New Paper: “A Proposal for a Global Database of Politically Exposed Persons”

My former student (and former GAB contributor) Ruta Mrazauskaite and I have a new paper, in the Stanford Journal of International Law, entitled “A Proposal for a Global Database of Politically Exposed Persons.” Here’s the abstract:

As part of the global effort to combat public corruption, anti-money laundering laws require financial institutions and other entities to conduct enhanced scrutiny on so-called “politically exposed persons” (PEPs)–mainly senior government officials, along with their family members and close associates. Unfortunately, the current system for identifying PEPs–which depends entirely on a combination of self-identification, in-house checks, and external private vendors that rely on searches of publicly available source material–is both inefficient and in some cases inaccurate. We therefore propose the creation of a global PEP database, organized and overseen by an inter-governmental body. This database would be populated with data compiled by national governments, drawing primarily on the data those governments already collect pursuant to declaration systems for public officials. A global PEP database along the lines we propose has the potential to make PEP identification more accurate and more efficient, reducing overall compliance costs and allowing compliance resources to be used more productively.

I hope readers will find the paper and the proposal to be of interest, and we welcome comments, criticisms, and further ideas about how to address the problem that our proposal is meant to ameliorate.

The Case for Governments Maintaining PEP Registries

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.  Continue reading