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August 14, 2013

Bank guidance on politically exposed persons assumes HNWs are guilty until proven innocent

By Spear's

’Even before customers are accused of any wrongdoing, many banks and other businesses are being pressurised to treat them like suspects’


THERE’S VERY LITTLE sympathy for wealthy members of society. With access to bottomless resources, networks of influence and every conceivable luxury, the public perceives an unfair advantage enjoyed by the elites, allowing them a power to achieve nearly any outcome while the rest of us toil against a fixed match. But is that really still the case? Do the rich still hold all the advantages, or has evolving legislation actually put targets on their backs?

New guidance recommendations on politically exposed persons (PEPs — hence this column’s name) released by the Financial Action Task Force, an intergovernmental organisation focused on combating money laundering, exhibit a distinctly arbitrary approach toward this group.

The FATF loosely defines a politically exposed person as an individual (and/or their family members) ‘who is or has been entrusted with a prominent public function’, who may potentially abuse that position for the ‘purpose of committing money laundering offences and related predicate offences, including corruption and bribery, as well as conducting activity related to terrorist financing’.

This definition is not limited to heads of state and high-ranking functionaries, but also includes judicial, military and political party ties, as well as any member of an ‘organisation’, be it a company, trust, or partnership. For example, holding a seat on the board of a state-owned company would put you on the list for extra scrutiny and due diligence. Regular international wire transfers can make you a PEP. The price of admission to becoming a PEP is simply a certain level of wealth and however much suspicion your government may hold toward you.

Presumed Guilt

Even before customers are accused of any wrongdoing, many banks and other businesses are being pressurised to treat them like suspects, which straight away deprives them of a number of basic rights to privacy and the presumption of innocence.

FATF recommendations require countries to ensure that financial institutions and designated non-financial businesses and professions ‘implement measures to prevent the misuse of the financial system and non-financial businesses and professions by PEPs, and to detect such potential abuse if and when it occurs’.

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These requirements compel banks and businesses to conduct a review to determine whether a customer is a foreign or domestic PEP, and if so, subject these individuals to ‘enhanced risk mitigation measures’, including but not limited to increased monitoring of the business relationship as well as an obligation to ‘take reasonable measures to establish the source of wealth and the source of funds’.

These kind of intergovernmental regulations may be successful in reducing money laundering and other illegal activities, but they also cast such a wide net that completely innocent figures are often dragged through an arduous and costly process that can not only damage reputation but also limit opportunities to function as productive free members of society. Governments are prone to mistakes, and these kinds of interventions are blunt instruments, so the damage can be extraordinary.

Power Corrupts

The mistake is to presume that regulatory powers will always be used for the purpose of regulation, and would not be subject to abuse for political, economic or personal motivations. In the name of anti-corruption, vague standards and obligations are downloaded to those ill-equipped to discharge them, leaving the wealthy and well-situated often exposed to bogus, defamatory and even illegal attacks based more on their status than their conduct.

There are even cases of white-collar law firms which are hired for compliance monitoring that have been quick to turn against the interests of their own clients, serving up scalps for regulators without even affording these employees a proper right to counsel.

The resurgence of political populism in both Europe and the United States has brought with it a considerable appetite on behalf of voters to see more scrutiny of the elites. And while of course there are cases of unscrupulous traders and entrenched tycoons who have gamed the system and should answer for it, an indiscriminate regulatory attack on the rich will inevitably cause collateral damage.

For HNWs, especially those who are internationally active, there is an urgent need to study your vulnerabilities, assess new risks and learn where and how your human rights can be exercised. Taken in combination with individually targeted sanctions, politically motivated abuse of Interpol Red Notices and wide-ranging powers of pre-trial asset seizure, in many ways it’s a difficult time for the above-average Joe.

Read more from Robert Amsterdam

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