Politically Exposed Persons Policy- United States

 

[ENTER NAME OF BANK] POLITICALLY EXPOSED PERSONS POLICY 

 

Document Control

 

EFFECTIVE DATE
PREPARED BY
APPROVED BY
NUMBER OF PAGES

 

Table of Contents

 

INTRODUCTION …………………………………………………………..……………… 4

 

PURPOSE ……………………………………………………………………………………. 4

 

SCOPE ………………………………………………………………………………………. 4

 

OWNERSHIP & REVIEW ………………………………………………………………… 4

 

DEFINITIONS ………………………………………………………………………………4

 

ADOPTION & SUPPORTING OPERATING STANDARDS …………………………. 5

 

POLICY …………………………………………………………………………….……… 6

 

PEP IDENTIFICATION ……………………………………………………………….…. 6

 

SCREENING …………………………………………………………………………….… 8

 

ANNEXTURE A: Pep Red Flags and Risk Indicators …………………………………… 12

 

ANNEXTURE B: PEPS Reporting Form …………………………………………….….. 17

 

1. INTRODUCTION

 

Certain Politically Exposed Persons (hereinafter referred to as “PEP”), as well as their immediate family members and persons known to be close associates, should be subjected to enhanced financial crime controls and measures, scrutiny and on-going monitoring. This is because it is both domestically and internationally recognized that a PEP may be in a position to abuse their public office for private gain and may use the financial system to launder the proceeds of this abuse. It is important to note that these requirements are preventive (not criminal) in nature and should not be interpreted as stigmatizing PEPs as necessarily being involved in criminal activity.

 

1. PURPOSE

 

This policy provides guidance on the acceptance, management and monitoring of clients which are considered to be Politically Exposed Persons. This is done in order to mitigate reputational risk, operational risk, and legal risk, based on internationally accepted best practice standards and guidelines on the management of PEPs whilst simultaneously meeting guidance provided by the Bank Secrecy Act, 1970 and the Money Laundering Control Act, 1986. This policy also seeks to apply the direction given by the Federal Reserve Board, the Federal Deposit Insurance Corporation, the US Treasury Department’s Financial Crimes Enforcement Network, the National Credit Union Administration and the Office of the Comptroller of the Currency. 

 

• SCOPE

 

This standard applies to [ENTER COMPANY’S NAME]’s relation to all PEP relationships established or maintained within the United States.

 

• OWNERSHIP & REVIEW

This Policy is owned by [ENTER COMPANY NAME]. To ensure the Policy remains current and appropriate for managing [ENTER COMPANY NAME]’s financial crime risks, it must be reviewed periodically or when as the United States’ legislative framework, regulations or guidance demands. 

 

• DEFINITIONS

 

Definitions of “Politically Exposed Persons” are wide-ranging.  The Bank Secrecy Act specifically defines a PEP as…:

 

A “senior foreign political figure” is a senior official in the executive, legislative, administrative, military, or judicial branches of a foreign government (whether elected or not), a senior official of a major foreign political party, or a senior executive of a foreign government-owned corporation. In addition, a senior foreign political figure includes any corporation, business, or other entity that has been formed by, or for the benefit of, a senior foreign political figure.

 

The “immediate family” of a senior foreign political figure typically includes the figure’s parents, siblings, spouse, children, and in-laws.

 

A “close associate” of a senior foreign political figure is a person who is widely and publicly known to maintain an unusually close relationship with the senior foreign political figure, and includes a person who is in a position to conduct substantial domestic and international financial transactions on behalf of the senior foreign political figure.

 

According to the Financial Action Task Force (hereinafter, “FATF”), the family members included depends on the culture. For example, in some cultures grandparents and grandchildren will be included. In other cultures, even cousins might be included.

 

• ADOPTION & SUPPORTING OPERATING STANDARDS

 

American financial institutions that provide financial services through private banking to a foreigner must comply with 31 U.S.C. 5318 of the Bank Secrecy Act. The provision requires that private banking institutions must take anti-money laundering precautions when they have a foreign client. It is the private banking institution’s responsibility to create appropriate procedures to detect and report possible money laundering.

