A PROPOSAL FOR A GLOBAL DATABASE OF POLITICALLY EXPOSED PERSONS.

• Author: Mrazauskaite, Ruta

I The Current System 156 A. The AML Framework and the Emergence of PEP Screening 156 B. Defining and Identifying PEPs 159 C. Disadvantages of the Current PEP Screening System 160 II The Proposal: A Global PEP Database 162 A. Preliminary Matters: Designating a Lead Organization and Defining PEPs 162 B. Generating National PEP Lists 164 C. Aggregating the National PEP Lists into a Global PEP Database 169 INTRODUCTION

The modern anti-money laundering (AML) framework (1) requires banks and other financial gatekeepers conduct enhanced due diligence--that is, more rigorous background checks and greater ongoing scrutiny--when dealing with customers who are considered "high risk." (2) One of the most significant requirements in this context is the obligation to scrutinize so-called "politically exposed persons" (PEPs). PEPs--senior politicians and public officials, as well as their close relatives and associates--are considered high-risk customers, from an AML perspective, principally because they have the opportunity to acquire substantial assets through corrupt activities, such as bribe-taking, embezzlement, and the misuse of confidential government information for personal gain. (3) Indeed, the International Monetary Fund (IMF) estimates that much, perhaps most, of the money laundered worldwide is derived from corruption, (4) and many of the biggest money laundering scandals of recent years have, to varying extents, involved corrupt politicians and public officials. (5) So it makes sense, from a regulatory perspective, to require so-called "obliged entities" (that is, the financial institutions and other entities obligated to comply with AML rules) to ascertain whether a current or prospective client is a PEP, and if so to apply enhanced due diligence. (6)

Unfortunately, the current system for identifying PEPs is both inefficient and inaccurate. In the absence of an official list of PEPs, obliged entities must rely on self-identification (that is, asking clients whether they are PEPs), coupled with in-house checks by the obliged entities and PEP screening services provided by external private-sector vendors. Both the in-house checks and the outside screeners rely on searches of publicly available source material. These searches are resource-intensive, and even though scraping public data to identify PEPs probably does a reasonably good job in most cases, this information is sometimes incomplete, inaccurate, or outdated. (7)

We propose the creation of a global PEP database, populated with data gathered by national governments, as a supplement to the existing approach to PEP identification. This is not a wholly original idea. (8) Indeed, various proposals in to create an international database of PEPs have been floated before, but so far have not met with much favor. A 2010 World Bank report on PEPs, for example, raised the idea only to dismiss it in a single paragraph. (9) But the idea has continued to attract adherents, and our goal in this article is to move the discussion forward by laying out and defending a more detailed proposal for a global PEP database.

The database that we advocate would be organized and overseen by an intergovernmental body--we tentatively suggest it should be the Financial Action Task Force (FATF), though this is not central to our argument--and would be assembled from domestic PEP databases compiled by national governments, drawing primarily on the data that those governments already collect from public officials as part of existing income and asset declaration systems. Access to the global PEP database would be restricted to law enforcement agencies and carefully vetted private firms--principally obliged entities and firms that provide PEP identification and screening services. (10) Such a model has the potential to make identification of PEPs more accurate and to reduce overall screening costs, which in turn allows firms to use their compliance resources more productively. To be clear, a global PEP database would not eliminate the need for obliged entities and outside vendors to conduct additional screening. But that screening could be more targeted, and more efficient, if there were a common, reliable, continuously-updated database that covered most PEPs.

The article is organized as follows. Part I provides some background on the development of the AML regulatory framework, the emergence of the concept of PEP screening, the current approach to conducting such screening, and its drawbacks. Part II turns to our proposal for a centralized PEP database, assembled from national-level PEP lists compiled principally using public officials' financial declarations. A brief conclusion follows.

