Domestic Politically Exposed Persons: Money Laundering Rules

Charles Walker Excerpts

Wednesday 20th January 2016 Commons Chamber

[Mr Charles Walker (Broxbourne) (Con)]

It is a great honour and privilege to have secured tonight’s debate. I note that it follows on from the proceeds of crime debate, so it is both appropriate and timely.

It is a truism that international money laundering is a serious crime, and the UK Government are right to want to both persecute and prosecute those responsible. The legislation contained in both the third money laundering directive and the soon-to-be-introduced fourth directive is wide in its scope and is being aggressively applied by the banks. Although my debate deals specifically with politically exposed persons, my concerns can be more widely read across to the many law-abiding professional people in this country who are experiencing difficulties with their bank or in opening a new bank account.

In setting out the scene for tonight’s debate, I thought it would be helpful if I defined what a politically exposed person is in relation to the Money Laundering Regulations 2007. The regulations transpose the third money laundering directive into UK law. I will quote from the 2005 report of Joint Money Laundering Steering Group. This is a direct quote from its guidance:

“Senior political figure is a senior figure in the executive, legislative, administrative, military or judicial branches of a government (elected or non-elected), a senior figure of a major political party, or a senior executive of a government-owned corporation. It includes any corporate entity, partnership or trust relationship that has been established by, or for the benefit of, a senior political figure.

Immediate family typically includes the person’s parents, siblings, spouse, children, in-laws, grandparents and grandchildren where this can be ascertained.

Close associate typically includes a person who is widely and publicly known to maintain a close relationship with the senior political figure and includes a person who is in a position to conduct substantial domestic and international financial transactions on his or her behalf.”

Those definitions are reflected in the Money Laundering Regulations 2007, which were introduced pursuant to the third money laundering directive 2005. Importantly, however, although banks are choosing to apply the legislation to holders of domestic UK office, these people are specifically excluded from its scope.

Schedule 2 to the Money Laundering Regulations 2007 defines a PEP as being an individual, including their immediate family members or associates

“who is or has, at any time in the preceding year, been entrusted with a prominent public function by:

(i) a state other than the United Kingdom;

(ii) a Community institution; or (iii) an international body.”

It therefore specifically excludes Members of Parliament serving in the United Kingdom Parliament. In addition, the Joint Money Laundering Steering Group guidance for the UK financial sector states that the definition of a PEP used by banks

“only applies to those holding…a position in a state outside the UK”.

However, UK banks have consciously chosen to adopt a broader definition of a PEP, which also includes customers who hold political office within the UK. Banks argue that this is desirable in advance of the introduction of the fourth money laundering directive, due to come into force in 2017, which, unless amended, will apply to domestic politically exposed persons.

The rules around money laundering are a mess. I know this; the Government know this; the Chair of the Treasury Select Committee knows this; and the principals of many small and medium-sized businesses in my constituency and in others know this. The position of the UK banking sector, in its aggressive application of money laundering rules to domestic politicians, to their extended families and—I now fear—more widely to many of our law-abiding constituents, is known, in banking parlance, as de-risking.

What are the practical consequences of de-risking? In regards to the teenage children of MPs, it amounts to intrusive demands for information. One 18-year-old was recently contacted by her bank demanding that she produce personal information or face losing her banking facilities. This demand included information about her occupation, her employer’s name and address, details of any residential addresses she used and how much time she had spent at each address and information about regular sources of funds, such as income, student loans and funds from her parents.

A Back-Bench colleague, who agreed to be interviewed by his bank, was required to answer questions about his account dating back 25 years. This colleague is yet to turn 50.

[Fiona Mactaggart (Slough) (Lab)]

The regulations have affected me, as a Back-Bench Opposition MP. I have been involved in family charitable trusts where my fellow trustees have said, “Please Fiona, you can’t play a role in this philanthropic enterprise. Setting it up would be too complicated because you’re a politically exposed person.”

