For compliance professionals and the programs they run, politically exposed persons are a big deal. PEPs trigger money laundering and corruption concerns and therefore attract enhanced due diligence. So, I always assumed PEPs are easy to identify. But on closer inspection, it turns out PEPs come from a surprisingly flexible and elusive group.
FinCEN hasn’t nailed down a PEP definition. In due diligence guidance published last month, FinCEN (the primary enforcer of the U.S. Bank Secrecy Act), along with other federal bank regulators, said PEP “commonly refers to foreign individuals who serve in a prominent public role, foreign individuals who are or have been entrusted with a prominent public function, as well as their immediate family members and close associates.”
I emphasized commonly refers to because it leaves the PEP door wide open. Incidentally, the Bank Secrecy Act itself doesn’t define PEP; it only refers to “corrupt foreign officials” who might use the U.S. financial system “for personal gain.”
What about Europe? The EU adds this warning to its PEP definition: “In order to provide for a coherent application of the concept of politically exposed person, when determining the groups of persons covered, it is essential to take into consideration the social, political and economic differences between countries concerned.”
Variables alert: PEPs might change according to families, clans, tribes, clubs, old school ties, wealth, etc., depending on where you’re looking.
The Financial Action Task Force (FATF) — an inter-governmental global money laundering and terrorist financing watchdog — updated its AML and counter-terrorist financing guidance last year. The guidance includes a haiku-like definition of PEP that leaves much to the imagination: “Foreign PEPs are individuals who are or have been entrusted with prominent public functions by a foreign country, for example heads of state or of government, senior politicians, senior government, judicial or military officials, senior executives of state owned corporations, important political party officials.”
Can official PEP definitions (and non-definitions) be reconciled? Is there some way to make life easier for those trying to comply with the various AML and anti-corruption standards? Not really.
At the World Bank, a paper written in 2010 as part of the Stolen Asset Recovery (StAR) Initiative said, “Unfortunately . . . there is no internationally agreed-upon definition of PEPs,” and a “worldwide definition is overdue.” Until then, the paper said, “A good definition [of PEP] will strike a balance between being comprehensive and being workable. It will be a guide rather than a set of inflexible rules, and will allow banks to focus their efforts on where the real risks lie.”
The Wolfsberg Group — an association of thirteen global banks that recommends standards for managing financial crime risk — warned in its PEP guidance from 2017: “There is no single, globally agreed definition of a PEP.”
Categories of PEPs, the Wolfsberg Group said, include heads of state, members of royal ruling families, executives of (some) state-owned enterprises, high-ranking military officers, senior political party officials, and so on. PEPs are natural persons but sometimes control and work through private organizations and state-owned bodies. So enhanced due diligence would also apply to organizations they control or heavily influence.
Close family members and associates of PEPs can also trigger enhanced due diligence. Spouses, children, parents, and siblings are “close family members,” the Wolfsberg Group said. So is a person who’s “equivalent to a spouse,” whatever that might mean. A PEP’s close associates include “widely- and publicly-known close business colleagues or personal advisors, in particular persons acting in a financial fiduciary capacity.”
“Circumstances” can influence who’s in or out of a PEP category. With close associates, for example, those circumstances might be “separation, estrangement, or the end of a business relationship.” With close family members, circumstances such as “ethno-cultural-religious links” can move someone in or out of the category. “These circumstances could be considered as part of the risk assessment process and documented accordingly,” according to the Wolfberg Group’s PEP guidance.
Aren’t there always “circumstances” of some kind to consider? No wonder so many people spend so much time and money trying to create “smart” due diligence standards.
But maybe the vagaries of PEPdom are a good thing. How so? The World Bank paper about PEPs cited above said: “Interestingly, most of the banks visited have developed a definition that extends to a broader group than required by the standard setters or by national law or regulation.” There’s no harm in banks and others doing more than required to combat money laundering and corruption.
Also, if any authoritative body were to expressly eliminate certain categories of people from the definition of PEPs — say circus clowns– we all know what would happen. Suddenly the world would be crowded with circus clowns who just happen to have some coincidental connection to this or that kleptocrat.
At the risk of driving compliance officers bonkers, there’s an argument for keeping PEP definitions a bit fuzzy around the edges.