Money Laundering Regulations: Politically Exposed Persons

Baroness Penn Excerpts

Tuesday 5th July 2022 Lords Chamber

[Baroness Hayter of Kentish Town]

To ask Her Majesty’s Government what was the outcome of their review of money laundering regulations in respect of their impact on politically exposed persons.

[Baroness Penn (Con)]

The recent review of the money laundering regulations—MLRs—has concluded that there should be no immediate change to the requirements for domestic politically exposed persons. The review commits to further work to better understand the risk profile of domestic PEPs. If this is sufficiently low, the Government will consider changing the MLRs so that enhanced due diligence is not automatically required but instead triggered only when other high-risk factors are present.

[Baroness Hayter of Kentish Town (Lab)]

My Lords, most—probably all—Members of your Lordships’ House, and indeed their children, have been extraordinarily inconvenienced by the way the banks interpret the PEP rules, demanding to know how many mortgages we have, how many necklaces we wear and things like that. They assume that we are all crooks unless we prove to the contrary, rather than assuming that we are not crooks until something in our bank account— perhaps putting a case of used fivers into the bank—suggests that we are money launderers. Not only does that inconvenience us, but it takes away scarce resources which ought to be looking at the people who are really bringing untoward money into our financial sector. Could the Minister just move a bit faster on this? Can she assure us that the old practice of subjecting us to these sorts of nonsenses will not continue, and that, in future, we will be asked to explain our wealth only if something very untoward is happening in our bank accounts?

[Baroness Penn (Con)]

My Lords, as I set out, the Government are looking at further evidence around changing the money laundering regulations so that enhanced due diligence is not automatically required for domestic politically exposed persons. In the meantime, I know that a round table was held with the noble Baroness and, I believe, the noble Lord, Lord Sharkey, to discuss some of these matters. My honourable friend the Economic Secretary will shortly be writing to all MPs and Peers on this issue to provide increased clarity to parliamentarians on the requirements placed on financial institutions regarding PEPs and the steps they can take to remedy any issues they may have with their banks.

[Viscount Hailsham (Con)]

My Lords, may I reinforce the Question asked by the noble Baroness, Lady Hayter? Over the last few years, I have received well over a dozen highly intrusive requests under the money laundering regulations. As a consequence, I studied both the regulations and the guidance, and I was in correspondence with Andrew Bailey when he was at the FCA and saw one of his senior officials. The plain truth is that the investment companies overinterpret—when they do not misinterpret—the regulations and ignore the guidance. They do not adopt a risk-based approach, they are not proportionate in their requests and they do not have access to publicly available sources of information, all of which is required by the regulations. They state they are required by law to obtain this information—which is not true—and, worse, they say that they will not release funds unless the intrusive information is provided. That is unlawful. This has to stop. Might I suggest that it is referred to a Select Committee of Parliament?

[Baroness Penn (Con)]

My Lords, it is for the Select Committees of Parliament to determine what they wish to investigate. However, I agree with my noble friend: he is absolutely right that firms are required to adopt a risk-based approach when deciding whether to apply enhanced due diligence. People who feel that they have been treated unfairly by firms have a route of redress via the Financial Ombudsman Service. However, as I said, my honourable friend the Economic Secretary will also be writing to parliamentarians to set out steps that they can take to remedy any issues that they have had with their banks where they feel that the action taken has been disproportionate.

[Lord Hunt of Kings Heath (Lab)]

My Lords, with the greatest respect to the noble Baroness, it is not for us to have to pursue this; it is for the Government to sort it out. Can she tell us what they are doing to stop the banks not taking the risk-based approach that she suggested they should take? They are acting on a wholly risk-averse basis and it is down to government to sort it out.

[Baroness Penn (Con)]

My Lords, the Government are engaging with banks on this matter. A round table was held on 4 March this year. At that meeting, banks reaffirmed their commitment to following the 2017 FCA guidance, which supports banks in treating most domestic PEPs as lower-risk. Therefore, we have engaged with the banks on this matter and we are committed to doing that further piece of work, an evidence review, to see whether the automatic checks that need to be applied to domestic PEPs could be removed.

[Baroness Kramer (LD)]

My Lords, of course we have to be tough on money laundering but a whole industry has been spawned that scans for PEPs internationally. Will the noble Baroness take this message on a risk-based approach to her various colleagues in other countries? I am getting quite tired of American relatives living in Germany being unable to open accounts because of their relationship with me, when I have no idea how I am even linked to them unless, frankly, data is being abused.

[Baroness Penn (Con)]

My Lords, the United Kingdom Government are always happy to advocate for a risk-based approach in regulating financial services and will continue to do so. The noble Baroness and other noble Lords will know that the obligations around politically exposed persons derive from international obligations from the Financial Action Task Force, so it is important that we continue to meet those standards and obligations internationally.

[Lord Flight (Con)]

My Lords, I believe that contributions this afternoon have shown how the vast majority of people are fed up with anti-money laundering regulations, which burn up a lot of effort and money to no purpose. However, far worse than that is the idea of politically exposed persons. I wonder how many noble Lords today have had a difficult time opening bank accounts and other such matters. I hope to see reform, particularly following the recent review, which should start with simplifying the idea of politically exposed persons.

[Baroness Penn (Con)]

My Lords, anti-money regulations play an important role in tackling economic crime, which I know is a subject that this House cares strongly about. We recently concluded a review of our anti-money laundering regulations and their effectiveness. We are committed to a piece of work on politically exposed persons, but the main conclusions from that review were about how we regulate professional services, and we will consult on our proposals for reform there to consider how we can improve our anti-money laundering regulations. I think everyone would agree that they are essential to protect against financial crime.

[Lord Harris of Haringey (Lab)]

My Lords, this has been going on for at least a decade, to my knowledge, so the Government are moving with extraordinary sloth. First, can we have a guarantee that this review will be published so that everyone can see it? Secondly, will the Minister examine the implications for voluntary organisations led by or are involved with politically exposed persons?

I have a personal experience: Metro Bank decided that an organisation that I chair and which has a board consisting of three politically exposed persons and one other—who is, incidentally, an emeritus professor of engineering and a former Chief Scientific Adviser to the Government—was somehow beyond its risk appetite. The rule is being applied in a blanket way without the sort of assessment that the Minister and her many predecessors have stood at that Dispatch Box to assure us will be the case.

[Baroness Penn (Con)]

My Lords, my understanding is that the original measures on PEPs were put into UK law in 2017, so the timescale is slightly different from that set out by the noble Lord, but I absolutely take his point on action that needs to be taken. That is why we have continued to follow up with banks about taking proportionate action under the current regulations and are looking at whether they can be amended, but we need a strong evidence base to take that action.

[Lord Kirkhope of Harrogate (Con)]

My Lords, as one of those involved in the drafting of the anti-money laundering directives—and, unfortunately, often described by colleagues as an expert in money laundering, as opposed to anti-money laundering—I point out to my noble friend that we fought very hard to ensure that the implementation of the directive would be proportionate. That word was as the result of British initiatives. It seems to me that the Financial Conduct Authority, in its further directions to our banking institutions, has failed to carry through the importance of proportionality and has therefore allowed the banks and others to behave in the way they are now, which is utterly unreasonable.

[Baroness Penn (Con)]

My Lords, after the original transposition of the regulations, further guidance was issued by the FCA to emphasise exactly the point my noble friend makes about action being risk-based and proportionate. Clearly, there are still issues in taking that forward. That is why we continue to engage with the FCA and banks on this. We will also be engaging with parliamentarians on the route to contact their banks where they think they are not following the very sensible, proportionate approach for which the UK advocated in the EU.