationships: spouse or common-law partner, child, mother or father, the mother or father of the spouse or common-law partner, and siblings. Nieces, nephews and stepchildren who were not legally adopted are not family members under the definition, but they may be assessed as close associates depending on the actual relationship.

What is a close associate of a politically exposed person?

A close associate is someone connected to a PEP or HIO for personal or business reasons, such as a business partner, a person in a romantic relationship with the PEP or a fellow board member. Close associates of foreign PEPs are always treated as high risk. For domestic PEPs and HIOs, close associates matter when a fact is detected and the risk is rated high.

When must an MSB check whether someone is a PEP?

At three points in a business relationship (when it begins, during periodic monitoring, and when the MSB detects a fact that gives reasonable grounds to suspect PEP, HIO, family member or close associate status), and at certain transactions of $100,000 CAD or more: international electronic funds transfers, virtual currency transfers, and the transport of cash or negotiable instruments, on both the requestor and beneficiary side.

Does being a PEP automatically make a customer high risk?

For foreign PEPs and their family members and close associates, yes. For domestic PEPs, HIOs and their family members and close associates, high-risk treatment applies only where the entity's own risk assessment finds a high risk of a money laundering or terrorist financing offence.

Does PEP status automatically require a suspicious transaction report?

No. PEP status is a risk classification and not evidence of suspicious activity. A suspicious transaction report is required where there are reasonable grounds to suspect that a transaction is related to money laundering or terrorist activity financing. That is assessed on the facts of the transaction, separately from the PEP determination.

What is the difference between source of wealth and source of funds for a PEP?

Source of wealth is the origin of a person's total assets. Source of funds, or source of virtual currency, is narrower: the origin of the specific funds or virtual currency used in a transaction. Depending on the trigger, both may need to be established, generally within 30 days of the relevant event.

What records should an MSB keep for a PEP determination?

The office or position and organization involved, the date of the determination, and the source of wealth if known, kept for at least five years after creation. For a prescribed large transaction, the record also includes the source of funds or virtual currency if known, the name of the senior manager who reviewed the transaction and the review date. An MSB keeps these for at least five years from the day the last business transaction with that person was conducted.

Keeping PEP Decisions Defensible Under FINTRAC

A sound PEP program comes down to six things: classifying the person correctly (domestic PEP, foreign PEP, HIO, family member or close associate), applying the risk treatment that category requires, gathering source of wealth and source of funds evidence, obtaining senior management review where it is required, keeping ongoing monitoring in proportion to the risk, and documenting each step so that someone who was not there can follow the decision.

If your current PEP procedures cannot answer these points with confidence, or you are building a program from scratch, ComplyFactor's Canadian AML advisory team can help design and test the workflow.