Recent PEPs Screening Guidance from Regulators

Disclaimer: The contents of this article are intended to provide a general understanding of the subject matter. It is not intended to provide legal or other professional advice, and should not be relied on as such.       Recently a number of jurisdictions have either introduced new regulations or revised guidance for Heads of International Organizations (HIOs) or politically exposed persons (PEPs) screenings and identification. Here is a short summary of what is new in the United States, Canada and Australia.      

PEP Screening Updates By Country

   

United States

In 2020, FinCEN along with the Board of Governors of the Federal Reserve System (Federal Reserve), the Federal Deposit Insurance Corporation (FDIC), the National Credit Union Administration (NCUA), and the Office of the Comptroller of the Currency (OCC) released a joint statement on due diligence expectations for bank customers who may be considered politically exposed persons.   The statement does not impose any new requirements but provides guidelines in the context of requirements in FinCEN’s customer due diligence (CDD) final rule which came into effect in 2016 and requires “covered institutions” to take steps to determine the individual beneficial owners of new accounts and to tailor risk assessments and reporting procedures based on who these individuals are.   While the Bank Secrecy Act (BSA) does not explicitly define PEPs, the term is used to refer to foreign individuals who are or have been entrusted with a prominent public function, as well as their immediate family members and close associates. By virtue of their public position or relationships, these individuals may pose a higher risk as their source of wealth or source of funds may be the proceeds of corruption or other illicit activity. The guidance affirms that the level of risk associated with PEPs varies and not all PEPs are automatically higher risk.   When discussing PEP risks, the Wolfsberg Guidance on Politically Exposed Persons (PEPs) says:   “Relationships with PEPs may represent increased risks due to the possibility that individuals holding such positions may misuse their power and influence for personal gain or advantage, or for the personal gain or advantage of close family members and close associates. Such individuals may also use their families or close associates to conceal funds or assets that have been misappropriated as a result of abuse of their official position or resulting from bribery and corruption. In addition, they may also seek to use their power and influence to gain representation and/or access to, or control of, legal entities for similar purposes.   It is important to understand, however, that the majority of PEPs are neither in a position to, nor do, abuse their position through grand corruption and therefore will not represent any undue additional risk to an FI solely by virtue of their categorization as a PEP.”   The Customer Due Diligence rule does not require financial institutions to have a “unique, additional due diligence steps for customers who are considered PEPs. Instead, the level and type of CDD should be appropriate for the customer risk.” The rule also does not require a bank to screen for or otherwise determine whether a customer or beneficial owner of a legal entity customer may be considered a PEP.   Instead, a financial institution may choose to determine whether a customer is a PEP at account opening to develop an initial customer risk profile and periodically, as part of the process to update customer information and perform ongoing risk-based monitoring.   When developing the customer risk profile and determining when and what additional customer information to collect, banks should consider the following factors:  

• Customer’s (or family member or close associate) public office or position of public trust
• Whether the customer (or the family member or associate) remains in a position of substantial power or influence
• The time that the customer has been out of office
• Level of influence he or she may still hold
• Any indication that the PEP may misuse his or her authority or influence for personal gain
• Type of products and services used
• Volume and nature of transactions
• Geographies associated with the customer’s activity and domicile
• Geographic-specific risks
• Customer’s official government responsibilities
• Level and nature of the customer’s authority or influence over government activities or officials
• Customer’s (or the family member’s or associate’s) access to significant government assets or funds
• Overall nature of the customer relationship
• Any relevant publicity concerning the PEP

  An article in the National Law Review also recommends considering whether the PEP is tied to a jurisdiction with a history of corruption and/or money laundering and whether the PEP’s home jurisdiction has comprehensive rules and robust practices for ethics reporting and government oversight.   Read the full statement from FinCEN. To read more about other recent FinCEN updates, visit our FinCEN blog.   When looking at transactions, risk factors that may increase the risk profile of an individual including PEPs include (but are not limited to):  

• A customer makes frequent or large transactions and has no record of past or present employment experience
• Wire transfer activity to/from a financial secrecy haven, or high-risk geographic location without an apparent business reason, or when it is inconsistent with the customer’s business or history
• Large incoming wire transfers on behalf of a foreign client with little or no explicit reason
• Wire activity that is unexplained, repetitive, or shows unusual patterns
• Payments or receipts with no apparent links to legitimate contracts, goods, or services
• Unusual transfer of funds among related accounts, or accounts that involve the same or related principals

     

Canada

As of June 1, 2021, all reporting entity (“RE”) sectors will have PEP and HIO (Heads of International Organizations) obligations under Canada’s Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA) and its Regulations. Previously, FINTRAC only required financial entities, securities dealers, money services businesses and life insurance companies to determine whether their customers were PEPs.   To help REs comply, FINTRAC has released revised guidance that answers the following questions:

1. Who is a domestic PEP?
2. Who is a foreign PEP?
3. Who is a HIO?
4. What is an international organization?
5. Who is a family member of a PEP or HIO?
6. Who is considered a close associate of a PEP or HIO?
7. What does it mean to “detect a fact” about a PEP or HIO?
8. How do I establish the source of funds, source of virtual currency (VC), or source of a person’s wealth?
9. Who can review a transaction or allow an account to stay open?
10. How do I establish that a person is a high-risk PEP or HIO?

