U.S. financial institutions seen lacking anti-corruption policies for domestic politicians

March 7, 2012

By Brett Wolf

ST. LOUIS/NEW YORK, March 7 (Thomson Reuters Accelus) – Despite an international push for financial institutions to crack down on corruption and money laundering linked to political figures, it remains unclear how firms in the United States and abroad will respond.

Some U.S. financial institutions say they have taken steps to address the specific corruption and money laundering risks associated with American political figures and those close to them. Others say they have not, and to date, regulators’ expectations are unclear.  “This is not something that financial institutions have specific policies on that we’re aware of,” Chip Poncy, the director of the U.S. Treasury Department’s Office of Strategic Policy for Terrorist Financing and Financial Crimes and the head of the U.S. delegation to the Financial Action Task Force (FATF), said during an online seminar on Tuesday. “So this is an issue we’re going to have to engage the private sector on, not for purposes of saying ‘You guys aren’t doing enough,’ but for the purposes of saying ‘What exactly are we doing? What works, what doesn’t work?'”

The risks posed by politicians, their family members and close associates — known in anti-money laundering (AML) parlance as domestic “politically exposed persons” (PEPs) — have raised the hackles of the FATF, the international standard-setter on combating money laundering.

The United States is an influential member of the FATF, and like other members, it is expected to incorporate the Task Force’s recommendations into its legal and regulatory framework.

Last month, the task force issued a number of updated AML recommendations, including one that would oblige financial institutions to identify customers who are domestic political figures and to treat those that pose “higher risks” of corruption in the same manner as their foreign counterparts. In such cases, the FATF recommends getting senior management approval for the accounts, determining the source of the account-holder’s funds, and monitoring their accounts closely.


Rick Small, a veteran AML professional currently with American Express, said that in some countries, identifying domestic PEPs “has not been a big issue.” He added: “I think for a lot of us in the United States we have not been doing that.”

John Byrne, the executive vice president of the Miami-based Association of Certified Anti-Money Laundering Specialists, which organized the seminar, said most of the anti-money-laundering professionals he has informally polled have reported without elaboration that their institutions “have systems to identify domestic PEPs.”

“A number of banks have said to me that they do identify domestic PEPs. We did not have a further conversation on what they do, so I think guidance, or at least conversation, would make sense,” Byrne said.

The USA Patriot Act, enacted after the Sept. 11, 2001 attacks, prompted regulations requiring U.S. financial institutions to scrutinize private banking accounts held by foreign PEPs. However, unlike the new task-force recommendations there was no requirement with regard to domestic political figures.

Domestic figures have not been a priority in the United States, Poncy said, and he suggested that one reason is that U.S. authorities are already good at tracking down corrupt politicians.

“Whether you’re a congressman, or whether you’re a president, or whether you’re a judge, or a mayor, there’s no shyness about … our law enforcement getting after you. If you’ve been up to corrupt activity, we don’t have a reputation for going easy on that,” he said. “Starting with a risk assessment, is this a place where we see a priority issue? No, we don’t.”

The FATF decided to address the issue of domestic political figures, Poncy said, because money-laundering enforcers have struggled to identify, track, and repatriate assets associated with corruption before they reach global financial capitals.

The task force has long emphasized the need for money-laundering controls in “asset centers” like the United States, which attract foreign investment and capital flows of both legitimate and corrupt nature. Poncy added, however, that the task force now wants to make sure that effective money-laundering controls are in place in countries where official corruption is commonplace and which tend to be the source of corruption funds. Such countries will be under pressure to act to avoid being added to the body’s list of “high-risk” and “non-cooperative” jurisdictions.

“While we had controls on the asset side … we didn’t have controls on the source side,” Poncy said. “We ought to make sure … that there is an expectation that those source countries of concern have some controls in place.”

Poncy added, however, that it remains unclear how financial institutions should determine which of their countries’ domestic political figures pose a level of risk worthy of enhanced scrutiny.

“How you take a risk-based approach to domestic PEPs is not self-evident. FATF gets that. They’re committed to developing guidance in this space,” he said.

“There have been a number countries that have expressed 100 percent support for the overarching policy of ‘let’s get better at this,’ but (have also expressed) real concern about how do we do this. So we’re not entirely sure how we do this.”

Input is needed from regulators, financial institutions and law enforcement agencies, Poncy said.

“What are institutions doing? What are we thinking is working? What does our law enforcement find useful when they do these investigations?” he said.

In the United States, the domestic political figures issue is closely tied to the Treasury Department’s recent proposal to issue a rule to clarify and strengthen financial institutions’ obligations to conduct customer due diligence, (CDD), including a requirement to determine the “beneficial owners” of accounts held by legal entities.

“I think (the domestic political figure issue) is going to fold nicely into the broader question of CDD. Ultimately, whether we need specific policies on this is a question that we are entirely open on and certainly interested in those views,” Poncy said.

Financial institutions have until early May to comment on Treasury’s CDD proposal.


(This article was produced by the Compliance Complete service of Thomson Reuters Accelus.  Compliance Complete (http://accelus.thomsonreuters.com/solut ions/regulatory-intelligence/compliance-complete/) provides a single source for regulatory news, analysis, rules and developments, with global coverage of more than 230 regulators and exchanges.)


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Regulators also reverse game the industries they regulate according to “A Regulator’s Exercise of Career Option To Quit and Join A Regulated Firm’s Management with Applications to Financial Institutions” at https://sites.google.com/site/behavioral econometrics/publications

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There is a good deal of puffery about due diligence – I suggest you look at the book “Due Diligence For The Financial Professional 2nd Ed , and the web sites for www.duediligenceequation.org, and www.aegisjournal.com for some more grounded views and approaches.

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