AML | GAB | The Global Anticorruption Blog	
The Case for Governments Maintaining PEP Registries
Posted on June 18, 2019 by Ruta Mrazauskaite	
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 →
Posted in Commentary	| Tagged AML, Anti-Money Laundering, enhanced due diligence, PEP, politically exposed persons, politically exposed persons registries	| Leave a reply
The EU Needs a Centralized AML Authority
Posted on February 15, 2019 by Ruta Mrazauskaite	
The European Union had a tough year. As if the refugee crisis, the rise of nationalist and far-right parties, and the Brexit affair weren’t enough, the 2018 headlines of European newspapers were crowded with a seemingly endless parade of money laundering scandals. Perhaps the most egregious was the case of Danske Bank, the largest bank in Denmark and a major retail bank in northern Europe. According to Danske Bank’s own report, between 2007 and 2015 the bank’s Estonian branch processed more than US$230 billion in suspicious transactions. The investigation, which is still ongoing, has already been dubbed the largest money laundering scandal in history. And there are plenty of others. In September 2018, for example, the Dutch bank ING Groep NV admitted that criminals used its accounts to launder money and agreed to pay a record US$900 million in penalties. And then in October 2018, after a string of scandals, Malta became the first EU Member State to receive an official European Commission (EC) order to strengthen enforcement of its anti-money laundering (AML) rules. By the end of 2018, it became apparent that the EU’s entire AML system needed a major overhaul.
The EU’s current AML legal framework is comprised of several components:
The first element is the set of so-called AML Directives, the most recent of which (the sixth) was adopted in 2018. These Directives require Member States to achieve certain legal results, but do not specify the particular measures that Member States must adopt.
Second, following the AML Directives, all EU Member States have adopted national AML laws and regulations that provide detailed guidance on a variety of topics, including the specification of different entities’ AML responsibilities, the sanctions for AML system breaches, and so forth.
The third important component of the EU’s AML framework is the EU Regulation on information accompanying transfers of funds, which is meant to harmonize across Member States the provision of payers’ and payees’ information when persons are transferring and receiving funds. In contrast to the AML Directives, this EU regulation, like other such regulations, has a direct legal effect on all Member States. Therefore, the information accompanying transfers of funds is identical in all Member States.
Taken together, these various instruments comprise one of the most stringent AML systems in the world, at least on paper. Perhaps for that reason, many commentators, including EU and EC officials themselves, attribute the spate of money laundering scandals plaguing EU countries not so much to weaknesses in the substantive regulations but rather to poor implementation—in particular, the fragmentation of AML oversight. Last October, Bruegel, an influential European think tank, presented a report calling for the establishment of a new centralized European AML authority—one that would work closely with national law enforcement agencies and be empowered to impose fines. ECB Chief Supervisor Danièle Nouy, who is intimately familiar with the problem, seems to agree at least to some extent. After one of last year’s many money laundering scandals, she suggested that “we need a European institution that is implementing in a thorough, deep, consistent fashion this legislation in the Euro area.” In fact, the proposal to create a more centralized EU AML architecture has been around for a while. It seems that the EU has finally decided that the time has come to do something like this, as the European Central Bank (ECB) announced last November that it would set up a central AML supervision office.
To understand the justification for creating a new centralized EU AML agency, one must first understand the extent to which, under the current system, supervisory and enforcement responsibility for the EU’s AML system is divided among several institutions, and the problems that this can create: Continue reading →
Posted in Commentary	| Tagged AML, Anti-Money Laundering, Danske Bank, european central bank, European Commission Bruegel, European Union, money laundering	| 5 Replies
The Road Ahead in Anti-Money-Laundering (AML): Can Blockchain Technology Turn the Tide?
Posted on November 7, 2016 by Christoph Nedopil	
One of the most exciting developments in financial and information technology in the past decade is the emergence of so-called blockchain technology. A blockchain is a database of information distributed over a network of computers rather than located on a single or multiple servers. The first and most famous practical application of blockchain technology is the electronic currency Bitcoin. Bitcoin and similar cryptocurrencies using blockchain technologies offer users the equivalent of anonymous cash transactions, and have been linked to illicit transactions in drugs, weapons, and prostitution as they. It is therefore no wonder then that blockchain technology is sometimes viewed as a problem, or at least a challenge, for those interested in fighting financial crime and corruption.
But blockchain technologies have other uses, many of which could in fact aid in the fight against these crimes. In an earlier post on this blog, Jeanne Jeong discussed how blockchain technology could be used managing land records. Another use for blockchain that has occasionally been mentioned (see here and here), but not yet sufficiently pursued, is anti-money-laundering (AML). Currently, banks spend about US$10 billion per year on AML measures, yet money laundering continues to take place on a vast scale. The goal of laundering money is to “wash” illegally obtained money (e.g. through corruption) into “clean” money, making the origins of the money untraceable. Blockchain technologies have five features that could make AML efforts both more effective and less costly:
Posted in Commentary	| Tagged AML, Anti-Money Laundering, banks, Bitcoin, blockchain, Corda, financial services, Technology	| 3 Replies