The recent media furore over the withdrawal of existing, or reluctance to offer, banking facilities for so-called politically exposed persons (PEPs) has shone a light on an issue that many prominent individuals have been grappling with for some time. The UK government wants to address the problem of PEP bank account closures through introducing tighter regulations, coupled with reviewing financial institutions’ (FIs) compliance with existing rules. However, the anticipated changes may be more lip service than substance.

Am I a PEP and what does it imply?

The term PEP generally covers those who hold, or recently held, prominent public functions. There is no exhaustive list of such functions and, beyond obvious categories such as heads of state and ambassadors¹, it is up to those relying on the identification – primarily financial institutions – to assess prominence. While the UK statutory definition is not intended to cover those in junior or mid-ranking positions², the distinction can blur in practice.

FIs and others subject to anti-money laundering supervision in the UK are obliged to identify existing or potential customers and their beneficial owners, including assessing whether they are PEPs³. Banks are expected to proactively manage the risks arising from their relationship with PEP customers, including establishing appropriate systems and controls. Banks do not need to decline or close a business relationship with someone merely because they meet the definition of PEP⁴, but they can do so where they consider that the relationship would cause too high a risk for them to be able to effectively manage. Banks must also identify, and risk assess, family members and ‘known close associates’⁵ of PEPs and those are often treated in the same manner as PEPs themselves (whether justified or not).

Just as there is no uniform definition of the word, there is also no single global database of PEPs. Typically, financial institutions will consult external lists maintained by third-party compliance service providers to identify PEPs and to assess the risks they pose. In doing so, institutions are expected to consider all information that is reasonably available, including reliable news sources, reputable pressure groups and public registers⁶. Ultimately, PEP status and the associated risk is in the eye of the beholder (or, rather, account operator).

What if my bank account is being closed?

Being identified as a PEP should not result in the automatic withdrawal of banking facilities. However, we have seen an increase in the volume of banking services being terminated due to a client’s PEP status – a process also known as de-risking. While FIs’ risk appetite may vary, those who have accounts closed may also find it hard to open alternative facilities at other institutions. In most cases, closure will have little to do with a PEP’s expressed political views and more with online allegations about their conduct or those of their associates, sometimes coupled with concerns about less usual transaction patterns and business relationships.

Unfortunately, it will often matter little how well-founded banks’ concerns are, especially once the decision has been made to de-bank a PEP. Ultimately, FIs are increasingly risk averse due to high-risk customer relationships resulting in adverse publicity and regulatory penalties. Prevention is often cheaper than mitigation; and the easiest form of mitigation is not to have ‘risky’ customers. PEPs are easy targets. Short-termist as this view may be, until now banks have been entitled to take it.

A customer not, or no longer, being aligned with an institution’s risk appetite is the most common reason given for de-risking. In such situations, PEPs should make a data subject request to establish the information on which the decision to terminate was made. This will enable them to identify inaccurate or incomplete material – such as being considered a PEP based on outdated information, mistakenly being linked to another PEP or unfounded allegations of misconduct that would automatically result in a higher-than-desirable PEP risk label. Customers should not only make representations to the bank but also to the compliance database provider with a view of getting inaccurate information deleted⁷. Where FIs stick to their guns – as is often the case – the PEP can complain to the Financial Services Ombudsman (FOS).

Will the situation improve soon?

The current position is unsatisfactory – account closure is often coupled with freezing funds, marred by poor communications and contradictory information, thus resulting in PEPs being kept in limbo (and sometimes without access to their funds) for extended periods. The FOS process is time consuming and often does not remedy lost business opportunities and reputational damage.

The reform proposals, which are set to become law in the autumn, stop short of providing PEPs (and others facing account closures) with a statutory right to review and challenge their banks before the decision becomes final and, as it stands, there is no route to challenge in court. However, they represent a step in the right direction by requiring banks to give 90 days’ notice of all intended closures and explain their decision⁸. Boosting transparency is important, but it remains to be seen how far FIs will be willing to go where their ability to share information with their customers is in practice restricted by far-reaching anti-money laundering tipping-off considerations.

Footnotes

¹ For a list of these, see regulation 35(12)(a) of the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017.
² Ibid at 1.
₃ Regulation 35(2).
⁴ See FCA Finalised Guidance FG17/6, paragraph 2.13 (FCA Guidance)
⁵ Regulation 35(12)(c)
⁶ FCA Guidance, paragraph 2.11
⁷ In accordance with the principles under the UK-retained version of the General Data Protection Regulation.
⁸ See the government’s press release.

This article was first first published in WealthBriefing on 2 August 2023.