  In addition to expanding the number of REs who have PEP and HIO obligations, the guidance provides RE sector-specific requirements. Account-based reporting entity sectors, which includes financial entities, securities dealers and casinos, have specific obligations that are outlined in the guidance.   For example, when looking at the question for when or for whom a RE must make a PEP, HIO, family member or close associate determination, the guidance says you must take reasonable measures:  

• when you open an account;
• for authorized users of prepaid payment product accounts (PPPAs) (FEs only);
• when you conduct periodic monitoring of existing account holders;
• when you conduct periodic monitoring of authorized users of PPPAs (FEs only);
• when you detect a fact about existing account holders that indicates a PEP or HIO connection; and
• when you detect a fact about authorized users of PPPAs that indicates a PEP or HIO connection (FEs only).

  If you are an FE or a casino then you must also take reasonable measures to make PEP, HIO, family member or close associate determinations for the following transactions:  

• initiation of an international electronic funds transfer (EFT) in the amount of $100,000 or more;
• final receipt of an international EFT in the amount of $100,000 or more;
• receipt of cash or an amount of VC equivalent to $100,000 or more (casinos only);
• transfers of an amount of VC equivalent to $100,000 or more (FEs only);
• receipt of an amount of VC equivalent to $100,000 or more for remittance to a beneficiary (FEs only); and
• payment(s) of $100,000 or more to a PPPA (FEs only).

  The guidance also provides answers to the following questions for account-based reporting entity sectors:  

• What are the exceptions to making a PEP, HIO, family member or close associate determination?
• What measures do I need to take after making a PEP, HIO, family member or close associate determination?
• What PEP, HIO, family member or close associate records do I need to keep?

  The guidance for non-account-based REs will apply to accountants, agents of the Crown, British Columbia notaries, dealers in precious metals and precious stones, real estate developers, brokers and sales representatives, money services businesses (“MSBs”) and foreign money services businesses (“FMSBs”).   When looking at the question for when or for whom a RE must make a PEP, HIO, family member or close associate determination, the guidance says you must take reasonable measures when you:  

• enter into a business relationship;
• conduct periodic monitoring of your business relationships; and
• detect a fact about your existing business relationships that indicates a PEP or HIO connection.

  You must also take reasonable measures to make PEP, HIO, family member or close associate determinations for the following transactions, as applicable:  

• receipt of an amount of $100,000 or more in cash or an amount of virtual currency (VC) equivalent to $100,000 or more (accountants, agents of the Crown, B.C. notaries, DPMS, and real estate developers, brokers and sale representatives only)
• initiation of an international electronic funds transfer (EFT) in the amount of $100,000 or more (MSBs/FMSBs only)
• final receipt of an international EFT in the amount of $100,000 or more (MSBs/FMSBs only)
• transfer of an amount of VC equivalent to $100,000 or more (MSBs/FMSBs only)
• receipt of an amount of VC equivalent to $100,000 or more for remittance to a beneficiary (MSBs/FMSBs only)

  This guidance also answers the following questions for non-account-based reporting entity sectors:  

• What are the exceptions to making a PEP, HIO, family member or close associate determination?
• What measures do I need to take after making a PEP, HIO, family member or close associate determination?
• What PEP, HIO, family member or close associate records do I need to keep?

  Both the account-based guidance and non-account-based guidance include annexes that outline when various REs must make a PEP or HIO determination, establish the source of funds, source of virtual currency (VC), and source of wealth, and retain records.   Life insurance companies, brokers and agents also have specific PEP and HIO requirements. Specifically, they must take reasonable measures to make a PEP, HIO, family member or close associate determination with respect to the following transactions:  

• Receipt of a lump-sum payment in the amount of $100,000 or more in funds or an amount of virtual currency (VC) equivalent to $100,000 or more in respect of an immediate or deferred annuity or a life insurance policy; and
• Remit an amount of $100,000 or more in funds or an amount of VC equivalent to $100,000 or more to a beneficiary over the duration of an immediate or deferred annuity or of a life insurance policy.

