JP Morgan, the US financial services giant, is allegedly closing the bank and credit card accounts held by non-domestic politically exposed persons (“PEP“) in the US in order to contain the risks and the costs of compliance with anti-money laundering law in respect of PEPs.
That would include the accounts of high profile public officials from Canada and elsewhere. If the story is accurate, it makes business and legal sense because PEP compliance is one of the most difficult and expensive areas in anti-money laundering law.
At least 3,500 foreign accounts held in the US at JP Morgan will be affected, however that number is likely higher because the majority of PEPs are not recognized as such. PEPs do not know they are PEPs and neither do financial institutions in the majority of cases except where it involves an obviously identifiable public official. In Canada, for example, the federal government has a website of its Crown Corporations that includes merely a handful of the country’s government owned or controlled entities.
A PEP is not universally defined in anti-money laundering law. In the US, a PEP is a current or former senior political official who is foreign and includes their immediate family (spouse, girlfriend/boyfriend (even if married), parents, children, in-laws) and close associates.
A political official is a person who holds a significant position in the executive, legislative, administrative, military or judicial branches of government and extends to include officials of major political parties and senior executives of government owned or controlled corporations and agencies in another country.
For example, for US financial institutions and asset managers and brokers, the Canadian Prime Minister is a PEP, as are all Canadian judges and the heads of major Canadian government corporations including the head of the Business Development Bank of Canada, Export Development Canada, Via Rail, Canada Development Investment Corporation, and PPP Canada. And so are their family members and close associates. Any accounts held by those persons with JP Morgan in the US will be closed, according to reports.
A close associate is a person who has close ties to the foreign public official in a business, advisory or personal capacity. They are included as a category because of the concern that they can exert influence over the public official or can be used as a facilitator of money laundering and asset removal. In respect of Chinese public officials for example, close associates, spouses, children and mistresses are used in the majority of cases for removal of the proceed of corruption out of China to other countries (mainly to Canada, the US and Australia through offshore accounts).
In anti-money laundering law, however, it is not the title of the foreign PEP that matters so much as the position held. In terms of risk assessments, the function is important in order to assess the risk posed by the position – the risk being naturally that funds transferred to another country may be proceeds of foreign corruption. If an agency or position has greater access to state funds, the risk is higher. Foreign agencies and persons who deal with significant construction projects or financings pose a greater risk.
Financial institutions, asset managers, insurance companies, MSBs and brokers are expected to take reasonable steps to ensure that they do not assist in hiding state assets of corrupt persons.
The alleged $70 billion removed from the Ukraine by the former administration is the type of situation that PEP procedures are designed to avoid.
When PEPs attempt to open bank, asset or investment accounts, enhanced due diligence is expected to be conducted which includes ascertaining and verifying source of wealth. If a potential client cannot satisfactorily establish source of funds (e.g., their position does not equate to their assets), it triggers the filing of a suspicious activity report regardless of whether the account is ultimately opened.
High profile foreign account holders with JP Morgan have allegedly complained to US authorities about the account closures. In the first instance it is the bank’s prerogative to close any account as a business decision and in the second instance, the closing of the accounts does not obviate the need to undertake a review upon closing of the accounts to confirm that the accounts, in and of themselves, should not be the subject of a SAR. That is because if the account of a PEP has $20 million, and the PEP is an ambassador whose salary could not have reasonably have generated the amount of personal wealth held by the bank at closing, the bank is still obligated to file a SAR irrespective of the closing of the account.
What JP Morgan is likely trying to contain, as are other banks who will likely follow suit, is the incredible compliance costs associated with what is a very difficult task of identifying PEPs. There is no service anywhere in the world that effectively identifies PEPs – at most, many of them identify already-known PEPs, which is not helpful because any compliance staff can do the same and the compliance exposure for banks is not in respect of those PEPs, rather it is in respect of all of the hundreds of thousands of other foreign PEPs that are off the radar and not in any database.
In addition to exposure for compliance failures for banks in respect of PEPs that they did not identify, banks are exposed to reputational risks for unwittingly accepting funds from PEPs if it later emerges that huge sums were exported to the US by PEPs that were proceeds of corruption, such as is alleged in the Ukraine.
As JP Morgan no doubt determined, if the risk cannot possibly be contained as is the case with PEPs, the advisable business and legal position is to eliminate the risk entirely.
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