Does the BSA require banks to screen all customers for politically exposed persons (PEPs) or treat every PEP as high risk?

No. The CDD rule does not require a bank to screen customers for PEP status, and a PEP is not automatically high risk. A narrower rule does require specific steps for senior foreign political figures (SFPFs), a subset of PEPs, but only on private banking accounts.

What the guidance says:

• The CDD rule does not require a bank to screen for or otherwise determine whether a customer or a beneficial owner of a legal entity customer may be a PEP. A bank may choose to do so at account opening if it finds the information necessary to develop a customer risk profile (2020 joint agency statement).
• The CDD rule creates no requirement, and there is no supervisory expectation, for unique, additional due diligence steps for PEPs. Separate private banking requirements apply to SFPFs under 31 CFR 1010.620. Under the CDD rule, the level and type of CDD should fit the customer's risk (2020 joint agency statement).
• Not all PEPs are high risk solely because of status. A limited transaction volume, a low-dollar deposit account or known legitimate source(s) of funds could support a lower risk profile (2020 joint agency statement).

What the private banking rule says:

• A covered financial institution's program must include reasonable steps to ascertain whether any owner of a private banking account is an SFPF (31 CFR 1010.620(b)(2)). This is not a bank-wide screening duty.
• If an SFPF is a nominal or beneficial owner, the program must include enhanced scrutiny designed to detect and report transactions that may involve the proceeds of foreign corruption (31 CFR 1010.620(c)(1)).
• The program must also set procedures for when due diligence cannot be performed, including when to refuse to open the account, suspend activity, file a SAR or close the account (31 CFR 1010.620(d)).

On risk calibration, banks may consider geography, time out of office, remaining influence, products used and the volume and nature of transactions. Banks must still identify and report suspicious activity, including transactions that may involve the proceeds of corruption (2020 joint agency statement).

These rules are written for banks. If you are an MSB, stablecoin issuer or other non-bank, check which obligations apply to you before relying on this.

Sources

1. 31 CFR § 1010.620(c)(1)-(2): https://www.law.cornell.edu/cfr/text/31/1010.620
2. Joint Statement on Due Diligence for Politically Exposed Persons (2020): https://www.fincen.gov/sites/default/files/shared/PEP%20Interagency%20Statement_FINAL%20508.pdf
3. 31 CFR 1010.620 (eCFR): https://www.ecfr.gov/current/title-31/section-1010.620

This answer is general information, not legal advice. Forteris is not a law firm.