 

When a PEP has a bank account with an American private banking institution, that bank must have certain policies and procedures in place of heightened security. The purpose of the heightened security is to identify when their client has made a transaction that might include profits from foreign corruption. When the bank believes that there is foreign corruption involved with the proceeds of a transaction the bank is required to file a Suspicious Activity Report.

 

Therefore, [ENTER COMPANY NAME] has an obligation to maintain this policy per the standards imposed by the law. 

 

• POLICY

 

[ENTER COMPANY NAME] is not precluded from doing business with a PEP therefore the identification of a PEP does not on its own create an automatic reason to decline or reject an application for funding. However, when a PEP is identified, Due Diligence should be conducted prior to a decision on whether to establish a business relationship or not. 

 

According to FATF recommendations, refusing a business relationship with a PEP based on the determination of a client as a PEP, is contrary to the letter and the spirit of the recommendations. 

 

• PEP IDENTIFICATION

 

Given that no single comprehensive list of PEPs, their family members and known close associates currently exists, it is accepted that it is not possible to identify all PEPs with complete accuracy; however, reasonable steps must be taken to identify PEPs in order to discharge [ENTER COMPANY NAME]’s regulatory obligations.

 

Although [ENTER COMPANY NAME] cannot place absolute reliance on commercial databases for purposes of PEP identification, the screening of all [ENTER COMPANY NAME]’s clients against commercially available PEP lists is deemed to be a primary and mandatory risk mitigation measure. 

 

In addition to screening, the starting point for the effective implementation of controls relating to PEPs is to have effective measures in place to know who the clients are and to understand their clients’ business.

 

The following are some of the available controls and measures for PEP identification, according to international best practice and regulator expectations.

 

1. Client Due Diligence (CDD)

 

Client due diligence is a key source of information for the purpose of determining if a client is a PEP. The sourcing of correct and complete client information by [ENTER COMPANY NAME] supports both the effective identification of PEPs and the screening process, by allowing for easy and quick investigations into potential matches. For example, a key factor in this on-going process is the client’s principle occupation or employment.

 

1. Internet and Media Searches 

 

[ENTER COMPANY NAME] can, where possible and appropriate, use the internet and media as sources of information for the determination, monitoring, verification of information in relation to PEPs, although noting that information that is retrieved may not in all cases be comprehensive or reliable. Searching focused sources that could be linked to the client may assist in locating relevant information (for example, (social) media websites in the client’s country of origin). Although a client might not initially (at the commencement of the business relationship) meet the definition of a PEP (or immediate family member or close associate), [ENTER COMPANY NAME] should take into account that this position might change over time. The Company should, as far as practicable, be alert to public information relating to possible changes in the status of its client.

 

 

1. Government Issued PEP-Lists 

 

Countries sometimes publish lists of domestic PEPs or prominent public functions. In general, while the inclusion on a list can confirm the fact that a person is a PEP, not being featured on a list does not necessarily exclude the possibility that a person is nevertheless a PEP.

 

1. In-House Databases and Information Sharing Within Financial Institutions

 

For foreign PEPs, [ENTER COMPANY NAME] may not have first-hand knowledge of the person readily at hand. Such information may be available from other institutions within the same financial group which are doing business in the foreign country or, alternatively, through the internet and other relevant sources. In relation to foreign PEPs, it is therefore best practice for institutions within international financial groups to share information on PEPs for Anti Money Laundering purposes, with appropriate client confidentiality and privacy controls in place.

 

 

1. Transaction Monitoring and On-Going Monitoring 

 

As [ENTER COMPANY NAME] conducts on-going monitoring of a business relationship, it may come across patterns that are difficult to explain, triggering further research into the client’s background. This investigation can lead to the identification of a PEP among existing clients.

