The term "politically exposed person" generally includes a current or former senior foreign political figure, their immediate family and their close associates. Interagency guidance issued in January 2001 offers banks resources that can help them to determine whether an individual is a PEP. More specifically:
- 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.
The New Hot Topic
Establishing a domestic list of PEPs is seemingly the new BSA rage, although many financial institutions have already been maintaining either a separate domestic PEP list or one combined with foreign PEPs. Defining domestic PEPs is a rather rudimentary procedure. Since one nation's foreign PEPs mirror another nation's domestic PEPs, the same FFIEC definition could be applied, substituting the different titles nation's use (secretary as opposed to minister for example). Defining a senior level political figure is also fairly straightforward. Suffice to say that in United States any federal elected official should occupy the list, plus Supreme Court Justices, ambassadors and the assorted secretaries, under-secretaries and directors that populate American government. One could argue that the United States system of government has a second tier of senior domestic PEPs, those on the state level, who in the context of state government are on an equal footing when it comes to authority and influence.
However you choose to go, it is at the customer identification program (CIP) stage where all PEPs must be identified and reported to BSA compliance. Any employee who administers CIP at a financial institution needs to be trained on whom exactly your institution is considering to include. The office held is what they are looking for since public officials come and go with the mood of the electorate. Because a new account opening form requires employment information, the task would appear to be more record keeping than anything else, however, most former public officials eventually go on to other occupations. Coupled with the sad fact that in America a large segment of the population would have to think twice about the name of their current senators and congressional representatives, let alone who occupied the position before them. The task may not be as simple as it seems, becoming even more difficult if your PEP parameters include state officials.
As for family members and close associates, an Internet search of the official, along with any third party databases your company subscribes to, would probably yield many of the close connections to which the definition speaks. Remember to then scrub your customer base to those results and perform your due diligence.
Reality vs. Theory
In reality, most American banks will never see a senior foreign official as their customer, nor have any inkling that a close associate may be a customer. The same holds true (to a somewhat lesser degree) for America's senior officials. Most PEPs, foreign or domestic, are generally confined to a specific geographical region such as Washington D.C. and its surroundings or New York City, home of the United Nations and its suburbs.
All PEPs are Local
When it comes to PEPs, the old adage, "All politics is local," certainly rings true. In many lower socio-economic nations that point is driven home all too often by violence, with local political leaders and law enforcement overseeing a reign of terror to protect their own criminal enterprises. They get away with it because the government in those countries is weak, indifferent, complicit and/or unable to logistically police the entire nation. Stories abound around the world of law enforcement being so brazen that even when they act for the good of society by making a legitimate arrest, they may decide to execute the suspect on the spot because of that same lawless culture. Whether they had the right person or not is somewhat irrelevant.
For financial institutions in the United States, it is the local PEP that poses the biggest challenge. We all obviously understand that a local mayor involved in a small conduit contribution scheme pales in comparison to a congressman, for example, jeopardizing the safety of the United States by selling government classified documents to the highest foreign bidder. But while the suspicious activity report (SAR) that exposed former New York State Governor, Eliot Spitzer, commands the headlines, big name politicians are usually the anomaly. It is the county legislator, city mayor, town councilman, superintendent of highways, police chief and building inspector who are usually knee-deep in bribes, kickbacks, shakedowns, influence peddling, self dealing and corruption. One look at the FBI Newark web site will validate the propensity for bad behavior by the local politico.
Even though not required, financial institutions may find it prudent to have a procedure in place where some of your more prominent local PEPs are on the radar. Perhaps, even more importantly, it is the political campaign account that should be singled out and placed under a watchful eye with enhanced due diligence.
Local PEP Red Flags
Most local PEPs generally do not start out as people intent on becoming involved in illegal activities. They are generally community people who, for whatever reason, get caught up in the world of politics and power; some ending up well over their heads. Many rationalize their activity as normal or commonplace, something universally accepted. Others convince themselves that it is tantamount to the welfare of society that they serve as opposed to the other guy, making bending the rules important because of the bigger picture. Of course, some just devolve into being crooks.
Some of the disadvantages to investigating local PEPs are that generally the amounts involved are small with many deals centering on a wink and a nod, political patronage and lucrative contracts as the payoff. Some of the advantages are that local PEPs and their friends are generally not the savviest individuals and may have no idea they are breaking the law. This leads to nothing more than a gossamer attempt to obfuscate their behavior, such as structuring a cash bribe. All the normal red flags for money laundering and economic crime apply to all PEPs, their families and associates, but a couple of schemes, which may fly under the radar, are the reason local PEPs and political accounts need monitoring.
Business by Spouse
One of the oldest tricks in the book, and not just reserved for politicians, is the establishment of an LLC by the spouse of a local official for the purpose of marketing or consulting that can be nothing more than a guise for influence peddling. As indicated above, the scheme is surface driven, meaning the name and activity on the surface appears to have no deeper connection. It creates a backdoor for directors to funnel money via inflated payments to the official, since the funds end up in the personal coffers of the official's household. Since most local campaigns are financially driven by the candidate's own personal funds, an extra $20,000 in return for steering business to the financial institution, or any of a multitude of favors, can mean the difference between winning or losing. In its most odious form, the scheme is nothing more than a gift, because the board and the politician are partisans of the same party and business being steered toward your company is nothing more than some favorable press at the local chamber of commerce meeting. The maneuver shows utter disdain for accountholders, shareholders and employees, robbing the bottom line.
A conduit contribution is a political donation made through someone else. The article in this issue entitled "Conduit contributions" details the red flags of the scheme for an AML investigator to be on the lookout for.
Domestic PEPs and Insiders
One of the biggest challenges for a BSA/AML professional, especially at smaller community based institutions, is the often unavoidable interlocking personal and business relationships between board members and local politicians and their associates, a relationship that many times leads to an appearance of a conflict of interest at the very least. Many involved in some local government capacity may even sit on the board. Investigating an insider can be a daunting, disconcerting and yes, even dangerous challenge (see the Retaliation Factor/ACAMS TODAY/December 2010 issue). Not only should all board members and senior officers have enhanced due diligence done on their accounts, but all vendors should be reviewed by BSA compliance to determine any beneficial ownership and/or conflict of interest.
Domestic PEPs as Victims
While the preponderance of crimes involving PEPs are by them, they may become the victim of a crime. That type of risk is heightened by geopolitical and economic factors with a foreign PEP of a third world country more susceptible to being a victim because of the prevailing culture and lawlessness of that nation as opposed to the United States. Many male domestic PEPs in the United States engineer their own problems using the Internet to campaign for something other than votes. That notwithstanding, blackmail and extortion still must be on the mind of the BSA/AML officer. Many PEPs are extremely wealthy and will pay hush money to cover-up an indiscretion, not only for themselves but especially a family member. Once again, the Spitzer case shows how activity could be initially construed as blackmail, and how the simplest red flags often lead to the discovery of bad behavior.
How, and if, you wish to monitor for domestic PEPs is up to each financial institution. You can take some solace in the fact that the normal red flags generated from AML reports and software will bring to light most wrongdoing inclusive of all PEPs.