The original article, written by Áine Clancy, Lecturer in Law in our School of Law, was published in The Conversation:
Reports vary as to why the private bank Coutts decided to close the account of former UKIP leader Nigel Farage. He claims he was excluded for his political views, the bank says the problem was a lack of funds. But either way, his case does highlight a wider and longstanding problem faced by so-called “politically exposed persons” or “PEPs”. Just a few days after the Farage story broke, the chancellor of the exchequer himself, Jeremy Hunt, revealed that he had been denied an account by online bank Monzo.
Hunt said of the incident, which happened before he became chancellor, that he was concerned that the rules around getting a bank account when you are a PEP could prevent people from wanting to take up public office.
Whether that is true or not, it is very much the case that PEPs face difficulties finding banks that are willing to take them on because of the way in which they apply certain banking rules.
When taking on new customers, banks in the UK are required to comply with anti-money laundering regulations that are supposed to deter criminals and help the police to investigate crime. The rules are designed to prevent the banking system from being used by criminals. They require that banks, building societies and certain other regulated groups undertake due diligence on their customers by verifying their identities and addresses.
Financial service providers usually satisfy this requirement by requesting photo ID and utility bills from new customers. Banks must also monitor customers’ dealings during the lifetime of their accounts, seek proof that the source of large deposits into accounts is legitimate and consistent with a customer’s business activities and report any suspicious transactions to law enforcement authorities.
The theory is that if the proceeds of crime can be linked to specific bank accounts and the ownership of those bank accounts has been properly established, law enforcement authorities can simply “follow the money” to see who is responsible for those crimes.
What is a PEP?
Where PEPs are potential customers, a beefed-up version of the due diligence requirements apply. A PEP is anyone who is “entrusted with prominent public functions” either in the UK or in any other country. The question of who is viewed as being “entrusted with a prominent public function” is somewhat opaque, but it includes all MPs and members of the House of Lords, senior judges, and the governing bodies of political parties.
The AML regulations recommend that banks consider “seeking additional independent, reliable sources to verify” that PEP customers are who they say they are, and require that PEPs’ transactions are subject to additional monitoring and oversight.
PEPs are viewed as “high-risk” clients because international lawmakers and transparency groups highlight that they may be more susceptible to bribery and other forms of corruption than other customers.
However, on top of the PEPs themselves, their families and their “close known associates” are also made subject to strict anti-money laundering laws too. That’s because their accounts can be used to receive and hold the proceeds of corruption. It is no coincidence that PEP-specific anti-money-laundering rules first emerged in the 2000s at a time when a number of high-profile international corruption scandals involving senior politicians and their families were unfolding. One legendary case of the time saw the wife of the recently deceased Nigerian dictator Sani Abacha caught trying to leave the country with 38 suitcases stuffed with cash apparently looted from their state coffers.
Are banks shutting down the accounts of PEPs?
In recent years, the Financial Conduct Authority has imposed massive fines on banks in the UK for failing to properly comply with money laundering rules. In 2015, Barclays had to pay £72 million in one such case involving PEPs.
Faced with such potential penalties, banks have apparently sought to minimise their own risk of incurring these fines by minimising the number of PEP customers they accept. This is despite the fact that the FCA has expressly warned that banks should not end their relationships with customers just because they are PEPs.
This enthusiastic application of money-laundering rules by banks and building societies may explain why politicians are claiming that they and their family members risk becoming “unbanked”’. And since estimates put the number of customers affected by the PEP-specific rules at over 150,000 people in the UK, this is not an insignificant problem. What’s more, the rules can continue to apply to PEPs even after they leave office, so the number of people implicated will only continue to grow.
Changing the guidance
In response to the grievances raised by UK politicians, Andrew Griffith, the economic secretary to the Treasury has written to the FCA asking it to fast-track a proposed review of its guidance to banks on dealing with PEP customers.
Given the ever-growing number of PEPs and the varying risk profiles presented by them, depending on the types of public function they perform, this is an excellent opportunity for the FCA to remind banks that they are required to take a risk-based approach in applying the money laundering rules. Banks should ensure that they direct their oversight resources towards riskier PEP customers and take a lighter-touch approach to PEPs who, by the nature of their activities, have little or no exposure to corruption risk.