While there are proposals by the UK government to change the law on PEPs, and possibly remove some of the problems that have arisen recently, the industry remains some way off from completely removing sources of confusion and difficulty in this area.
Controversy over the removal of bank accounts from
high-profile figures such as former UKIP leader Nigel Farage
(Coutts/NatWest), and by an ironic contrast, that of anti-Brexit
campaigner and fund management figure Gina Miller (Monzo) raised
a set of questions, including the need for access to bank
accounts to be enshrined in law. It has, understandably, created
a storm over whether so-called “cancel culture” is causing harm
to banking and the wider economy. Specifically, it has also shed
light on that strange-sounding creature, the “politically exposed
person.”
To consider the issues in detail about PEPs and
banking, we carry this article from Diana Czugler, senior
associate at law firm Peters &
Peters. The editors are pleased to share these views; the
usual disclaimers apply. Email the editor if you have thoughts:
[email protected]
The recent media furore over the withdrawal of existing, or
reluctance to offer, banking facilities for so-called politically
exposed persons (PEPs) has shone a light on an issue that many
prominent individuals have been grappling with for some time. The
UK government wants to address the problem of PEP bank account
closures through introducing tighter regulations, coupled with
reviewing financial institutions’ (FIs) compliance with existing
rules. However, the anticipated changes may be more lip service
than substance.
Am I a PEP and what does it imply?
The term PEP generally covers those who hold, or recently held,
prominent public functions. There is no exhaustive list of such
functions and, beyond obvious categories such as heads of
state and ambassadors (1), it is up to those relying on the
identification – primarily financial institutions – to assess
prominence. While the UK statutory definition is not intended to
cover those in junior or mid-ranking positions (2), the
distinction can blur in practice.
FIs and others subject to anti-money laundering supervision in
the UK are obliged to identify existing or potential customers
and their beneficial owners, including assessing whether they are
PEPs (3). Banks are expected to proactively manage the risks
arising from their relationship with PEP customers, including
establishing appropriate systems and controls. Banks do not need
to decline or close a business relationship with someone merely
because they meet the definition of PEP (4), but they can do so
where they consider that the relationship would cause too high a
risk for them to be able to effectively manage. Banks must also
identify, and risk assess, family members and ‘known close
associates’ (5) of PEPs and those are often treated in the
same manner as PEPs themselves (whether justified or not).
Just as there is no uniform definition of the word, there is also
no single global database of PEPs. Typically, financial
institutions will consult external lists maintained by
third-party compliance service providers to identify PEPs and to
assess the risks they pose. In doing so, institutions are
expected to consider all information that is reasonably
available, including reliable news sources, reputable pressure
groups and public registers (6). Ultimately, PEP status and the
associated risk is in the eye of the beholder (or, rather,
account operator).
What if my bank account is being closed?
Being identified as a PEP should not result in the automatic
withdrawal of banking facilities. However, we have seen an
increase in the volume of banking services being terminated due
to a client’s PEP status – a process also known as de-risking.
While FIs’ risk appetite may vary, those who have accounts closed
may also find it hard to open alternative facilities at other
institutions. In most cases, closure will have little to do with
a PEP’s expressed political views and more with online
allegations about their conduct or those of their associates,
sometimes coupled with concerns about less usual transaction
patterns and business relationships.
Unfortunately, it will often matter little how well-founded
banks’ concerns are, especially once the decision has been made
to de-bank a PEP. Ultimately, FIs are increasingly risk averse
due to high-risk customer relationships resulting in adverse
publicity and regulatory penalties. Prevention is often cheaper
than mitigation; and the easiest form of mitigation is not to
have ‘risky’ customers. PEPs are easy targets. Short-termist as
this view may be, until now banks have been entitled to take it.
A customer not, or no longer, being aligned with an institution’s
risk appetite is the most common reason given for de-risking. In
such situations, PEPs should make a data subject request to
establish the information on which the decision to terminate was
made. This will enable them to identify inaccurate or incomplete
material – such as being considered a PEP based on outdated
information, mistakenly being linked to another PEP or unfounded
allegations of misconduct that would automatically result in a
higher-than-desirable PEP risk label. Customers should not only
make representations to the bank but also to the compliance
database provider with a view of getting inaccurate information
deleted (7). Where FIs stick to their guns – as is often the case
– the PEP can complain to the Financial Services Ombudsman
(FOS).
Will the situation improve soon?
The current position is unsatisfactory – account closure is often
coupled with freezing funds, marred by poor communications
and contradictory information, thus resulting in PEPs being kept
in limbo (and sometimes without access to their funds) for
extended periods. The FOS process is time consuming and often
does not remedy lost business opportunities and reputational
damage.
The reform proposals, which are set to become law in the autumn,
stop short of providing PEPs (and others facing account closures)
with a statutory right to review and challenge their banks before
the decision becomes final and, as it stands, there is no
route to challenge in court. However, they represent a step in
the right direction by requiring banks to give 90 days’ notice of
all intended closures and explain their decision (8). Boosting
transparency is important, but it remains to be seen how far FIs
will be willing to go where their ability to share information
with their customers is in practice restricted by far-reaching
anti-money laundering tipping-off considerations.
Footnotes
1 For a list of these, see regulation 35(12)(a) of the
Money Laundering, Terrorist Financing and Transfer of Funds
(Information on the Payer) Regulations 2017 (the Regulations)
2 Ibid at 1.
3 Regulation 35(2).
4 See FCA Finalised Guidance FG17/6, paragraph 2.13 (FCA
Guidance)
5 Regulation 35(12)(c)
6 FCA Guidance, paragraph 2.11
7 In accordance with the principles under the UK-retained
version of the General Data Protection Regulations.
8 See
https://www.gov.uk/government/news/government-clamps-down-on-unfair-bank-account-closures
for the government’s press release.
