PEPs, Correspondent & Private Banking EDD *(OUTLINE + BULLET BODY)*

A new private-banking client wires in twelve million dollars. He's polished, well-referenced, and in a hurry. He's also the deputy oil minister of a country with a serious corruption problem — and the money is "proceeds from a family business." That single fact, his government role, just moved him from "valued client" to your highest-risk category. By the end of this lecture, you'll know exactly what enhanced due diligence the law requires before that account ever opens, and why correspondent banking and shell banks belong in the same conversation.

- A politically exposed person is an individual entrusted with a **prominent public function** — heads of state, senior politicians, senior government/judicial/military officials, senior executives of state-owned enterprises, and important political-party officials (FATF Recommendation 12 and the FATF PEP Glossary definition). - The risk PEPs carry is **corruption and bribery**: their position gives them access to public funds and the influence to launder the proceeds. Being a PEP is not a crime — it is a risk *category* that triggers extra scrutiny. - The PEP definition **extends beyond the individual** to **family members** (spouse, children, parents) and **close associates** (known business partners, people with joint beneficial ownership of a legal entity). Launderers routinely place assets in a relative's or associate's name to dodge screening (FATF R.12 interpretive note).

- **Foreign PEPs** — entrusted with prominent functions by a *foreign* country. FATF Recommendation 12 requires, for foreign PEPs, **mandatory enhanced measures regardless of risk**: senior-management approval to open or continue the relationship, reasonable measures to establish source of wealth and source of funds, and enhanced ongoing monitoring. - **Domestic PEPs** and **international-organization PEPs** (e.g., senior officials of the UN, IMF, World Bank) — FATF applies a **risk-based** standard: take reasonable measures to determine PEP status, and *if* the relationship is higher-risk, apply the same enhanced measures as for foreign PEPs. - Note the U.S. nuance for the exam: U.S. regulation historically uses the term **"senior foreign political figure"** in the private-banking context (USA PATRIOT Act §312, 31 CFR 1010.620) and does **not** mandate special EDD for purely domestic PEPs — but FFIEC guidance still expects a risk-based approach to all PEPs. - **Once a PEP, the risk doesn't vanish on leaving office.** FATF says institutions should assess **residual risk** based on the former role's influence; many programs apply a "step-down" only after a documented risk assessment, not automatically.

- Private banking = personalized services for **high-net-worth individuals**, often with low transparency and high transaction values — a classic higher-risk channel. - USA PATRIOT Act **§312** (31 CFR 1010.620) requires a U.S. institution offering a **private banking account** (defined as requiring a minimum aggregate deposit of **$1,000,000+** for one or more non-U.S. persons) to apply EDD: identify the **nominal and beneficial owners**, determine whether any are a senior foreign political figure, and **ascertain the source of funds and source of wealth**. - **Source of funds vs. source of wealth** — a tested distinction: *source of funds* is the **origin of the specific money** in this transaction/account; *source of wealth* is how the customer **acquired their total net worth** over time. For a PEP you generally need both, and you must **corroborate**, not just take the client's word.

- A **correspondent account** is one bank (the **correspondent**) holding an account for **another financial institution** (the **respondent**) to provide services — wires, check clearing, foreign exchange — often cross-border. - The core risk: the correspondent bank serves the respondent's customers **without knowing them**. You are relying on the respondent's own AML program — this is **nested risk** by design. - USA PATRIOT Act **§312** requires EDD on **foreign correspondent accounts**: assess the respondent's AML controls, the nature of its business and regulatory environment, and the quality of its home-country supervision. The **Wolfsberg Correspondent Banking Due Diligence Questionnaire (CBDDQ)** is the public-domain industry tool used to gather this information. - **Payable-through accounts** (PTAs) — a correspondent account whose **respondent's customers** can transact **directly** (e.g., write checks/initiate wires) through it. Higher risk because those sub-customers get banking-system access while remaining largely invisible to the U.S. bank.

- **Nested correspondent banking** — a respondent bank uses its correspondent account to provide services to **other financial institutions it banks** that have *no* direct relationship with the correspondent. Foreign banks "nest" inside the relationship, multiplying the unknown parties. Detect it by monitoring for transactional volume or jurisdictions inconsistent with the respondent's stated business. - **Shell-bank prohibition** — USA PATRIOT Act **§313** (31 CFR 1010.630) **prohibits** U.S. financial institutions from maintaining correspondent accounts for **foreign shell banks**: a shell bank is one with **no physical presence** in any country and **not affiliated with a regulated financial group**. Institutions must also take reasonable steps to ensure correspondent accounts are **not used indirectly** to provide services to shell banks, and must obtain a **certification** (or recertify) from foreign respondents on shell-bank status and U.S. agent for service of process. - Tie it together: PEPs, private banking, correspondent banking, and shell banks are all **EDD scenarios** because each one *distances* the institution from the true source of funds and the real customer — exactly where corruption and laundering hide.

So, the through-line. A PEP isn't a criminal, but their access to public money makes them a corruption risk — foreign PEPs get mandatory EDD with senior-management approval and source-of-wealth checks, domestic and international-org PEPs get a risk-based version. Private banking under PATRIOT Act §312 demands you nail down both source of funds and source of wealth above that one-million-dollar threshold. Correspondent banking means you're trusting another bank's customers you can't see — so watch for nested activity and payable-through accounts — and §313 flatly bans correspondent accounts for shell banks with no physical presence. Next, we move from *who* you bank to *how you watch them*: transaction monitoring, the SAR-versus-CTR decision, and the one mistake that can turn a compliance officer into a defendant — tipping off.