[Mr Walker]

The right hon. Lady’s timing is prescient, because I was about to say that some colleagues had been denied places as charity trustees or board members, simply because the charity could not deal with the financial compliance required to make the offer of the voluntary position worth while. These colleagues want to give their time and experience for free.

Another example of heavy-handedness concerns colleagues who retain a link with their professional practices. De-risking by banks means colleagues are struggling to open company bank accounts, often despite being required to do this by their own professional regulator, in order to look after and protect client moneys. In another case, a colleague’s 81-year-old father was summoned for an interview by his bank to verify his details and sources of wealth, despite his having been with the bank for more than 50 years.

Other colleagues have been asked to provide details of their parents’ financial assets, such as property, share and cash holdings. A son-in-law of a Back-Bench MP who owns his own business was recently informed that he had been identified as a politically exposed person and was required to provide details of his business’s transactions, as well as information about his personal account. In a similar vein, a Back-Bench MP’s son was required to provide information about his wife and details about her parents—his in-laws.

The actions of banks are, at best, highly intrusive and, at worst, in danger of restricting the ability of honest people, such as sons, daughters, brothers and sisters, to raise the money required to invest in and grow their business.

[Pauline Latham (Mid Derbyshire) (Con)]

We were recently contacted by a bank that we have been with for more than 40 years asking for proof of our address. It beggared belief, as it had managed to send us statements for the whole of those 40-odd years. I said, “Well, don’t you know where we live?” It said, “You’ve never proved it.” This is taking it to the most stupid nth degree, and it has to stop.

[Mr Walker]

My hon. Friend’s intervention brings me nicely on to the next part of my speech. The aggressive application of de-risking by the banks comes despite assurances from Lord Deighton, the then Commercial Secretary to the Treasury, to his colleagues in the other place, on 14 October 2014, when he said—I quote again I am afraid—that

“while UK parliamentarians are not currently considered to be “politically exposed persons”—or PEPs—domestically, revised global standards to which the UK is fully committed will require that they are treated as such. These global standards require enhanced due diligence and ongoing monitoring only when the business relationship is assessed as high risk. The UK will make representations when negotiating the fourth money laundering directive to ensure that it reflects these standards.”

Lord Deighton went on to say:

“The key here is in the approach of the banks in doing their due diligence appropriately. 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. The problem is when banks do not apply the right kind of risk-based assessment and instead revert to inappropriate box-ticking approaches.”—[Official Report, House of Lords, 14 October 2014; Vol. 756, c. 114.]

What is now obvious is that the banks have not paid the blindest bit of regard to the entreaties of Lord Deighton. In advance of the fourth money laundering directive, they have decided to apply the rules with no regard to any assessment of risk. This should come as no great surprise. The financial crisis that the banks sprung on us in 2008 clearly demonstrated that they have no, or at best a limited, understanding of risk.

[Heather Wheeler (South Derbyshire) (Con)]

I apologise for being detained at the very beginning of this debate.

Would my hon. Friend be as surprised as I was to be phoned up by a bank that I had banked with for over 30 years to be told that I was high risk, that the bank would not deal with me any more and that it was closing my account? That was a phone call I received in my parliamentary office. Subsequently, a second bank has written to tell me that it is closing my bank account—with no explanation whatever.

[Mr Walker]

That is an outrageous act by banks. The banks would argue that they are not public utilities, but my response would be that they are, because it is taxpayers and us who have bailed them out. They have a responsibility to behave responsibly, whether it be to Members of Parliament, small businesses or our constituents.

We are now faced with the somewhat laughable situation that not only Members of Parliament are being assessed as high risk in regards to money laundering, but their extended families are, too. On the basis of this Chamber alone, that puts nearly 10,000 people in the frame.

In common with all parts of the population, Members of Parliament can, of course, do bad and stupid things. That has always been the case and always will be the case. When it comes to our elected politicians, however, it is impossible to imagine a more scrutinised group. Not only do we have to register details of our commercial activities with the Register of Members’ Financial Interests—under pain, in extremis, of being dismissed from this place if we fail to do so—but we have the likes of The Daily Telegraph, the Daily Mail and Channel 4’s “Dispatches” breathing down our necks in the hope of catching the slightest whiff of wrongdoing.