 

 

1. Family Members and Known Close Associates

 

If [ENTER COMPANY NAME] finds that a PEP has family members and known close associates, it should search its records to determine whether it may be providing services to such members or associates, and if so, classify them as PEPs and apply the required due diligence measures. For the purpose of deciding whether a person is a known close associate of a prominent person, [ENTER COMPANY NAME] needs only have regard to information which is in its possession, or to credible information which is publicly known. In more practical terms, [ENTER COMPANY NAME] should typically regard a person as a known close associate to a PEP under the following circumstances (although it is important to note that other circumstances could also exist): 

 

1. Where recurring transactional activity between a PEP and a third person or persons indicates the possible existence of a relationship (of whichever nature); and / or 

 

1. where open sources indicate the possible existence of a relationship (of whichever nature) between the PEP and a third person or persons; and / or

 

1. where a third party or parties act as Mandated Person(s) on the account of a PEP, and vice versa.  

 

• SCREENING

 

PEP screening is the screening of customer names and associated details against PEP information at certain points during the customer relationship. 

 

Regulatory requirements usually require [ENTER COMPANY NAME] to adopt reasonable, risk-based measures to identify PEPs. While this could include PEP screening, the decision as to the manner in which screening should be conducted depends on the size, scale, footprint and capability of [ENTER COMPANY NAME] and on the inherent risk of PEPs using [ENTER COMPANY NAME]’s products and services to launder the proceeds of crime. 

 

Where deemed to be an appropriate control, PEP screening should be automated. However, manual screening may be acceptable where deemed appropriate for the size of the business and the materiality of the inherent risk posed by PEPs.

 

PEP screening should occur in accordance with [ENTER COMPANY NAME]’s risk appetite and takes place at least:

 

1. As part of the onboarding process
2. At periodic customer review

 

1. When there is a trigger event which warrants a customer due diligence review.

 

It should be noted that, in many instances, PEP screening is not the primary control for identifying PEPs.

 

•  Parties to Be Screened 

 

As a minimum, PEP screening should be undertaken on those parties who are subject to identification requirements to meet [ENTER COMPANY NAME]’s standards. This could include, but is not limited to: account holders, beneficial owners (including settlors, named and vested beneficiaries) and individuals with control over the account.

 

•  PEP Screening Categories 

 

[ENTER COMPANY NAME] shall assess which categories of PEPs fall within its PEP definition and which PEP positions are therefore appropriate to be screened. There is no requirement to screen information concerning positions which sit outside of a Financial Institution’s PEP definition. 

 

As part of [ENTER COMPANY NAME]’s policy, [ENTER COMPANY NAME] may hold it acceptable for customers to be screened more frequently against categories of PEPs that are deemed to present the highest risk and/or are most likely to identify a match aligned to [ENTER COMPANY NAME]’s risk appetite. 

 

Wherever possible, [ENTER COMPANY NAME]’s PEP screening standards shall be applied consistently on the required basis under the law. 

 

•  Minimum Data Quality Standards Required for Effective Pep Screening 

 

In order to carry out effective and efficient screening, [ENTER COMPANY NAME] shall have complete and accurate electronic customer data records and the PEP database used for screening shall contain sufficient unique identifying data. Without this information, PEP screening will result in irrelevant alerts, which is not only ineffective and inefficient, but inconsistent with this policy. 

 

Unique identifying data, whether maintained by third parties or determined internally [ENTER COMPANY NAME], shall include the following:

 

1. Name (all known names and aliases);

 

1. Date of Birth, and where this isn’t available, Year of Birth;

 

1. Country of political exposure;

 

1. Gender (where available);

 

1. Politically exposed role(s), and date(s) or year(s) of appointment;

 

1. Date or year that the PEP left their position (where applicable).

 

In addition, should a PEP be deceased, [ENTER COMPANY NAME] shall have that appropriately recorded.

 

The accuracy and completeness of the PEP data shall be subject to regular review and changes in personal details and political positions shall be reflected in a timely manner.

