By Samantha Sheen, AML Director Europe, ACAMS
4 October, 2016

“Banks need to invest their resources, time and energy in going after high-risk people. Banks know which people are high risk… Banks’ energies should be focused not on chasing after the good, but on chasing after the very bad”.

Charles Walker, Member of Parliament for Broxbourne, 19 April 2016

Introduction

Last week I had the privilege of being invited to speak on an AML panel at Callcredit’s Annual Fraud Summit. Despite being the last panel of the day – and the only thing standing between the attendees and post-event refreshments served on one of the last sunny evening in London for the year – our session on the 4th Money Laundering Directive (“4AMLD”) was well-attended.

During my talk, I referred to UK regulatory changes introduced in response to the 4AMLD’s provisions on PEPs. Afterwards, when speaking with some of the attendees, I realised these changes aren’t all that well known yet.

So, here’s a brief summary about amendments introduced under section 30 of the Bank of England and Financial Services Act 2016 (“2016 Act”) which received royal assent on 4 May 2016. The 2016 Act amends the Financial Services and Markets Act 2000 (“2000 Act”). This latter piece of legislation essentially sets out the regulation of financial services, and establishes the Financial Conduct Authority (“FCA”) along with its powers and responsibilities.

PEPs and Banking

Over the last nine months, I’ve repeatedly heard comments that the PEP AML requirements are being applied to the detriment of those who fall under this classification. Some blame this on a tension between what the AML requirements state, versus how some AML compliance professionals interpret what the regulators expect them to do when dealing with a PEP.

From time to time I’ve also heard anecdotal stories about politicians’ children having difficulty opening their first savings accounts because they fall under the category of PEP “family members” and are be subject to enhanced due diligence (“EDD”) requirements.

Not being even remotely a PEP myself, I hadn’t really understood the unintended consequences for those who end up being classified as a PEP…until I started to research the background behind the 2016 Act.

Taking a look at the 19 April 2016 parliamentary scrutiny debate, it’s pretty clear there is a perception that PEPs in the UK have, in some instances, been dealt with without any meaningful consideration about the actual financial crime risk they might pose. In other words, the main concern is that the AML requirements for PEPs are not always being applied in a proportionate manner [emphasis added]. By way of example during the debate, Member of Parliament Mr. Walker noted that:

“I [Mr. Walker] am aware that one such close associate is a member of the press lobby. He had some problems with an individual savings account and was subject to close questioning by his bank. When he asked the person on the other end of the phone why the bank was conducting itself in such a way, the response was, “Because we understand that you are an associate of the Prime Minister”.”

Concerns have been escalating due to the anticipated transposition of the 4AMLD and its broadening of the PEP definition to include domestic (i.e. local) PEPs. While the 4AMLD makes reference to the adoption of a “proportionate” approach, the 2016 Act requires that additional measures be introduced to ensure that this actually takes place when a customer is a PEP. So, the amendments are intended to minimise misunderstandings about how EDD requirements should be applied or the consequences of unfairly applying a “one size fits all” CDD approach to PEPs.

But what amendments have been made to the 2000 Act?

Clear Guidance and Appeal Mechanisms

First, prior to the enactment of the 4AMLD, the FCA must publish clear guidance defining what “proportionate” actually means in practice, when dealing with PEPs. This is intended to allow financial institutions to effectively focus resources on those PEPs who actually pose a high AML risk. This should also give institutions a clear indication about what the regulator expects of them when dealing with PEPs.

The guidance must include (but not be limited to):

  1. A requirement that institutions take a proportional, risk-based and differentiated approach to conducting transactions or business relationships with each category of PEP; and
  2. Specified categories of persons (i.e. positions) be defined and identified as
    1. included, or
    2. excluded, from any definitions of PEPs.

In transposing the 4AMLD’s requirements, the UK Government must also ensure that clarity is provided about the meaning and interpretation of the term “prominent public function” – along with the fact that some PEPs may not actually have a prominent public function.

I understand that work on the proposed guidance is underway and a draft version may be published before the end of 2016.

Appeal Mechanism for PEPs

The second change provides for the introduction of a measure through which PEPs can seek redress if they feel that have been treated unreasonably by their banks (e.g. being denied bank services).

The FATF guidance on PEPs indicates that an individual will generally lose their PEP classification twelve months after departing from the role that made them a PEP in the first place. However, it also explains that this may not be appropriate, depending on the level of risk posed. In some cases, the “Once a PEP always a PEP” rule has been applied, requiring that EDD and monitoring be applied for the duration of the business relationship, regardless of how long ago the individual left their “PEP-classified” position.

In some cases, institutions here in the UK have applied the “Once a PEP always a PEP rule” to some categories of individuals and not on a case by case basis. This again could be occurring due to uncertainty over regulatory expectations. The consequences for those individuals who have fallen into this PEP classification was described during the parliamentary debate as “the lobster pot from which few can escape”.

The amendments introduced in the 2016 Act allow for regulations to be introduced for a PEP adjudication mechanism. Specifically, complaints from individuals could be dealt with by the FCA where:

  1. The individual was treated as though he or she was a PEP (and he or she was not),
  2. The individual is a PEP and was treated unreasonably in disregard of guidance issued about PEPs, particularly the requirement to take a proportional, risk-based and differentiated approach, or
  3. The individual was refused a business relationship solely on the basis that he or she is a PEP.

Regulations may also be introduced that list the circumstances in which:

  1. Compensation payments must be made to the individual, or
  2. Financial penalties can be imposed on regulated entities where complaints are upheld.

Conclusion

The 2016 Act introduces some interesting measures. The guidance could prove to be a welcome addition by helping financial institutions refine the way PEP CDD and monitoring is undertaken.

The appeals process could prove to be an interesting exercise. In designing the framework, careful consideration will need to be given about when appeals can be brought, and in what circumstances compensation or financial sanctions can be imposed. The drafters will need to be mindful that the process does not divert the resource gains achieved through the published guidance, by having financial institutions and the FCA’s time consumed with the defence and adjudication of appeal cases.

But make no mistake here – the motivation for introducing these measures wasn’t just to improve access by those classified as PEPs to financial services, but also to clarify regulatory expectations. I think Mr Walker said it best:

The fourth money laundering directive should be about capturing bad people in its scope, not capturing all people. If everyone is thought of as bad, it is very difficult to identify who is actually breaking the law. We want to go after the law breakers, not those people who, by accident, are described or identified as PEPs by banks in this country.”

For a copy of the 2016 Act, see: http://www.legislation.gov.uk/ukpga/2016/14/pdfs/ukpga_20160014_en.pdf

Mr Walker’s comments can be found at: https://www.theyworkforyou.com/search/?pid=11461&pop=1&p=3