Are HNWs at risk of becoming ‘unbankable’?

Close up of businessman's hand carrying briefcase --- Image by © John Smith/Corbis

New money laundering regulations for Politically Exposed Persons spell trouble for HNWs as more and more individuals may now be classified as high risk customers, writes Dr Anna Bradshaw

On 26 June 2017, The Money Laundering, Terrorist Financing and Transfer of Funds (information on the Payer) Regulations 2017 came into force in the UK. The date signalled the deadline for the EU-wide implementation of the Fourth Money Laundering Directive. Its laudable and seemingly innocuous purpose – raising the bar for anti-money laundering and counter-terrorist financing measures – belies the profound effects this legislation can have on legitimate personal and business dealings.

Many more individuals and entities will now find themselves classified by banks and other regulated businesses as ‘high risk’ customers, for regulatory purposes. The enhanced due diligence and monitoring necessary to reduce this risk increases the burden for both banks and their customers – and for many in the regulated sector, the greater compliance costs may not be outweighed by the anticipated commercial benefits of continuing the customer relationship. Such an assessment might manifest itself in a sudden and largely unexplained decision by a bank to close all accounts associated with a particular customer, leaving only a short notice period within which to make alternative arrangements. Whatever form it takes the consequences of a terminated relationship can be reputationally and commercially devastating for both individuals and businesses, on account of its ‘signalling’ effect.

This is particularly so for one specific sub-category of high risk customers, for whom the steps are more prescriptive: the customer’s source of wealth must be established along with the source of any funds involved in any proposed transaction, senior management approval must be sought and all transactions undertaken by the customer subjected to particularly careful scrutiny. These are the ‘Politically Exposed Persons’, most commonly known by their acronym (PEPs): anyone who holds or has recently exercised a ‘prominent’ public function, whether domestically, overseas or with an international body.

The concept of a PEP was originally developed as an anti-corruption tool, as a way of flagging the specific risk of public resource diversion; but over the space of a decade and a half it has come to signify an increased risk of money laundering or terrorist financing more generally. Although PEP status should be confined to ‘high’ public office the inevitable mission creep has meant that it may now have triggered posts such as membership of the governing body of a political party or of the administrative, management or supervisory bodies of state-owned enterprises. Even more problematic is the ripple effect: it is not only the PEPs themselves who will automatically be classified as high risk, but also any of their family members and ‘known close associates’.

The reasons why these provisions are now suddenly making themselves felt more strongly are many, but include the mushrooming and unregulated commercial market in ‘PEP lists’ and related due diligence screening services. You will typically not be told if, or why, you have been classified as high risk, but often it will be as a result of ‘adverse media’ collected and circulated by these providers. The savvy will rely on data protection legislation to monitor and correct any inaccuracies in these records, but in the absence of a correspondingly international data protection regime the effectiveness of this strategy will vary depending on jurisdiction. The sheer size of the compliance industry poses a further challenge.

Engaging proactively and transparently with regulated persons has never been more important – but this should not imply that it will always be appropriate to comply with all information requests, however broad. Ultimately, the onus is on domestic and international regulators to ensure that the ‘risk-based approach’ is applied with sensitivity to different degrees of ‘risk’ and fundamental human rights. If they fail to do so, they will face a further risk: that of the courts stepping in to address the proportionality deficit, as more customers resort to private litigation to challenge unfair practices by regulated persons in the name of risk management.

Dr Anna Bradshaw is Of Counsel in the Business Crime Department at Peters & Peters. She can be reached on 020 7822 7751 or abradshaw@petersandpeters.com