1. THE CURRENT SYSTEM

   1. The AML Framework and the Emergence of PEP Screening

      The modern AML legal regime emerged, both at the national and international level, between the mid-1980s and the early 1990s principally as a tool to combat drug trafficking. While concerns about money laundering prompted some efforts toward financial industry self-regulation beginning in the late 1970s, (11) and the Council of Europe issued some recommendations related to measures against the transfer of criminal funds in 1980, (12) it was not until 1986 that the United States became the first country to criminalize money laundering. (13) An international AML regime began to take shape over the next few years. In 1988, the U.N. Convention Against Illicit Traffic in Narcotic Drugs and Psychotropic Substances (the Vienna Convention) obligated State Parties to criminalize activities related to laundering the proceeds of illegal drug sales;(14) that same year, the Basel Committee on Banking Supervision published guidance regarding the obligations of banks to know their customers, avoid suspicious transactions, and cooperate with law enforcement. (15) Then in 1989, the G-7 countries, the European Commission, and eight other countries jointly created FATF, an organization tasked with developing a set of common AML standards. (16) FATF promulgated these standards, the so-called "FATF Forty Recommendations," in 1990. (17) These recommendations, though non-binding, have become the global standard for national AML regulation. The European Union (EU) issued its First AML Directive in 1991; that Directive essentially required EU member states to integrate the FATF Recommendations into their national laws. (18)

      Heightened due diligence for PEPs was not part of the discussion during this early period. Indeed, the term PEP had not yet been coined. The reason for this omission is likely that this first wave of AML regulation was focused primarily on the illegal drug trade, and to a somewhat lesser extent on other illicit markets (such as weapons) and private sector fraud, rather than on public corruption. It is probably no coincidence that the Vienna Convention was the first international treaty to explicitly address money laundering, a fact that "reinforced the narrow framing of money laundering as a by-product only of the illicit drug trade." (19) Likewise, while there is no published information on the drafting history of the first version of the FATF Forty Recommendations, (20) the introduction to FATF's first annual report makes clear that concern over drug trafficking was driving the process. (21) Given this focus on drug traffickers, and the apparent lack of attention to money laundering by corrupt public officials, it is understandable that the AML framework that emerged during this period did not focus on PEPs.

      But while the AML framework originally emerged as a complement to the drug war, money laundering is associated with a wide range of other organized criminal activities. It is thus unsurprising that over time, the AML framework came to be seen as an important element in the fight against other forms of transnational crime, including security threats like terrorist financing and WMD proliferation. (22) Most relevant for present purposes, over the course of the 1990s, as concerns about public corruption became more salient, there was increasing pressure on the international AML regime to address the money laundering risks associated with politicians, public officials, and their close family members and associates--the people we would now call PEPs. (23)

      The view that financial institutions should apply heightened due diligence to PEPs solidified in the early 2000s. In 2001, the Basel Committee on Banking Supervision published a Consultative Document on Customer Due Diligence for Banks; this document declared that "potentates"--individuals holding important public positions, along with their close relatives--are high-risk customers that should be carefully screened and, if taken on as customers, carefully monitored. (24) Then in 2003, two significant developments firmly established enhanced due diligence for PEPs as a central feature of the international AML regime. First, the United Nations Convention Against Corruption (UNCAC)--which was adopted in 2003 and entered into force in 2005--included, in Article 52, an express provision obliging each State Party to "require financial institutions within its jurisdiction ... to conduct enhanced scrutiny of accounts sought or maintained by or on behalf of individuals who are, or have been, entrusted with prominent public functions and their family members and close associates." (25) Second, during the 2003 review and revision of the FATF Forty Recommendations, FATF included for the first time the specific term "politically exposed person," along with a definition of that term and an explicit recommendation that financial institutions establish appropriate risk management procedures to determine the PEP status of their customers and to take special measures for dealing with such customers. Those special procedures included requiring senior management approval for establishing business relationships with PEPs, taking "reasonable measures" for identifying the source of a PEP's...