Joint Statement Clarifies Due Diligence Expectations for Politically Exposed Persons

Ballard Spahr LLP

Ballard Spahr LLP

Regulators’ Joint Statement Attempts to Clarify AML Expectations Regarding Potential Corrupt Actors

On August 21, the Treasury Department’s Financial Crimes Enforcement Network (FinCEN) and other banking regulators – specifically the Federal Reserve, the FDIC, the National Credit Union Administration, and the OCC – issued a joint statement that provides additional guidance in applying Bank Secrecy Act (“BSA”) due diligence requirements to customers who may be “politically exposed persons” (“PEPs”).

According to the joint statement, PEPs are “foreign individuals who are or have been entrusted with a prominent public function, as well as their immediate family members and close associates.” By nature of their roles in government and/or relationships with people of public influence, PEPs may present a higher level of risk of public corruption and bribery and, in turn, may pose a higher risk of taking part in transactions that involve illicit proceeds.

The joint statement thus identifies what constitutes a PEP; describes various risk-based factors that banks and other financial institutions should consider when determining whether to collect additional information from PEPs; and clarifies expectations on due diligence requirements for PEPs. Key clarifications regarding PEPs in the joint statement include:

  • PEPs do not include U.S. public officials.
  • PEPs are not high risk, ipso facto, by virtue of their status. Rather, banks ought to assess risk by a variety of factors, including, for instance, the nature of the PEP’s authority or influence over government activities or officials, his or her access to significant government assets or funds, the volume and nature of their transactions, and the type of products and services used.
  • There is no regulatory requirement in FinCEN’s customer due diligence (“CDD”) rule nor a supervisory expectation for banks and other financial institutions to implement “unique, additional due diligence steps for customers who are considered PEPs.” That said, PEPs are subject to traditional BSA/anti-money laundering requirements, including, for instance, suspicious activity reporting, customer identification, and beneficial ownership identification.
  • The CDD rule does not require banks to screen for or determine whether a customer – or a beneficial owner of the customer – is a PEP.

Notably, this guidance may be at odds with previously issued Financial Action Task Force (“FATF”) guidance that measures countries’ compliance with FATF standards; namely, a requirement in local law to conduct enhanced due diligence in certain “high risk circumstances,” a phrase that includes foreign PEP relationships.

Looking ahead, financial institutions may take comfort that there are no unique, additional due diligence requirements for PEPs. In practice, however, financial institutions should continue to assess their BSA/AML programs to ensure that its risk-based procedures are sufficient for conducting CDD on PEPs.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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