OPINION OF THE WEEK: Politically-Exposed Persons And "De-Banking"

Tom Burroughes Group Editor 7 July 2023

OPINION OF THE WEEK: Politically-Exposed Persons And

The idea of the "Politically-Exposed Person" is not a familiar one to the broad public but that changed with a vengeance this week with the banking affairs of a colourful political figure, and the tale from the son of a former top finance minister from the Thatcher years. I reflect on where the sector goes from here.

It’s not just the summer that causes heat. The temperature, at least mentally, is rising at banks.  

As I noted last week about the inflationary climate, bonus-conscious bankers have had to juggle acquiring more clients with avoiding compliance problems. According to Fenergo, the Ireland-headquartered regtech firm, enforcement actions for AML-related compliance breaches soared globally by 52 per cent in 2022. Even if the cynics think that fines are small relative to total income and just part of the cost of doing business, these aren’t trivial. 

Unsurprisingly, banks have started to adopt a full-on “Precautionary Principle” when it comes to that strange-sounding beast, the “Politically Exposed Person,” or PEP. According to one definition from the Financial Action Task Force, a group of major countries designed to combat money laundering, a PEP is “an individual entrusted with a prominent public function.” Nationally, PEP definitions vary – I’ll come back to this below.

Two Nigels
The PEP issue surfaced – although details haven’t yet been fully locked down as of the time of writing – in a couple of mainstream press reports this week. There is the case of former UKIP leader Nigel Farage. Farage thinks that his being potentially designated as a PEP may have been a reason why a bank – which some reports said was Coutts – shut a particular account he had. Farage has not directly named the bank in question. (This news service has contacted Coutts about this; it has not replied.) He also claimed that attempts to open accounts at other banks were rebuffed. (Farage was accused in the House of Commons by Labour MP Chris Bryant of having received £548,573 ($697,370) from state-backed Russian media, a claim he denies). Bryant’s claim was covered by parliamentary protection from libel; Bryant hasn’t repeated the allegation outside Parliament, or withdrawn his story. 

Other reports (BBC, 5 July, others) said a reason for the bank “de-banking” Farage was that he fell below the amount required for this particular firm. Time will tell what the full cause of Farage’s situation is.

There is also the case of Dominic Lawson, the journalist and son of former UK Chancellor in the Margaret Thatcher administration, Nigel Lawson. In an article published in the Daily Mail on 2 July, Dominic Lawson said that for a period in 2016 he had been unable to open an account with Barclays on behalf of his grown-up daughter, Domineca. According to Dominic Lawson, he was told that because his father was at the time of the application a member of the House of Lords and therefore a PEP, the bank could not open the account, although Barclays told him it would examine the matter.  Barclays did eventually open an account, however, although Dominic Lawson said it was a laborious process. 

Cancel culture or commercial rigour?
The political optics are bad. The late Nigel Lawson was not just a senior Tory politician of the highest rank in the 1980s, he was a critic of the European Union and of global warming alarmism. Farage is a passionate Brexiteer, and friendly with Donald Trump. In parts of the Right-leaning media, dots have been connected and there is talk about how centre-Right politicians are being persecuted by banks. A difficulty, of course, is that banks understandably decline to discuss individual cases. Even so, if a lender “de-banks” someone, they should go into more detail as to why in order to prevent misconceptions or theories going wild. Losing a bank account is not, in a modern economy, a trivial matter, particularly if other options are, so it is alleged at least in the Farage case, cut off. Stories about banks shedding clients can easily get out of hand unless the process is fully explained.

Just as onboarding is a big part of banking, "de-banking" must be done properly to avoid problems, difficult though that can be. Banks should remember that they are to some extent linked to the state, and underpinned by central banks like the US Federal Reserve and the wider public. Over a decade ago, several US ones, and those in other nations, were bailed out. Roll on a decade and we have what happened to Silicon Valley Bank and First Republic, when they were put into the arms of the FDIC in the US, for example. UBS's takeover of Credit Suisse was at the urging of the Swiss government. This stuff is inevitably very political.

“Peak PEP”?
Back on the PEP point, even in cases where being a PEP isn’t the reason for a bank avoiding onboarding a client, or for them to “sack” clients – as in the case of certain Russians and those linked to other regimes – there’s a need to reform the system. The UK Treasury told me this week that reforms are being made. Under an EU directive that underpins UK law, Brussels ended the distinction between domestic PEPs, considered lower risk, and those from other countries. According to media reports, UK ministers agree that EU rules go beyond international regulations.

Whatever changes are made to PEP definitions, problems for some relatives of prominent politicians on all sides of the spectrum aren’t likely to go away. And that’s a problem if more ordinary people want to go into politics. Running for office shouldn’t mean you cannot easily get a bank account or that your grandchildren will have a problem later in life. PEP status ought to be strictly delimited and, where necessary, reviewed by a third party. 

National variations
While my comments here are drawn mainly from the UK, the challenges for banks of dealing with PEPs are international. For example, a paper about PEPs from the US Federal Reserve states: “Banks must have appropriate risk-based procedures for conducting ongoing CDD [customer due diligence] to understand the nature and purpose of customer relationships, and to develop a customer risk profile.” 

In the US, a PEP is also known as a senior foreign political figure (SFPF). In the US, if a customer or potential customer is an SFPF, a family member of an SFPF, or a known close associate of them, regulations require “financial institutions to apply procedures for enhanced due diligence reasonably designed to detect and report transactions that may involve the proceeds of foreign corruption.” (source: Wilkie Compliance).

As mentioned already, the PEP regime for UK banks stems from the European Union. 

In Singapore, a PEP is “someone who is or has been entrusted with any prominent public function in Singapore (domestic PEPs) or in a country or territory outside Singapore (foreign PEPs).” So we see that the foreign/domestic distinction is referred to.

For Switzerland, a PEP seems to refer largely to foreigners. FINMA, the regulator, doesn’t apply the broad global PEP definition to people in Swiss public life. It said on its website that the “abusive use of an account by a PEP in his country of origin is in principle less probable than the abusive use of a bank account in a foreign country.” FINMA continued: “In addition, the broadening of the definition of PEP to include persons performing official public functions in Switzerland would have increased the number of concerned persons and therefore could have caused capacity problems at the level of the most senior executive body.”

So it does appear that some countries have a tougher approach than others, or spread the PEP net more widely. From what appears to be the case from my reading, the UK has been applying the term so much that it has caused political heat. Given that the UK is, post-Brexit, keen to be seen as still open to global capital, getting the PEP issue right is important.

Where do we go from here?
There’s a saying that hard cases make bad law, and whatever the political and “cancel culture” noise, it is important to keep an eye on the wider picture. There’s a war going on in Ukraine. Those who bear ill-will to democratic societies continue to misuse financial institutions. Their channels must be cut. But clearly, as in all wars, it is important to understand that innocent people can be caught in the crossfire.

Some of the costs – as in longer and more tedious onboarding – may be the price we pay for foiling bad actors. But, where possible, every step should be taken to get the balance right. Technology has its part to play, but it isn't a silver bullet. Legislation may have to be clarified, and any vagueness removed, lest it leads to abuses.

Recent controversies, whatever one thinks of the immediate people involved, may shed light on an issue that until now has been largely under the radar of the general public. 

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