This story has been prominent in the UK, but it is potentially international in scope. For example, a Christian charity which helps impoverished Ugandans had its account shut down by Bank of America. Non-profit Indigenous Advance Ministries – which opposes abortion and same-sex relationships – has raised concerns that its accounts were closed because the bank disagrees with its "religious views," media reports said. A complaint has been filed to the Tennessee Attorney-General's office by the charity, which claims to have had a banking relationship with BoA since 2015. The bank denies that it "de-banked" the body over these views, and that "religious beliefs are not a factor in any account-closing decision."

To try and cut through the thickets of all this is Rory Doyle, Head of Financial Crime Policy at  Fenergo, the Ireland-based regtech firm which provides digital know your customer and client lifecycle management solutions. The editors are pleased to share these insights; the usual disclaimers apply. Jump into the conversation! Email tom.burroughes@wealthbriefing.com

Nigel Farage’s ongoing battle with private wealth bank Coutts – which has reportedly offered to reinstate his bank account – has spotlighted an increasingly critical issue facing finance institutions globally: how best to identify and manage politically exposed persons.

While nothing untoward was found with the onboarding of Farage, a PEP generally refers to people who may be more susceptible to bribery or corruption, and are important for banks to identify due to their greater potential to be implicated in money laundering. Moreover, failure to identify them can be costly – not just from a reputational perspective. In 2020 alone, global financial institutions, including the likes of Goldman Sachs, received $10.6 billion in enforcement actions for financial crime violations, spanning breaches of anti-money laundering and know your customer regulations – up 27 per cent from 2019.

With the pandemic giving rise to increasing levels of fraudulent activity, financial firms are now being urged by regulators to be ever more vigilant, particularly when it comes to adequately identifying PEPs – a crucial component of KYC and AML compliance. However, PEP management can pose many difficulties, not least relating to the accurate categorization of an individual as a PEP due to jurisdictional variances in definitions.

The PEP definition dilemma
The definition of a PEP varies from jurisdiction to jurisdiction, but it is generally accepted to include individuals who hold a "prominent public function," including presidents, prime ministers, and other senior politicians. The definition also extends to members of royal families, senior executives of state-owned entities, and heads of international organizations, such as the United Nations, World Health Organization, and International Monetary Fund. Most jurisdictions consider individuals with the ability to direct and control government funds, or influence decisions, to be politically exposed, and thus susceptible to external influence, bribery, or corruption. It is important to note that identifying an individual as a PEP is not a suggestion of previous or future criminal behavior.

It is also necessary for banks to adequately identify not only the individuals themselves who hold prominent public functions, but also "known close associates" – those considered to be closely connected to senior politicians, such as family members and business associates. The purpose of identifying a PEP is to ensure that the appropriate level of due diligence is applied in accordance with a risk-based approach. In determining the acceptability of higher-risk accounts, a bank should be able to obtain sufficient information to evaluate whether an individual is or is not a PEP – whether domestic or foreign.

However, there is a problem with the definition of a PEP globally. In the US , it is at odds with EU standards and FATF Recommendation 12, as the US authorities only define foreign PEPs under the PATRIOT Act, but in recognition of the increased risk posed by what others would call domestic PEPs, a joint statement was issued by multiple US agencies including FinCEN, FDIC, and the OCC outlining how financial institutions should deal with the increased risk profile of those with increased due diligence needs under the Banking Secrecy Act.  

European Union 
In the EU, the definition of PEP was extended under the 4th AML Directive , enacted in 2015, to include all national/domestic PEPs and categorize them as higher risk. In the US, it’s also not a regulatory requirement that would demand obliged entities to apply specific measures – which again, differs vastly from the EU approach. This disjointed approach highlights the need for regulators to strengthen cross-border collaboration and offer a single framework reflecting both foreign and domestic PEPs. 

Tech-powered PEP
Financial organizations should be vigilant when assessing the risk of doing business with PEPs. Extra care must be taken when determining whether an individual is a PEP, and whether their financial activity requires additional scrutiny. Banks have an obligation to identify the source of wealth as well as source of funds that belong to PEPs, which will give a sense of the kind of activity a financial organization could expect from that PEP throughout their relationship with them. And, of course, institutions will have to keep a close eye throughout the relationship to identify any behavior that may give rise to suspicious activity, including transactions that may be related to bribery, corruption, or money laundering.

However, many banks struggle to untangle complex entity hierarchical structures during onboarding, largely due to the manual, paper-based processes and operational silos related to the onboarding process. But with emerging digital onboarding solutions that incorporate graph data visualization software, financial institutions can visually map company structures and more easily identify ultimate beneficial owners, controllers and other individuals who have an interest in an entity.

This technology can also help financial institutions manage PEPs and high-risk individuals more efficiently, enabling the collection of enhanced due diligence information and documentation in line with regulatory requirements. Indeed, as stories like the Farage-Coutts battle and surging levels of financial fraud bring AML and KYC regulations front of mind for financial institutions across the globe, it seems high time banks had a proper PEP talk.