Agencies Clarify CDD Requirements For Politically Exposed Persons

The Federal Reserve Board, the FDIC, FinCEN, the National Credit Union Administration and the OCC (collectively, "the Agencies") clarified customer due diligence ("CDD") requirements for customers that may be "politically exposed persons" ("PEPs").

In a joint statement, the Agencies explained that Bank Secrecy Act ("BSA") / AML regulations have not formally defined PEPs, but that the term commonly refers to foreign individuals and their close associates who have "been entrusted with a prominent public function." The term does not include U.S. public officials.

Customer Due Diligence Requirements and Considerations

The Agencies stated that banks must carry out CDD measures that are commensurate with the risk profiles of customers that are PEPs. While the Agencies elaborated that there is no regulation that requires additional due diligence procedures for all PEPs, the Agencies recommended that banks leverage existing processes for developing customer risk profiles, including taking into account:

• the duration of a PEP's time in office and the influence the PEP may still retain after leaving office;
• the PEP's position of public trust;
• the financial products and the types of services the PEP is using;
• the volume and type of transactions in which a PEP engages;
• a PEP's location, with respect to financial activity;
• A PEP's ongoing government responsibilities; and
• A PEP's access to government assets.

Commentary

This jointly-issued guidance makes clear that "senior foreign political figures" (as defined under the BSA private banking regulations) are a subset of a larger group of PEPs. In the private banking context, there are specific CDD requirements for senior foreign political figures. Outside of the private banking context, there are no specific requirements in the BSA regarding CDD for PEP customers; financial institutions are required to apply a risk-based approach to CDD, which may or may not include considering a customer's status as a PEP.

In practical terms, this clarification changes little. A financial institution that turns a blind eye to PEP-related risks would be inviting regulatory action. Financial institutions with PEPs CDD programs would do well to keep some form of those programs in place.

Primary Sources

1. FRB, FDIC, FinCEN, NCUA, OCC Joint Statement: Bank Secrecy Act Due Diligence Requirements for Customers Who May Be Considered Politically Exposed Persons

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