  Like the other RE sectors, there are exceptions for when life insurance companies, brokers and agents make a PEP, HIO, family member or close associate determination. This includes if you already determined that a person is a foreign PEP or a family member of a foreign PEP or when dealing in reinsurance.   The guidance also provides answers to the following questions for life insurance companies, brokers and agents:  

• What measures do I need to take after making a PEP, HIO, family member or close associate determination?
• What PEP, HIO, family member or close associate records do I need to keep?

  Remember that June 1, 2021 is when all reporting entities will be required to meet their obligations for politically exposed persons and head of an international organization. FINTRAC has released a policy interpretation that may be useful for those looking to update their PEP/HIO policies and procedures. To read more about other recent FINTRAC updates, visit our FINTRAC blog.      

Australia

AUSTRAC recently updated their information about the money laundering methods, vulnerabilities and indicators associated with politically exposed persons (PEPs). Their 20-page strategic brief provides insights on money laundering risks, trends and five examples of methods used to launder the proceeds of corruption.   Australian financial institutions have submitted a range of suspicious matter reports (SMRs) involving PEPs. Examples include:  

• Account holdings and transactions involving spouses, other family members or associates and concerns surrounding the source and legitimacy of funds.
• Foreign PEPs using the bank accounts of their Australia-based dependents to move funds.
• PEPs receiving multiple cash deposits into their personal bank account from third parties within a short time frame.
• An applicant for a large amount of funding for a development project in Australia is identified as a family member of a foreign PEP from a high-risk jurisdiction.
• PEPs and/or third parties circumventing cash transaction reporting requirements by depositing and withdrawing funds at different bank branches or remittance business locations on the same day in amounts below the cash reporting threshold.
• A PEP receives large international funds transfers to a gaming account. The PEP withdraws a small amount for gaming purposes. The balance is subsequently withdrawn by way of cheque.

  The list of indicators provided by AUSTRAC are useful for any financial institution in any jurisdiction to identify potential money laundering activity. While any one single indicator may not indicate illicit activity, the existence of multiple indicators should be investigated. The list includes:  

• A PEP holds a mortgage or loan account and makes high-value payments into the account
• A PEP uses the bank accounts of dependents living in another country to move funds
• A PEP has significant holdings in bank term deposits and other high-wealth products such as shares and investment portfolios in another country
• A PEP’s account shows high-volume account activity involving significant cash transactions
• A PEP is unable or reluctant to provide details or credible explanations for establishing a business relationship, opening an account or conducting transactions
• A PEP receives large international funds transfers to a gaming account. The PEP withdraws a small amount for gaming purposes and withdraws the balance using checks
• A PEP receives multiple international funds transfers from different beneficiaries within a short time frame or on the same day
• A PEP uses multiple bank accounts for no apparent commercial or other reason
• A PEP uses third parties to exchange cash for gaming chips with minimal gaming activity
• Cash deposits made in Australia by a PEP or an associate of a PEP, followed by funds withdrawals from the account, conducted in high-risk jurisdictions
• International funds transfers where a PEP is both the ordering and beneficiary customer

  Visit the AUSTRAC website to view the full document on the money laundering methods, vulnerabilities and indicators associated with politically exposed persons. To read more about other recent AUSTRAC updates, visit our AUSTRAC blog.      

Checking for PEPs

Our blog, How to Check if Someone is a Politically Exposed Person, provides some tips for compliance teams on how to check if an individual is a PEP or an HIO. Questions we cover include:  

• Are there free lists for PEPs screening
• Questions you should ask when engaging with third-party risk data providers for PEPs lists
• Minimum data quality standards required for effective PEP screening
• How long is a PEP considered a PEP?

  The blog also provides links to other resources for how to effectively screen for PEPs.      

Advice on screening for PEPs

• Where possible, use native character searching. Searching for names in their native language greatly reduces false positives by limiting transliteration issues.
• Use geography to help determine risks—not all countries pose the same risk. Lower-risk countries present the opportunity to reduce the amount of time spent reviewing close associates and relatives.
• Reduce the number of hits you receive by using date of birth and age to refine your search.
• Utilizing a defined set of risk factors, build or implement a PEP risk-scoring model that works for your organization. For each risk category, weigh the risk factors and then build a defensible risk-scoring process.
• Consider changing screening levels by risk levels. For low-risk PEPs, consider screening and monitoring for sanctions only; for medium-risk, PEPs, screening and monitoring for sanctions and regulatory actions only; and for high-risk PEPs, screening and monitoring against an entire database.

  Alessa offers the ability to identify whether someone is a PEP by using internal and external lists to screen individuals. Screening can be done in native characters and compliance professionals can build their own risk models, depending on the risk appetite of the organization.   All these features allow compliance professionals to quickly and correctly identify whether an individual is a PEP and to take a risk-based approach to the relationship. If you would like to learn more about PEP screening, contact us.