The Financial Crimes Enforcement Network (“FinCEN”) and the U.S. banking agencies issued a joint statement clarifying FinCEN’s customer due diligence (“CDD”) requirements for politically exposed persons (“PEPs”). The statement also described the risk-based compliance approach associated with such requirements under the Bank Secrecy Act (“BSA”).
While FinCEN issued the joint statement in response to questions raised by banks regarding certain BSA provisos, the CDD provisions described in it also apply to broker-dealers. Specifically, Rule 17a-8 under the Securities Exchange Act of 1934 requires broker-dealers to comply with the reporting, recordkeeping, and record retention rules adopted under the BSA. FinCEN reiterated such applicability in its “Statement on Enforcement of the Bank Secrecy Act,” stating that the BSA applies to “other financial institutions,” which include “broker-dealers in securities.”
The joint statement addressed the following topics:
- The PEP definition
- CDD requirements and considerations
- The risk-based approach associated with PEPs
The BSA and anti-money laundering (“AML”) regulations do not define PEP. To address this, the joint statement offered the PEP definition often used by the financial industry: “foreign individuals who are or have been entrusted with a prominent public function, as well as their immediate family members and close associates.”
The joint statement also noted that a person that is identified as a PEP does not automatically present a higher risk. Each financial institution must conduct a review to assess the risk of each person.
Section 352 of the USA PATRIOT ACT and FINRA Rule 3110 require broker-dealers to establish AML programs that cover, among other things, risk-based policies and procedures for conducting ongoing CDD. Such policies and procedures should enable financial institutions to:
- Understand the nature and purpose of customer relationships as they develop customer risk profiles
- Conduct ongoing monitoring to identify and report suspicious transactions
- Maintain and update customer information on a risk basis
Regarding the CDD requirements, the joint statement clarifies the following:
- The CDD rule does not require banks (and financial institutions) to implement additional, unique due diligence steps for PEPs
- The rule also does not require banks (and financial institutions) to determine a customer’s PEP status at account opening
Risk-Based Approach Associated with PEPs
As mentioned, the CDD rule does not require financial institutions to assess a customer’s PEP status. However, the joint statement listed the following factors that firms should consider when developing customer profiles and deciding if a PEP determination is necessary:
- Indications of a PEP misusing his or her authority or influence for personal gain
- Product and service types used
- Transaction volume
- Locations where the customer conducts activities and is domiciled
- The customer’s access to significant government assets or funds
- The overall nature of the customer relationship
Broker-dealers should assess if any of the information above would impact the firms’ current practices and procedures. If so, the firms’ AML programs should be updated accordingly.
For more information, please contact your ACA consultant or Dee Stafford.