Variations in Money Laundering Rules Prove Tricky for Banks

Members of the U.K.’s House of Lords and sporting officials in Switzerland are to receive additional scrutiny by banks, a consequence of the widening effort by worldwide regulators to clamp down on money laundering.

These two roles will soon be officially classified as “politically exposed persons,” a concept employed by banks and regulators to mark out certain individuals as being at higher risk of being involved in money laundering. PEPs, as they are known for short, are typically government officials, their relatives or close associates.

For banks, keeping up with the expanding definition of PEPs is just part of the challenge of complying with anti-money laundering rules that vary greatly around the world.

Data compiled by Dow Jones Risk & Compliance illustrate the wide differences in PEP counts between nations, a reflection of marked differences in who’s counted as a PEP in each country.

Spain has by far the largest number of PEPs, more than 100,000, because its expansive definition extends far into local government. Russia comes second with 42,000 individuals and China next with 19,000. Yet other nations define PEPs much more narrowly. The Netherlands, for example, has only 2,000 or so. News Corp NWSA +1.77%.’s Dow Jones & Co., which owns the Risk & Compliance database, is the publisher of the Wall Street Journal.

Some of the stark differences are evident between neighboring countries. Uruguay, for example, counts many local officials as PEPs and its broad definition yields a total of 6,500 or so individuals. Next-door Argentina has a narrower definition and has about half as many PEPs, despite a population that is more than 10 times that of Uruguay, according to the Dow Jones data.

“The short answer is it’s generally an issue just trying to reach a consistent definition of PEPs,” said Michael Cho, head of global financial institutions compliance at Wells Fargo WFC +3.07% & Co. But, in terms of the practical application of these definitions in compliance, he said banks mostly rely on third-party providers of screening services. “It’s a challenge but the vendors continue to get better and better,” he said.

Most financial institutions follow the broad PEP definitions of the Financial Action Task Force, an intergovernmental body that sets standards for anti-money laundering and counter-terrorist finance policies. However, the detailed definitions in individual countries can vary widely, even if they’re based on the FATF guidelines.

The picture is complicated when a bank’s operations in a foreign country fall under local regulators rather than being branches of the U.S. company, Mr. Cho explained. When that’s the case the bank would probably apply a standard PEP definition internationally but augment it to comply with local regulations. Practically that might mean “two or three more things you have to do,” such as supplemental due diligence on customers and keeping files present in the country, he said. Wells Fargo has a mix of branches and locally regulated entities so has to apply this approach in some places.

Most banks have processes for identifying PEPs, with KPMG last year finding 70% of global banks it surveyed use a commercially available list for that purpose. The report said “financial institutions are more focused than ever on the need to exercise more scrutiny over PEP transactions.”

Banks typically apply more stringent controls to customers who are PEPs, because of their higher risk, but can also face regulatory action if those controls are seen as inadequate. Last year the U.S. Financial Conduct Authority fined Standard Bank PLC7.6 million pounds for such alleged failures. Standard Bank cooperated with the investigation and said it had taken steps to address the issues identified by the regulator.

The European Union’s proposed fourth Anti-Money Laundering Directive would require banks to apply additional controls on PEPs.

More generally, U.S. regulators have been scrutinizing banks’ anti-money laundering controls and have handed out large penalties to several banks including HSBC Holdings PLC and Standard Chartered PLC.

The wide variations in PEP definitions between countries add to the difficulties of keeping up with changing PEP definitions and tracking names on lengthening lists of PEPs. “The list of PEPs is large and is continually changing,” said Jason Chorlins, an anti-money laundering specialist at accounting firm Kaufman Rossin Co. Banks have had to apply more scrutiny to PEPs, according to Mr. Chorlins, including looking into their sources of funds and the nature of their business.

Such scrutiny can rankle bank customers. Members of the U.K.’s House of Lords will be classified as PEPs under the EU’s fourth Money Laundering Directive. Some Lords have complained about they or their family members being asked for additional information in order to conduct transactions, or barred from some services altogether, according to local media reports.