Compliance

“De-banking” – Why This Is A Growing Concern

Rebecca Niblock and Mary Young 12 July 2023

“De-banking” – Why This Is A Growing Concern

As more cases have come to light about the "de-banking" phenomenon in the UK, this article from legal experts tries to set out what firms can do, and suggests the possible way forward.

Following recent stories and controversy concerning public figures and their “de-banking” experiences, we carry this important commentary from partners at Kingsley Napley, LLP. They are Rebecca Niblock (criminal litigation) and Mary Young (dispute resolution).

This is too important a subject to become swept up in political “theatre” – readers know we have to provide actionable ideas as to what the problems are, and suggestions about how to deal with them. We invite debate and feedback, so please email tom.burroughes@wealthbriefing.com

As ever, any views of outside contributors are subject to editorial disclaimers.

 

Nigel Farage’s recent fuss over the enforced closure of his bank account has shone a spotlight on the issue of de-banking and the fact that it seems to be a growing trend.

Farage claims he has been blacklisted as a customer either for his Brexit views or because he is being treated as a politically exposed person (PEP) due to alleged payments for appearances on Russia Today. (Editor’s note: Farage did not mention the bank by name; media reports said it was Coutts. The bank has not replied to requests for comment from this news service.)

Further cases have also come to light concerning, for example, a gender-critical parent group and ethnic minority customers having banking facilities removed, suggesting that Farage’s experience is not an isolated example. Often accounts are halted with little notice and no right of appeal.

Regardless of the headlines or the specific allegations, “de-banking” is not new. Back in 2016, the Financial Conduct Authority recognised the tension for banks between money laundering compliance and wholesale de-risking, calling for “common sense” and “an effective risk-based approach.”

The question remains, however, how banks should implement this in practice. The UK Treasury is now said to be reviewing whether banks are blacklisting customers with controversial political views and whether the right balance is being struck by banks seeking to comply with their anti-money laundering obligations (including the rules on PEPs) and their right to manage commercial risk.  

Pivotal case in this area and AML obligations
In July 2019 the High Court found in favour of Royal Bank of Scotland (now known as NatWest Group) in a case brought by a former customer challenging its freezing of accounts and termination of the banking relationship (N v RBS). RBS had suspected that some of the customer’s accounts contained the proceeds of crime. The court found that RBS was entitled to terminate its relationship with its customer without notice on the basis that it had carried out a thorough risk assessment and that expecting RBS to have adopted a different approach such as ringfencing funds or seeking daily consent from the National Crime Agency (NCA) was unreasonable in the circumstances.

In contrast we are all aware of the opprobrium that Deutsche Bank received for failing to sever its relationship with Jeffrey Epstein. It has since received a $150 million fine from the New York state financial regulator and earlier this year paid out $75 million to settle a civil lawsuit from a group of women who accused the German lender of helping facilitate Epstein’s sex trafficking operations. 

Both of these cases should be set against a backdrop of intensifying money laundering obligations. Following trends in the US, successive money laundering directives (MLDs) from the European Union have placed heavy emphasis on the importance of a risk-based approach, with the most recent, MLD 5, introducing changes to the definition of PEPs to include domestic as well as overseas PEPs, high-risk countries and beneficial ownership. These are still applicable in the UK after Brexit. 

Practical implications
Whilst it is to be expected that banks take their AML obligations seriously, the concern is that they are becoming risk-averse in the extreme. There are problems that arise when a risk-based approach leans too far towards the absolute avoidance of risk, as against a proper assessment, consideration and weighing of the issues involved. Customers can find themselves penalised for classifications they have little (or no) ability to challenge.

When it comes to PEPs, for example, it is widely accepted that the Interpol red notice system is open to abuse. Governments seeking to silence opposition politicians overseas need only institute proceedings against an individual on a fabricated criminal charge in order to seek the publication of a red notice on Interpol’s website. Naturally the compliance departments of banks responsible for managing risk then take action accordingly.

The N v RBS decision serves to entrench this attitude by the banks – in reality, they have more to lose by carrying out a properly considered and nuanced risk assessment than by terminating a relationship with a customer whose profile raises any red flags.

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