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.

Right to banking
Being denied banking facilities has always been inconvenient, but in recent years the impact of a termination of a banking relationship or refusal to provide banking facilities has widened.

We need bank accounts to shop and receive wages, particularly now, given cash is on the wane. Without a bank account it is difficult to rent a property or instruct a solicitor. 

Importantly, lack of banking facilities very effectively restricts or closes off a person’s ability to either bring a legal challenge against a bank, or to defend against an improperly motivated criminal charge.

Some have argued there should be a right to banking to ensure that people are not excluded from society or denied access to justice because of decisions taken by banks which are not easily appealable, transparent or subject to external scrutiny. That may well become a more pressing debate in the future. For the moment, the banks can point to the fact that although there is a right to a basic payment account for those legally resident in the UK, in practice AML obligations can easily trump this.   

An ironic consequence of excluding customers from having bank accounts, of course, is that the very type of underground and unmonitored activity that AML regulations are designed to stamp out become the fallback of those barred by our banking institutions. Indeed, the World Bank, the European Banking Authority and others have recognised this conundrum and raised concerns about the effect of de-risking on financial stability as well as on customer protection. 

Alternative approach
It is clear that we need to find a way for banks for comply with their money laundering obligations without causing financial exclusion.   

As suggested in N v RBS, there are steps which a bank can put in place in circumstances in which it has concerns about the use of accounts which would allow it to undertake the necessary checks, without resorting to full scale termination of facilities.

These include ringfencing suspect funds, manually operating the account and/or seeking regular consent from the NCA or others for use of the facilities.

Banks could also be more willing to engage with customers to explore and address AML concerns: for example, discussing and investigating the source of funds; and looking behind and engaging with litigation which may be political in nature, particularly in circumstances in which freezing accounts and/or terminating facilities could have a significant impact on the customer’s ability to instruct lawyers and defend the proceedings. But this requires judgment rather than a box ticking approach. 

Those banks that do not engage in this more rigorous risk-based assessment but continue to apply a one-size-fits-all approach may well see an exodus of HNWI customers seeking to ensure that they bank with institutions who are prepared to tailor their approach to their particular circumstances. 

It will certainly be interesting to see what the Treasury’s proposed review of de-banking and de-risking recommends. Without doubt more checks and balances in this area are needed, but thus far, although a problem has been identified, solutions have remained elusive. Any proposals would need to be highly commercial and not just toothless guidance or more red-tape.