The UK media has shone a light on the forced closing of bank accounts of clients whose profiles do not meet the risk appetite of the bank. Rightly so – but do you understand your own risk status and why it is so important?
The regulatory risk assessment requirements for financial institutions, particularly in relation to Politically Exposed Persons (PEPs), have been actively debated when discussing the implications for such individuals, their family and associates, who could be key targets of the banks account closure notices. This practice is said to have been increasing over years, but falling under the radar of the public, that is until now.
What hasn’t caught the eye of the press is the extensive, often mis-understood, perhaps mis-applied, and overzealous interpretation of International Legislation and Directives. The “overseeing” bodies such as the EU, Moneyval and Regulators, could be seen to be creating a risk adverse financial environment. The implications of banks publicly being seen to have fallen short of the anti-money laundering legislation has created a banking market where “high” risk clients are discarded, irrespective of mitigating factors. The fear of using a risk-based approach, judged by overseers, may have led to risk avoidance, leaving consequences for many, including service industries such as Corporate Services Providers (CSP’s).
Martyn Fiddler as a CSP, is reliant on banks to enable the companies we act as company officers for, to maintain bank account relationships to facilitate the financial transactions necessary for the operation of aircraft and other similar asset owning companies. We are exposed to the vagaries of banks risk assessments of clients and are continually having to adapt to the receipt of notice closures.
Financial institutions need to know their risk exposure in relation to the services they offer and the clients they serve. Their method of collecting this important information is via risk assessments which are undertaken prior to onboarding a new client (and performed continually thereafter.) The concluding risk status determines whether the individual, business or organisation in question is considered ‘safe’ to take on. It also decides the documentation required to establish the relationship, the level of monitoring and oversight applied to the activities of the account, and is likely to impact the level of service fees applied.
High risk status’s cause significant banking difficulties for clients. Clients considered to be high risk include PEPs but not exclusively; flaws lie in the face that a whole jurisdiction may be classed high risk, causing a client with association to that jurisdiction as high risk also.
Politically Exposed Person’s (PEP’s) are defined by the Financial Action Task Force (FATF) as “an individual who is or has been entrusted with a prominent public function”. The definition has since extended to included individuals and organisations both domestic and foreign in relation to the location of the financial service provider.
Many PEPs are in positions that could potentially be abused for the purpose of committing money laundering offences and related predicate offences, including corruption and bribery, as well as conducting activity related to terrorist financing. This raises red flags for the bank and their risk appetite and will frequently result in the decline of banking services or the closure of established relationships, often with no option of providing mitigation and comfort to the bank concerned.
It is not the intention of the regulations and supporting directives or guidance notes to close off banking to PEPs, they are in place to highlight risk and the need to adopt processing to mitigate and monitor the risk. This approach is the same with individuals or businesses who have considered high risk traits e.g. country based, or business activity based, it is meant to drive enhanced oversight and not exclusion. However what is happening in practice shows that your risk status can not only have major implications on your banking arrangements, but with the operation of your business too.