 

•  PEP Screening Methodology, Rules Management and Tuning

 

While screening PEP data on an “exact match” basis will likely be too restrictive, it is acceptable to undertake screening on a “close match” basis. This shall take account of transposition errors, common variations on names and minor typos and misspellings. 

 

When using an automated screening solution, it is acceptable for [ENTER COMPANY NAME] to implement rules that are aligned to its risk-based standards. These rules may include auto-discounting, i.e. where irrelevant alerts are automatically discounted based on pre-defined criteria, such as a material difference in the year of birth. Care shall be taken to ensure that auto-discounting criteria are based only on reliable information indicating a clear difference between the PEP and the customer or related party being screened. 

 

[ENTER COMPANY NAME] may choose to implement ongoing delta screening, whereby changes to the PEP database are continuously screened against the full customer population to be screened, and changes to the customer data are continuously screened against the full PEP database. In such cases the definition of a “change” shall be set to include not only any new records on either side, but also any material alteration to the existing data such that the reliability of the previous “no-match” assessment could be compromised.

 

Where [ENTER COMPANY NAME] chooses not to implement delta screening, it shall maintain a “no-match” list of false matches, in order to prevent matches between the same PEPs and customers (or related parties) from being repeatedly regenerated each time PEP screening is carried out. In such cases, it shall be the match between the PEP and the customer that is listed, rather than the customer themselves, as the customer may still be matched to another PEP record. Any material changes to the PEP or the customer record shall result in the “no-match” assessment being reconsidered.

 

•  Identification of a True Match 

 

When a true match to a PEP is identified, the appropriate team or individual responsible shall be notified and the appropriate due diligence procedures shall be instigated if not already underway or completed. 

 

To the extent that the PEP relationship should have been, but was not, identified by business lines/customer-facing staff, [ENTER COMPANY NAME] shall seek to understand why this did not occur, and, where necessary, consider any changes to procedures or training.

 

•  Training and Awareness

 

For those employees who are involved in PEP alert handling, appropriate training shall be designed and delivered on a regular basis. 

 

ANNEXURE A: PEP RED FLAGS AND RISK INDICATORS

The FATF has developed a collection of red flags / indicators that can be used to assist in the detection of misuse of the financial systems by PEPs during a client relationship. Matching one or more of these red flags or indicators may raise the risk of doing business with a client.

 

1. PEPs attempting to shield their identity

 

Examples of ways in which this is done are:

 

• Use of corporate vehicles (legal entities and legal arrangements) to obscure the beneficial owner.

 

• Use of corporate vehicles without valid business reasons.

 

• Use of intermediaries when this does not match with normal business practices or when this seems to be used to shield the identity of a PEP.

 

• Use of family members or close associates as legal owners.

 

1. The PEP’s behavior

 

• Use of corporate vehicles (legal entities and legal arrangements) to obscure i) ownership, ii) involved industries or iii) countries.

 

• The PEP makes inquiries about the institution’s financial crime policy or PEP policy.

 

• The PEP seems generally uncomfortable to provide information about source of wealth or source of funds.

 

• The information that is provided by the PEP is inconsistent with other (publicly available) information, such as asset declarations and published official salaries.

 

• The PEP is unable or reluctant to explain the reason for doing business in the country of the financial institution.

 

• The PEP provides inaccurate or incomplete information.

 

• Funds are repeatedly moved to and from countries to which the PEP does not seem to have ties with.

 

• The PEP is or has been denied entry to the country (visa denial).

 

• The PEP is from a country that prohibits or restricts its/certain citizens to hold accounts or own certain property in a foreign country.

 

1. The PEP’s position or involvement in business

 

• The PEP has a substantial authority over or access to state assets and funds, policies and operations.

 

• The PEP has control over regulatory approvals, including awarding licenses and concessions.

 

• The PEP has the formal or informal ability to control mechanisms established to prevent and detected financial crime.

 

• The PEP (actively) downplays the importance of his/her public function.

