This week, on June 12, 2018, the Financial Crimes Enforcement Network (FinCEN) issued an advisory on human rights abuses enabled by corrupt senior foreign political figures - also known as Politically Exposed Persons (PEPs) - and their financial facilitators. In their 15-page advisory, FIN-2018-A003, FinCEN explains that high-level political corruption “undermines democratic institutions and public trust, damages economic growth, and fosters a climate where financial crime and other forms of lawlessness can thrive.” FinCEN also explains that corrupt senior foreign political figures can also contribute directly and indirectly to human rights abuses. Therefore, FinCEN has issued this guidance to, among other things, help financial institutions identify “red flags” for suspicious activity in relationship to senior foreign political figures. The advisory also provides guidance for filing SARs on PEPs.
Red Flags Related to Corrupt PEPs
In their advisory, FinCEN provided 14 “red flags” that institutions should look for in regards to corrupt PEPs. In doing so, FinCEN advises that no single transactional red flag indicates suspicious activity. Rather, financial institutions must consider “additional indicators and the surrounding facts and circumstances, such as a customer’s historical financial activity and whether the customer exhibits multiple red flags” before deciding that a specific transaction is suspicious activity requiring a SAR. Financial institutions are also advised to perform additional inquiries and investigations when appropriate.
The “red flags” that could be indicative of corrupt senior foreign political figures include the following:
Use of third parties when it is not normal business practice.
Use of third parties when it appears to shield the identity of a PEP.
Use of family members or close associates as legal owners.
Use of corporate vehicles (legal entities and legal arrangements) to obscure i) ownership, ii) involved industries, or iii) countries.
Declarations of information from PEPs that are inconsistent with other information, such as publicly available asset declarations and published official salaries.
The PEP or facilitator seeks to make use of the services of a financial institution or a designated non-financial business or profession (DNFBP) that would normally not cater to foreign or high-value clients.
The PEP or facilitator repeatedly moves funds to and from countries with which the PEP does not appear to have ties.
The PEP or facilitator has a substantial authority over or access to state assets and funds, policies, and operations.
The PEP or facilitator has an ownership interest in or otherwise controls the financial institution or DNFBP (either privately or ex officio) that is a counterparty or a correspondent in a transaction.
Transactions involving government contracts that are directed to companies that operate in an unrelated line of business (e.g., payments for construction projects directed to textile merchants).
Transactions involving government contracts that originate with, or are directed to, entities that are shell corporations, general “trading companies,” or companies that appear to lack a general business purpose.
Documents corroborating transactions involving government contracts (e.g., invoices that include charges at substantially higher prices than market rates or that include overly simple documentation or lack traditional details (e.g., valuations for goods and services).
Payments involving government contracts that originate from third parties that are not official government entities (e.g., shell companies).
Transactions involving property or assets expropriated or otherwise taken over by corrupt regimes, including individual senior foreign officials or their cronies.
Regulatory Obligations Regarding PEPs
The advisory continues by providing a reminder to financial institutions of their regulatory obligations regarding PEPs. In general, these include:
Due diligence obligations
Enhanced due diligence obligations for private banking accounts
General obligations for correspondent account due dilligence and AML programs
Suspicious activity reporting
Additional SAR Guidance for PEPs
One of the most important elements of the FinCEN advisory is the guidance provided in relationship to filing SARs on PEPs. Specifically, the advisory states that financial institutions need to provide all pertinent available information in both the SAR form and the narrative. This includes selecting field 35(1) (Suspected Public/Private Corruption (foreign)) as well as referencing the advisory by using the following key term in both the SAR narrative and SAR field 35(z) (Other Suspicious Activity-Other): “Financial Facilitator FIN-2018-A003.” FinCEN states that using this term will indicate a connection between the suspicious activity being reported and the persons and activities highlighted in the advisory.
Examples of PEP Corruption Through Financial Institutions
The FinCEN advisory ends with an appendix that provides several different examples of financial facilitation methods previously used by PEPs:
Tax haven shell companies
Laundering of stolen government funds
Corruption in South Sudan
Laundering of embezzled funds
Illicit trade of ivory, weapons, and money
Misappropriation of state assets
Corruption and residential real estate
Human rights abuses, censorship, and enhanced monitoring
Application to Financial Institutions
This release should be an indicator to financial institutions that regulatory expectations regarding senior foreign individuals (PEPs) is increasing. In the past, the expectations were often fairly low - especially for community banks and credit unions - as regulators often wouldn’t inquire about PEPs, or if they did, the expectations were minimal. Based on this new guidance, it would be prudent for financial institutions to evaluate both their policies and procedures in regards to PEPs as well as ensuring that all senior foreign political figures with accounts at the institution are appropriately identified. As the Financial Action Task Force (FATF is a group of 36 nations that set AML standards for all countries) has included measuring risk of PEPs as their Recommendation 12, it would appear that US regulator’s focus on PEPs will only be increasing in coming years.
The full 15 page advisory can be found here.