Politically Exposed Persons (PEPs)

By Prof. William H. Byrnes IV and Dr. Robert J. Munro *

Editor's Note: The following is an excerpt from the e-book only title, Money Laundering, Asset Forfeiture and Recovery and Compliance -- A Global Guide, by William Byrnes and Robert Munro. Chapter contributor: Ashley Paulson, Thomas Jefferson School of Law.

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Politically exposed persons (PEPs) are those currently or formerly holding a powerful foreign public position, and family members and close associates of the PEP. In 2003, the Financial Actions Task Force (FATF) released obligatory requirements for foreign PEPs. In 2012, the FATF extended these requirements to domestic PEPs and PEPs of international organizations...

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The Financial Actions Task Force (hereinafter "FATF") released obligatory requirements for foreign Politically Exposed Persons, the PEPs family members, and the PEPs close associates, in June 2003. [Financial Actions Task Force. http://www.fatf-gafi.org/.] The FATF extended the requirements to include not only foreign Politically Exposed Persons but also domestic Politically Exposed Persons and Politically Exposed Persons of international organizations in February 2012.

Financial Crimes Enforcement Network

The Financial Crimes Enforcement Network (hereinafter "FinCEN") was established on April 25, 1990. The Secretary of the Treasury established FinCEN. 31 U.S.C. 310 formed FinCEN as a bureau within the Treasury Department.

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Treasury Order [180-01] describes FinCEN's responsibilities to implement, administer, and enforce compliance with the authorities contained in what is commonly known as the "Bank Secrecy Act." [Bank Secrecy Act. http://www.fiec.gov/.]

Bank Secrecy Act

The Bank Secrecy Act (hereinafter "BSA") was passed by the United States Congress in 1970. The BSA has been amended several times since it was passed in 1970. The purpose of the BSA is to establish guidelines and requirements for financial institutions to identify and to prevent money laundering. The BSA requires financial institutions to keep records on cash purchases, to file reports of cash purchases that are $10,000 or more, and to report suspicious activity.

Financial Action Task Force

Generally

The Financial Action Task Force (hereinafter "FATF") was established in 1989. The FATF creates policies to encourage and commence national legislative and regulatory reform in combating money laundering, terrorist financing, and every other associated danger to the integrity of the international financial system. "The objectives of the FATF are to set standards and promote effective implementation of legal, regulatory and operational measures for combating money laundering, terrorist financing and other related threats to the integrity of the international financial system." [Financial Actions Task Force. http://www.fatf-gafi.org/.]

The FATF has created Recommendations that are recognized internationally as the standard ". . . for combating of money laundering and the financing of terrorism and proliferation of weapons of mass destruction."

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Politically Exposed Persons Defined

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 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.

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Risk Factors

Generally

Politically Exposed Persons have been known to utilize banks as a medium for illegal activities. These illegal activities have ranged from corruption and bribery to money laundering. Different Politically Exposed Persons pose different levels of risk.

The level of risk differs depending on many factors. Some of those factors include: ". . . geographic location, industry, or sector, position, and level or nature of influence or authority." Additional factors to consider include: ". . . purpose of the account, the actual or anticipated activity, products and services used, and size or complexity of the account relationship."

Some Politically Exposed Persons are low risk and some are high risk. A banks reputation is at risk if they conduct business with a Politically Exposed Person that is known to be dishonest or crooked. It is helpful for banks to be aware of who the Politically Exposed Person is in terms of their access/control/influence over the government and corporate accounts.

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Risk Mitigation

It is essential for banks to have procedures in place for handling clients that are Politically Exposed Persons. Banks must procure information on each Politically Exposed Person that wishes to do business in that bank. The best time for a bank to obtain information on a Politically Exposed Person is when that person is attempting to open an account with the bank. The Bank Secrecy Act says that banks must do their "due diligence" to implement procedures for Politically Exposed Persons.

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Private Banking Due Diligence Program

Private banking exists when a bank offers financial services that are tailored toward wealthy clients. 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. "Section 312 of the USA Patriot Act added subsection (i) to 31 U.S.C. 5318 of the BSA." 31 U.S.C. 5318 of the Bank Secrecy Act 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.

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When a Politically Exposed Person 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. FinCEN requires that the bank enter "foreign corruption" on to the Suspicious Activity Report.

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* Prof. William H. Byrnes, IV is the Associate Dean of the Walter H. & Dorothy B. Diamond International Tax & Financial Services Graduate Program. He has achieved authoritative prominence with more than 38 book and compendium volumes, 93 book, treatise and supplement chapters, and 800 articles. Professionally, William Byrnes left Coopers and Lybrand as an Associate Director to full time academia wherein he pioneered online legal education in 1995, thereafter creating the first online LL.M. offered by an ABA accredited law school. He trains and supervises more than 200 professional and government LLM and JSD candidates annually for international tax and money laundering compliance.

Dr. Robert J. Munro is Professor of Law at Thomas Jefferson School of Law in San Diego, CA. and a Senior Research Fellow and Director of Research for North America at CIDOEC at Jesus College, Cambridge University. He holds Masters degrees from the University of Iowa and Louisiana State University, a Juris Doctor from the University of Iowa and a Ph.D. from the University of Florida. He has done further graduate studies at Cambridge University, Oxford University and the Institute of Advanced Legal Studies at the University of London. He is the author of thirty-two published books, including the five-volume treatise, Money Laundering, Asset Forfeiture and International Financial Crimes, the three-volume, Cybercrime and Security, the three-volume Tax Havens of the World and Foreign Tax and Trade Briefs, Second Edition.

Information referenced herein is provided for educational purposes only. For legal advice applicable to the facts of your particular situation, you should obtain the services of a qualified attorney licensed to practice law in your state.

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