Taking due diligence to new levels

EU directive will monitor MPs’ bank transactions

EU directive will monitor MPs’ bank transactions

Thousands of Britain's most important figures in public life could have their banking transactions monitored closely under new rules from Brussels.

The fourth EU money laundering directive, about to be rubber-stamped after political agreement was reached in December, will call on banks to carry out due diligence on MPs, judges, peers, council chiefs, diplomats and anyone else "who are or have been entrusted by the member state with prominent public functions".

Until now those judged to be 'politically exposed persons' (PEPs) were defined as all those in an important public role in another country. The regime was set up in the late 1990s, after Nigerian dictator Sani Abacha organised with his family members and associates a network of massive asset thefts from his own government. Now, for the first time, 'domestic' PEPs are being included as well.

It's estimated that around 150,000 people in Britain, including public figures' close relatives, could face intensive checks that include scrutiny of all their transactions as a result.

The British government had called for banks to adopt a risk assessment process which would see all those judged to be low-risk exempted from facing a lengthy due diligence process.

"The main feature of these arrangements is that domestic PEPs should be assessed in terms of their level of risk, and in the main UK parliamentarians should be assessed as low risk and, frankly, treated in precisely the same way as any other customer," Treasury minister Lord Deighton told worried peers last autumn.

"The problem is when banks do not apply the right kind of risk-based assessment and instead revert to inappropriate box-ticking approaches."

But that is exactly what has been happening.

Tim Clement-Jones, the Liberal Democrat peer, said his 16-year-old son had been called into his bank when he tried to open his first account.

"The manager closes the door and in hushed tones says 'are you the son of Lord Clement-Jones'?" he explained. "He puts my son through my paces – including how much pocket money he gets a week, and whether he has any other sources of income. He's a 16-year-old at school."

The bank manager didn't explicitly explain what the trouble related to. But Lord Clement-Jones insists: "There's absolutely no doubt that this was all down to my supposed PEP status."

On another occasion, his 70-year-old brother was unable to exercise power of attorney for their dying mother.

"They took one look at it, and said – 'Your brother is a member of the House of Lords. He's a politically exposed person, so we have to exercise enhanced due diligence before we can even consider whether or not you're allowed to exercise this power over your mother's accounts. Your mother' – who was in a home – 'would also have to come in and be interviewed'. My brother hit the roof."

Lord Clement-Jones is not alone in having had his life and the lives of those he loves affected by the PEP rules. Patrick Wright, the former head of the diplomatic service, was told by his two sons they were experiencing difficulties when they tried to open bank accounts in Singapore and New York, coincidentally at the same time. They were refused when the bankers discovered who their father was. "They were both told that because they were my son – and because they had mentioned my name – that I was a politically exposed person," Lord Wright said. "That was the first time I'd heard of this extraordinary expression. It brought proceedings to a rather rapid close."

Lord Wright did not leave the matter there. "When I learnt I had the extreme privilege of being a politically exposed person, I assumed even greater mortals in the Lords might be exposed," he added. "Without telling you the name, I discovered one fellow peer has run into difficulties – he is or was a chairman of a British bank. So it's not only the great and good who are affected."

There seems to have been some confusion about what exactly the rules require. Banks looking to apply the letter of the law have appeared to have been going beyond what is required. Some of those affected have privately suggested the Financial Conduct Authority is behind the unnecessarily onerous due diligence checks.

Whatever is behind the troubles so far, the fourth EU anti-money laundering directive will be a fresh start. That is exactly the point Lord Deighton wanted to put across last year. When asked whether he could convey to his European colleagues that the new rules are meant to be applied reasonably rather than draconically, he replied: "I can confirm that that will be precisely the message in the final negotiations on the fourth money laundering directive."

Now that we've seen the text of the directive it looks like Lord Deighton has succeeded – to a point.

The text outlines that "individuals who hold or have held important public positions, particularly those from countries where corruption is widespread," need watching carefully. This requires something called 'enhanced customer due diligence', the most robust form of monitoring. The watered-down version – merely 'due diligence' – is still very strong, however. It includes "ongoing monitoring of the business relationship including scrutiny of transactions undertaken throughout the course of that relationship".

This only has to take place "on a risk-sensitive basis", however. It means there is probably sufficient wriggle-room for banks, and governments, to ignore it.

The question now is whether the regulator and the banks will actually do so. The Treasury has already reassured peers and others that they have nothing to fear under the existing rules – but it's clear they have. Banks have insisted they need to implement the checks under recommendations 11 and 12 of guidance issued by the Financial Action Task Force – the instrument by which the G20 currently controls these rules.

Now the European parliament's final vote on new rules is expected in March or April, the question-mark is over whether anything will actually change. "All the time there's more and more intrusiveness," said Lord Levene of Portsoken, who faced a "Spanish inquisition" over a French account for one of his homes in Normandy. "Why is it necessary to have all this detail spread to so many places and so many people? I don't like it. Am I, Peter Levene, personally going to take a big stand against it? I've got better things to do. But if you say to me on principal is it fair, I'd say no. I don't like it."

A Treasury spokesperson said: “The fourth money-laundering directive subjects all PEPs to enhanced due diligence checks. However, it also requires member states to certify that firms have appropriate risk management systems to identify a PEP and that any necessary checks are appropriate to the individual risk posed. The Treasury is working with other member states and the Commission to ensure a common risk-based approach to due-diligence in implementing the directive.

“The government recognises the importance of the provision of bank accounts to legitimate UK businesses and individuals. For this reason, the Treasury has recently been consulting and working with regulators and industry associations to identify what else can be done to encourage effective and proportionate application of these legal requirements.”

Under the new regime the stakes are going to be raised, for the directive gives banks permission to keep the data they will hold on PEPs for up to ten years. "The fight against money laundering and terrorist financing is recognised as an important public interest ground by all member states," the directive states. It is using that motive to create a system of rules which, across the whole of Europe, will affect hundreds of thousands of innocent people.