When speaking with fee earners about their understanding of what has changed for domestic politically exposed persons (PEPs), we often hear a similar response: they are lower risk now, so we do not need to worry about them as much. While it is an understandable reading of the rule, this type of misconception can lead a firm straight into a breach of its obligations and would raise concerns during a desk-based or remote AML review from the SRA’s Anti-Money Laundering (AML) Proactive Supervision Team.
In this guide, our compliance team provides further clarity on domestic PEPs and why lower risk does not eliminate the need to assess risk.
Regulation 35 and What it Means for Domestic PEPs
Regulation 35 of the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 does treat domestic PEPs as presenting a lower level of risk than their non-domestic counterparts. However, what it does not do is switch off enhanced due diligence, remove the need to identify a PEP in the first place, or excuse a firm from documenting how it reached its conclusion. Lower risk is a starting point for the assessment, but it does not cancel it out or remove a firm’s assessment obligations.
What the Rule Actually Says
The current treatment of domestic PEPs is set out in the Money Laundering and Terrorist Financing (Amendment) Regulations 2023, which inserted Regulation 35(3A) with effect from 10 January 2024. It provides that, where a customer is a domestic PEP, or a family member or known close associate of one, the starting point for the risk assessment is that they present a lower level of risk than a non-domestic PEP. Where no enhanced risk factors are present, the extent of the enhanced due diligence applied should be less than it would be for a non-domestic PEP.
Compliance officers and relevant fee earners should take note of two words in that provision which carry the weight:
- “Starting point” means the assessment begins from a position of lower relative risk and moves from there according to what the firm finds.
- “Less than” means reduced, not removed.
Neither of these words means none.
This sits within the wider set of recent AML changes we set out in Money Laundering Regulations 2026: Changes Now in Place and the earlier MLR 2026 Amendments: What Law Firms Need to Know. The domestic PEP position has not been undone by those amendments. It remains exactly as described above, which is why it continues to catch firms out.
A Domestic PEP Is Still a PEP
The point that often gets lost is that everything else in Regulation 35 still applies to a domestic PEP. Lower relative risk does not remove the core obligations. Before establishing or continuing a business relationship with a domestic PEP, the case handler must still:
- Obtain senior management approval for the relationship.
- Take adequate measures to establish the source of wealth and source of funds involved.
- Conduct enhanced ongoing monitoring of the relationship throughout its course.
Those requirements are not scaled away by the lower risk starting point. A firm that treats a domestic PEP as an ordinary client, skips senior management sign-off, and takes source of funds on trust has not applied a proportionate version of enhanced due diligence. It has failed to apply enhanced due diligence at all.
The monitoring obligation has a tail worth remembering. A person does not stop being a PEP the moment they leave office. Enhanced monitoring should continue for at least twelve months after a PEP has left their public function, and longer where the residual risk justifies it.
The Part Firms Get Wrong: Identification and Evidence
The lower risk classification only becomes available once you have done two things. You must identify that the client is a domestic PEP, and you have to satisfy yourself that no enhanced risk factors are present. Both steps are easy to skip, and both are where firms often come unstuck.
Identification is the first gap. Domestic PEPs are classified as British MPs, senior civil servants, judges, senior military officers, and the like, along with their family members and known close associates. A private client team acting on a probate matter, or a conveyancing team acting on a house purchase, may not think to screen for PEP status at all if the client seems unremarkable. The lower risk treatment is irrelevant if the PEP is never spotted, because the file will simply show a standard client with none of the Regulation 35 steps applied.
The second gap is enhanced risk factors. “Lower risk starting point” assumes there is nothing else in the picture that raises the risk. Wealth that does not match a known public salary, credible allegations of misconduct, involvement in large or opaque public contracts, or connections to higher-risk jurisdictions can all push a domestic PEP back up the risk scale. The starting point is a presumption, and presumptions can be displaced. A fee earner who applies the lower risk label without checking these factors has not made a qualified assessment; they have made an assumption.
Then there is evidence, which is where the recent enforcement pattern becomes relevant. As we discussed in AML Risk Assessments Still Catching Firms Out: Lessons from Recent SRA Decisions, several firms have been fined not because they failed to assess risk, but because they could not evidence that they had done so. The same trap applies squarely to domestic PEPs. The decision that a domestic PEP is lower risk, the confirmation that no enhanced risk factors are present, the senior management approval, and the source of funds and wealth enquiries all need to be recorded on the file. If a supervisor cannot see the reasoning, or if it was not recorded, the firm is in the same position as one that never carried it out.
What Firms Should Do
None of this requires a wholesale change of approach. It requires the lower risk treatment to be applied deliberately rather than as a reason to relax. In practice that means a few things:
- Make sure PEP screening actually happens at client and matter level, across all departments, not just where someone thinks to look. This connects directly to the client and matter risk assessment discipline we covered in Client and Matter Risk Assessments – Lessons from a Recent Case.
- Update your policies, controls and procedures (PCPs), so they clearly state that domestic PEPs are treated as lower relative risk as a starting point, in the absence of enhanced risk factors, and that the full Regulation 35 requirements still apply.
- Record the enhanced risk factor assessment, not just the conclusion. A one-line note stating that a client is a “low risk domestic PEP”, with nothing to support it, is not sufficient evidence of an assessment.
- Keep senior management approval, source of funds and source of wealth enquiries, and ongoing monitoring in place for every PEP relationship, domestic or not.
- Train staff so they understand that lower risk is a calibration of enhanced due diligence, not an exemption from it.
How RACO Can Help
Getting the domestic PEP position right is a good example of where the detail of the MLRs meets the practical reality of a busy firm. The rule is not difficult, but it is easy to over-simplify, and the cost of over-simplifying is a documented breach.
RACO works with firms and their MLROs to make sure their AML framework reflects the rules as they actually stand.
Our Detailed Risk Management and Compliance Review provides firms with a structured, firm-wide gap analysis of your approach to risk, supervision, and regulatory compliance. Our Training Courses, including dedicated AML training, Client and Matter Risk Assessment Guidance, Client Due Diligence, and MLRO or MLCO sessions, make sure the people doing the work understand what the rules require.
Our Client Due Diligence & Risk Assessment Service provides an outsourced route for completing client and matter risk assessments, including source of funds and source of wealth work and enhanced due diligence where it is needed.
For firms wanting ongoing cover, SRA Compliance Essentials and Fully Outsourced Risk and Compliance Management provide continuing support to keep the framework current as the regulations evolve.
Speak to Our Compliance Specialists
For more information on the Regulation and Compliance Office and to discuss how we may be able to assist in accelerating your risk management or compliance and regulation, or to simply keep this up to date, please call us on 0203 985 8550, complete the online enquiry form below, or email us info@regulationandcomplianceoffice.co.uk