Indeed, it often comes as a great disappointment to our pursuers that so few of us cavort with international despots and criminal masterminds. The much less glamorous truth is that most Back Benchers indulge in far more mundane but worthy pursuits, such as trying to sort out our constituents’ housing and street-lighting problems. Indeed, the tiny fraction of Back-Bench colleagues who lead altogether more politically racy lifestyles are well known to the media, with their activities well reported. It must be remarked, “Oh, what a friend the banks’ compliance departments have in Fleet Street and the House of Commons Press Lobby.”

That, of course, leaves Ministers, but again the Executive discretion Ministers have in relation to contracts is minimal. The tendering process is conducted by civil servants, with the Minister passed a single name to sign off on or, if they are lucky, perhaps the option of two names, with the chance to exercise a smidgeon of discretion given only under the careful watch of the permanent secretary.

In concluding my comments, I say this to the Minister and the banks: regulation needs to be proportionate to the risk.

[Craig Mackinlay (South Thanet) (Con)]

I would like to put my experience on the record. The 81-year-old mentioned in my hon. Friend’s speech a few moments ago was indeed my father. He has been with the same bank for over 50 years. He was asked into the bank to answer detailed probing questions about his banking and other activities. Understandably, my father told the bank that he was not going to do so. As for my own experience, I had a two-hour interview with a banking institution that required information about everything about every bank account I have owned for the last two years. This is simply over-gold plating, and we are seeing it too often in the money laundering regulations.

[Mr Walker]

I thank my hon. Friend for his useful intervention. In response, I would say that regulation needs to be proportionate to the risk, with the highest-risk bank customers attracting the most scrutiny from their compliance departments and the Financial Conduct Authority.

It may well be the case that intelligence suggests that an individual MP is up to no good, and, of course, that MP should be investigated thoroughly, but the banks and the FCA seem to be eschewing an intelligence-led approach in favour of an unfocused tick-box exercise.

[Karl MᶜCartney (Lincoln) (Con)]

My hon. Friend is making an excellent speech. Can he tell us whether every bank and every Back Bencher has been affected? I ask because, at present, one party seems to be, shall we say, over-represented in the Chamber.

[Mr Walker]

Colleagues are naturally reluctant to talk about the issue, but I can tell my hon. Friend that this applies to every bank, although some are worse offenders than others. The banks that I have come across are HSBC, Lloyds, the Halifax and Barclays, but there will be others.

[Pauline Latham]

NatWest.

[Mr Walker]

My hon. Friend mentions NatWest. I think that all banks are conducting their business in this way.

[Jake Berry (Rossendale and Darwen) (Con)]

And Coutts.

[Mr Walker]

My hon. Friend has given another example.

If the banks’ tick-box approach is replicated throughout their wider compliance operations, it suggests that they do not have a clue what they are doing, or where the risk actually lies within their customer base. Of course, a less charitable interpretation of their conduct would be the suggestion that they have a very good idea of where the money laundering threat lies in their business, but the cost in lost fees of addressing that threat, and the consequential deterring of high-net-worth individuals as clients, is greater than the cost incurred through the occasional regulatory fine. Far better for the balance sheet to make a great deal of noise—noise that both dazzles and impresses the regulator and makes the lives of law-abiding minnows difficult—than to actually engage in the hard and costly yards of nailing the serious bad guys.

The money laundering regulations need to be revisited. Their purpose is to target despots and dictators, not law-abiding citizens. They are being disproportionately applied. Today I am discussing politically exposed persons, but tomorrow I could just as easily be discussing the aggressive application of these requirements in relation to my constituents, their businesses and their families. The Government must act now to end this nonsense across the piece.

Let me leave Members with this thought: if everyone is under suspicion, no one is a suspect.