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US Clarification of Due Diligence on Politically Exposed Persons



Joshua Ray of Rahman Ravelli details the money laundering advice being given to US banks by regulatory agencies.

Five US regulatory agencies have emphasised the importance of banks and financial institutions assessing money-laundering risks and conducting appropriate due diligence when dealing with foreign public officials and their families or associates. 

In a joint statement, the agencies make it clear that people who are considered politically exposed persons (PEPs) may pose higher risks because their funds may be the proceeds of corruption or other illicit activities.

The agencies did, however, state that risks associated with politically exposed individuals will vary. The statement from 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 says that the risk will depend on “facts and circumstances specific to the customer relationship”.

The agencies also clarified that there are no regulatory requirements for financial institutions to have in place special, extra due-diligence procedures for clients that are considered politically exposed; although they emphasise that banks have to “identify and report suspicious activity, including transactions that may involve the proceeds of corruption.” 

The agencies’ announcement is a response to concerns voiced by some banks that were unsure how to apply a risk-based approach to politically exposed clients that complied with their money laundering obligations. 

While the new guidance does not materially alter existing anti-money laundering obligations, it is of value to a banks as it specifies the types of risk factors that they should most focus on when conducting due diligence on their customers. 

These are: 

  • The nature of the PEP’s public position (or that of their close associate or family member), their official government responsibilities and influence over government activities and officials.
  • The extent of the PEP’s access to significant government assets or funds.
  • Any indication that the PEP may misuse his or her public position for personal gain.
  • Where the PEP is no longer in office, the length of time served within the government and the level of influence he or she may still hold.
  • The volume and nature of the PEP’s transactions with or through the bank.
  • The legal and enforcement frameworks within the PEP’s domicile.
  • The overall nature of the customer relationship. 

The regulators’ statement highlights the intensely fact-specific nature of due diligence inquiries that must be conducted where PEPs are concerned.  The flexibility is helpful for banks seeking to do business with PEPs but, at the same time, it diminishes the usefulness of off-the-shelf, standardised anti-money laundering processes.  This means that banks must tailor their examination to each individual PEP’s unique circumstances, in order to ensure that each of the key factors are appropriately addressed.  The statement also underscores US regulators’ continued focus on PEP-related money laundering issues and the resulting need for banks to remain attuned to the distinct risks that PEPs present.   

Joshua L. Ray

Joshua L. Ray

Counsel/Legal Director

joshua.ray@rahmanravelli.co.uk
+ 44 (0)203 947 1539 vCard

Specialist Areas of Practice: International Regulation and Corporate Crime, Fraud and Business Crime, Corporate Investigations.

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