Financial institutions are obliged to apply enhanced client due diligence to politically exposed persons (PEPs) in order to comply with anti-money laundering (AML) and other regulations. Yet there are no official, government-sponsored or government-endorsed sources for identifying PEPs. As a result, financial institutions typically rely on private firms to identify PEPs across the globe. But this reliance is problematic. With barely any independent oversight into how these firms compile their lists, there is no way to ensure the lists are accurate, and there’s at least some evidence that they aren’t: Many of the vendors on which financial institutions rely were found to have “incomplete and unreliable PEP lists” in the past and these commercial databases also produce thousands of false positives due to people with identical names. Given these problems, very few AML officers rely solely on those external databases; they are forced to supplement the private vendor lists with ad hoc internet searches on Google, Linkedin, and other sources, often relying on Google-translations of foreign media articles. This does not seem very reliable. Some civil society groups have sought to contribute to the identification of PEPs by creating online registries, drawing on publicly accessible data on the international level and the national level. But none of these attempts has been comprehensive enough for AML purposes, and civil society organizations probably would not have the resources to compile PEP lists that would be suitable for financial institutions to use for screening clients on a sustainable, ongoing basis.
It is time to change how we approach the task of identifying PEPs for AML and related purposes. A couple of years ago, Professor Stephenson asked on this blog whether there should be a public registry of PEPs, sponsored and maintained by national governments or by an inter-governmental body such as the Financial Action Task Force (FATF). Such an idea is not entirely revolutionary. The UN Convention against Corruption (UNCAC) hints at something along these lines in Article 52(b)(2), which instructs each state party “in accordance with its domestic law … [and] where appropriate, [to] notify financial institutions within its jurisdiction … of the identity of particular natural or legal persons to whose accounts such institutions will be expected to apply enhanced scrutiny,” though the “where appropriate” and “in accordance with domestic law” qualifiers mean that there’s no concrete obligation here. Some countries, such as Australia, have undertaken to circulate lists of PEPs to financial institutions. And the European Union, in its Fifth AML Directive, required Member States to compile a list of government positions that are considered “politically exposed,” though the Directive does not require governments to name the actual persons holding those positions at any given time.
Yet these measures all fall well short of the possibility that Professor Stephenson raised in his post: official PEP lists compiled and maintained by governments. Professor Stephenson framed his post as merely posing the question whether this would be a good idea. I want to argue for what I believe is the correct answer to that question: Not only should governments maintain PEP registries, but the international community, through bodies such as the FATF and the UNCAC Conference of States Parties, ought to require governments to create and maintain such registries, using an internationally-standardized set of functional criteria to identify which public positions should be considered to be politically exposed.
There are several objections to the idea of creating government-managed PEP registries (several of which Professor Stephenson summarized in his previous post). Yet none of them provides a sufficiently convincing reason to reject the idea:
- First, some argue that government PEP registries would be expensive and unnecessary, given that the private sector is already providing this service. Admittedly, maintaining government PEP registries would require resources, but much of what needs to be done can be done using existing systems, and new technologies can further decrease the costs significantly. Governments could build their PEP lists starting with the existing interest, asset, and income declarations that many countries already have in place. This means that no extensive resources would be needed to introduce official PEP registries, especially if countries could use relatively simple computer code to automatically assign PEP status to certain officials based on specific criteria. (That said, states would need to identify PEP positions not covered by existing asset declarations and make sure that the registry is complemented with names from other sources.) While this might require the existing interest, income, and asset declaration systems to become more efficient that they currently are in many places of the world, that would be a change for the better.
- Second, there are worries such state-created PEP lists would be incomplete and would quickly become outdated, or, more seriously, that governments could manipulate the contents of the list to target members of the opposition. The concern about incompleteness rings hollow in light of the fact that the existing system, which relies on private firms and internet searches, is hardly comprehensive, and a state PEP list would complement, rather than replace, other sources of information. As for concerns about manipulation of PEP lists to target the opposition, it’s likely that any government that would do such a thing would already employ much more powerful weapons to harass political enemies than heightened due diligence requirements when those people open bank accounts.
One additional question that would need to be addressed is whether the government-compiled PEP lists should be made public. I tend to think not. While making these lists public would increase the possibility that they would be used by investigative journalists, and would also give civil society organizations a chance to suggest additions or changes, making the lists public would also raise significant security and privacy concerns, and might facilitate circumvention. Rather than making the lists fully public, these government-sponsored PEP lists should be shared with financial institutions and with other governments. And the shared information should be in a format that allows easily scraping data and re-using it. This would allow financial institutions to rely on an official source in their internal AML systems by feeding the official registry in their internal monitoring system. Such competition would likely also drive down the cost of the services of the current private sector players in the market, thus decreasing compliance costs. Financial crime law enforcement institutions across borders would also benefit from such a tool in their work, which is why international sharing—and an international body like FATF to coordinate the sharing—would be so important.
To some, the idea that governments should be required to take a leading role in compiling PEP lists might sound like a radical change, one that suggests the need to rethink the entire international AML framework. I agree. Indeed, it is high time to do just that. The international fight against money laundering is relatively young and should not be viewed as complete, especially in the light of the recent AML scandals. Moving away from a system that relies on the private market and ad hoc internet searches toward one in which governments take more responsibility for facilitating the necessary (and expensive) due diligence on those who seek to access the international financial system is a development we should encourage.