 

• The PEP does not reveal all positions (including those that are ex officio).

 

• The PEP has access to, control or influence over, government or corporate accounts.

 

• The PEP (partially) owns or controls financial institutions, either privately or ex officio.

 

• The PEP (partially) owns or controls the financial institution (either privately or ex officio) that is a counter part or a correspondent in a transaction.

 

• The PEP is a director or beneficial owner of a legal entity that is a client of a financial institution.

 

1. Industry / sector within which the PEP is involved

 

• Arms trade and defence industry;

 

• Banking and finance;

 

• Businesses active in government procurement, i.e., those whose business is selling to government or state agencies;

 

• Construction and (large) infrastructure;

 

• Development and other types of assistance;

 

• Human health activities;

 

• Mining and extraction;

 

• Privatisation; and

 

• Provision of public goods or utilities.

 

1. Business relationship / transaction, purpose of business relationship

 

• (Consistent) use of rounded amounts, where this cannot be explained by the expected business.

 

• Deposit or withdrawal of large amounts of cash from an account, use of bank cheques or other bearer instruments to make large payments, or use of large amounts of cash in the business relationship.

 

• Other financial institutions have terminated the business relationship with the PEP.

 

• Other financial institutions have been subject to regulatory actions over doing business with the PEP.

 

• Personal and business-related money flows are difficult to distinguish from each other.

 

• Financial activity is inconsistent with legitimate or expected activity. Funds are moved to or from an account or between financial institutions without a business rationale.

 

• The account shows substantial activity after a dormant period; or over a relatively short time; or shortly after commencing the business relationship.

 

• The account shows substantial flow of cash or wire transfers into or out of the account.

 

• Transactions between non-client corporate vehicles and the PEP’s accounts.

 

• 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 by way of cheque.

 

• A PEP uses third parties to exchange gaming chips for cash and vice versa with little or minimal gaming activity.

 

• A PEP uses multiple bank accounts for no apparent commercial or other reason.

 

1. Products, services, transaction or delivery channels

 

• Anonymous transactions (including cash).

 

• Non-face-to-face business relationships or transactions.

 

• Payments received from unknown or un-associated third parties.

 

• Businesses that cater mainly to (high value) foreign clients.

 

• Trust and company service providers.

 

• Wire transfers to and from a PEP account that cannot be economically explained, or that lack relevant originator or beneficiary information.

 

• Correspondent and concentration accounts.

 

• Dealers in precious metals and precious stones, or other luxury goods.

 

• Dealers in luxury transport vehicles (such as cars, sports cars, boats, helicopters and planes).

 

• High end real estate dealers.

 

1. Country-specific indicators

 

• The PEP is from a higher risk country. Additional risks occur if a PEP from a higher risk country would in his/her position have control or influence over decisions that would effectively address identified shortcomings in the AML/CFT system.

 

• PEPs from countries identified by credible sources as having a high risk of corruption.

 

• PEPs from countries that have not signed or ratified or have not or insufficiently implemented relevant anti-corruption conventions, such as the UNCAC, and the OECD Anti-Bribery Convention.

 

• PEPs from countries with mono economies (economic dependency on one or a few export products), especially if export control or licensing measures have been put in place.

 

• PEPs from countries that are dependent on the export of illicit goods, such as drugs.

 

• PEPs from countries (including political subdivisions) with political systems that are based on rule, autocratic regimes, or countries where a major objective is to enrich those in power, and countries with high level of patronage appointments.

 

• PEPs from countries with poor and/or opaque governance and accountability.

 

• PEPs from countries identified by credible sources as having high levels of (organised) crime.
• At Legal writing experts, we would be happy to assist in preparing any legal document you need. We are international lawyers and attorneys with significant experience in legal drafting, Commercial-Corporate practice and consulting. In the last few years, we have successfully undertaken similar assignments for clients from different jurisdictions. If given this opportunity, we will be able to prepare the legal document within the shortest time possible.