The US Federal Reserve, the Federal Deposit Insurance Corporation (FDIC), the Financial Crimes Enforcement Network (FinCEN), the National Credit Union Administration (NCUA) and the Office of the Comptroller of the Currency (OCC) have issued some pronouncements regarding politically exposed persons.

Flying in the face of the wishes of the Financial Action Task Force, the world's anti-money-laundering standard-setter, the agencies do not interpret the term “politically exposed persons” to include US public officials. The FATF began calling for the inclusion of "domestic PEPs" in 2012.

Regulations issued in accordance with the Bank Secrecy Act 1970 do not define PEPs as such, but the term is used widely to mean foreign individuals who are or have been entrusted with prominent public functions, plus their immediate families and close associates. PEPs should not be confused with “senior foreign political figures” (SFPFs) which are mentioned in the Bank Secrecy Act's private banking regulation; these people are a mere subset of PEPs.

The CDD rule

The agencies have restricted their pronouncements to requirements imposed on financial firms by the Customer Due Diligence rule (CDD rule), which is to be found at 31 CFR [Code of Federal Regulations] 1010.210, 1020.210(b)(5) (CDD), and 1010.230 (beneficial ownership of legal entity customers). This section does not address the requirements of section 312 USA PATRIOT Act 2001, codified at 31 CFR 1010.600-630.

The CDD rule, according to the agencies, does not create a regulatory requirement and no regulator expects banks to have unique, additional "due diligence" steps for customers who are considered PEPs. Instead, the level and type of CDD should be appropriate for the risk that the bank runs of this-or-that customer wanting to launder dirty money.

Banks must apply a risk-based approach to CDD in developing the risk profiles of PEPs and are required to establish workable written procedures that identify and verify beneficial owners of legal entity customers. These procedures must enable them to understand the nature and purpose of their relationships with the PEPs for the purpose of developing risk profiles for them and also to monitor their activities continually, the better to spot and report suspicious transactions and to hoard and update information about them in a risk-related way. The agencies' paper mentions the vague word 'risk' 26 times without explaining it once.

PEP-related exercises

A bank may choose to determine whether a customer is a PEP at account opening, if the bank determines the information is necessary for the development of a risk profile. It might also conduct periodic reviews with respect to PEPs. When a PEP is no longer in active government service, the bank may also consider the time he has been out of office and the influence that he may still exert on the public finances. It might also take into account any indication that the PEP may misuse his authority or influence for personal gain, along with the type of products and services he wants to use, the volume and nature of his transactions, the countries associated with his activity and domicile, his official government responsibilities, the level and nature of his authority or influence over government activities or officials, his access to significant government assets or funds, and the overall nature of its relationship with him.

The regulators point out that some banks have wealth management accounts that fall outside the US definition of “private banking account” but may still pose a higher risk of illicit financial activity. These HNW account may also include "high dollar" accounts and large transactions.

National security and foreign graft

One interesting revelation to be found in the paper is the fact that the regulators have somehow persuaded themselves that the "public corruption" (presumably as opposed to the private corruption) of foreign officials poses some kind of threat to the security of the United States as a nation. They do not, however, explain this assertion.

The joint statement does not alter existing BSA/AML legal or regulatory requirements, nor does it establish new supervisory expectations.

A call for EDD for domestic PEPs

Rachel Woolley, the global director of financial crime at Fenergo, is less than impressed by the communique. She told Compliance Matters: “The statement issued by the five agencies is positive but problematic in that the very definition of PEP in the US is at odds with European Union standards and FATF guidance. In the EU, the definition of PEP was extended under the 4th AML Directive of 2015 to include all national/domestic PEPs and categorise them as high risk – the US only considers foreign PEPs. Shouldn’t this apply to all individuals who are exposed to politics, regardless of whether they are domestic or foreign?

"Furthermore, the CDD rule does not create a regulatory requirement – which, again, differs vastly from the EU's approach.”

Elsewhere in North America, Canada and Mexico require screening for domestic PEPs, as does everywhere else except the USA. Surinam is the only exception to this in South America, a continent in which the definition of 'PEP' varies considerably from country to country. In some places it can be a mayor, an as-yet-unelected candidate for office or even the owner of a football team and sometimes "immediate family members" are held to include grandchildren (not an FATF requirement). Outside the Americas and the EU, the picture is extremely mixed.