PEP Databases – How Online Databases Participate in the PEP Regulatory Framework

Corporate Clients, AML, Banking & Finance

This is the final article of our series diving into the classification of financial services clients as ‘Politically Exposed Persons’ (PEPs) and the issues it can bring. This series of three articles outlines the purpose and consequences of PEP status and how the process of PEP status designation and due diligence can go wrong at various stages. 

This final article outlines the role that online databases and research tools have come to play in the PEP classification process and discusses the issues that can arise therefrom. For a discussion of the difficulties associated with the current implementation of the FCA and FATF’s guidance on PEPs, see our previous article: PEP Due Diligence – Breadth and Complexity

Introduction 

The previous article in this series explained how the broad nature of the FCA and the FATF’s guidance on PEPs and the complexity of PEP classification have led to difficulties in the consistent implementation of the regulatory framework and the diffusion of the practice of ‘de-risking’. This state of affairs, along with the costs associated with the research and analysis of risk assessments, has opened a space for third parties to step in. Online databases and research tools have begun to offer financial services firms a PEP identification and due diligence service on the basis of FATF guidance. Firms consult these databases in order to cross-check or guide their own research on potential PEP clients.

On the whole, these databases are rigorous in their approach and update their lists regularly, and firms, in turn, make appropriate use of the information. However, databases face the same issues of interpretation of the guidance that were outlined in the previous PEP article. In fact, these issues are arguably worsened by the fact that PEP databases have become middlemen with fewer consumer duties than firms and no direct anti-money laundering (AML) obligations, and who add a further layer of conflicting interpretative policies. The situation is confused further by the great number of less scrupulous PEP lists that can be found online which rely on fewer news sources and update their data less frequently than more reputable multi-purpose databases. If, in parallel, firms place too much faith in the research and analysis of these databases, the former can adopt the latter’s mistakes, leading to significant consequences for themselves and their clients. 

Interpretation and Policy

Most problematic is the variable interpretation of the FATF guidance. It is inevitable that each database that provides a list of PEPs will have a different interpretation of the guidance (the guidance applied internationally) and will develop a different risk assessment policy. This can lead to discrepancies in designation of PEP status between databases. These discrepancies are reasonably commonplace and, given the number of lists on offer to firms, they have the effect of increasing the likelihood of a firm misattributing PEP status to an individual. This is not aided by the fact that databases do not always publish their policies for the public and firms to scrutinise. It is therefore not known if databases are applying an unduly loose or low-risk interpretation of the guidances; one can only infer from their practices.

An illustrative example from which one can infer a low-risk approach is the practice of retaining an individual on a PEP list long after they have left their politically exposed role. While the FATF guidance leaves the question of PEP status time limits open and acknowledges the possibility of an individual remaining a PEP indefinitely, this possibility is clearly not appropriate for every PEP. Indeed, the FCA guidance states that a PEP must be treated as such for at least twelve months after they leave their relevant role but that any measures continuing beyond twelve months will only be necessary where the PEP poses a higher risk.

Nevertheless, many databases take a low-risk approach, seemingly indiscriminately retaining PEP status for long periods of time. One database has privately commented to NBLO that they do ‘not assess the risk associated with a PEP’ when making this decision, instead leaving this to firms. Given the broad range of people who can come under the PEP umbrella-term, this policy appears illogical and dilutes the meaning of PEP status. This approach would also be at variance to some extent with any claim made by a database that PEP lists are regularly reassessed and updated. The result of such a low-risk approach to this binary status is that a greater number of people are labelled as PEPs and remain so for long periods of time. 

Over-reliance

The risk of this system is that firms rely too heavily on databases to meet their regulatory obligations and as a result mischaracterise some clients as PEPs. This in turn brings further due-diligence obligations and costs for firms and more burdensome checks for clients to complete. This pressure on firms is an unnecessary drag on regulatory mechanisms and could lead to wider deficiencies in their AML 

More seriously, firms that choose to ‘de-risk’ and not take on certain PEP clients, as designated by databases, exclude more people from the banking system. This can have serious consequences. In 2014, the Guardian reported that three large muslim organisations, including Finsbury Park mosque, had had their accounts closed by HSBC for ‘falling outside [their] risk appetite’, prompting speculation of islamophobia. In 2017, having struggled to open accounts with other banks, the mosque then won damages and an apology from Thomson Reuters whose World-Check database had wrongfully placed them on a list of organisations linked to terrorist activities. While the majority of checks made in consultation with PEP databases will achieve the correct designation, this example illustrates the potential consequences of firms immoderately relying on third parties to comply with their  PEP obligations. 

Conclusion

Online databases offer firms the attractive service of shouldering the burden of the PEP regulatory scheme. This can be a compliant and effective use of firms’ resources to meet their obligations. However, the proliferation of these databases has served to diversify the interpretation of FATF guidance and flood the market with less reputable providers, increasing the number of people caught by the PEP label. This exacerbates the issue set out in our previous article of low-risk clients facing barriers to banking or even total exclusion. This can reach unlawful levels, even discrimination, where banks blindly apply the conclusions reached by their chosen database. It is important that firms are aware of how databases can mislead and that they carry out their own research before they respond. 

If you would like to know more on similar topics, follow our LinkedIn and subscribe to our newsletters. If you believe you may have been unfairly affected by the PEP scheme, whether it be PEP designation or de-risking, please get in contact to see how we can help.