There’s been a lot of comments in the media, both in the U.K. and U.S., about the issue of banks either denying accounts to people or closing the accounts of existing customers. In fact it’s taken on the appearance of something of a moral panic in recent time. What is slightly puzzling to me is that people are getting angry with the banks when the banks are responding rationally to the economic incentives set for them by their regulators. If people want to get angry about this stuff, they should be getting angry with the government and the Financial Action Task Force and the various people responsible for the regulations.
The U.K. government responded to the panic with Andrew Griffith, who is Economic Secretary to the Treasury, wringing a letter to the Financial Conduct Authority (FCA) say that while he recognised the importance of measures to prevent money laundering, “it is crucial that an appropriate balance is struck” so that elected officials and their families can access banking services.
What appropriate balance could there be though when the banks can be fined millions of dollars for violations?
It’s an issue of risk. We’ve been here before, remember, when there was the issue of cross-border transfers a while back. The government imposed various know your customer (KYC), anti-money laundering (AML), counterterrorist financing (CTF) and politically exposed persons (PEP) regulations — which together might be labelled Customer Due Diligence (CDD) regulations — and these were accompanied, of course, with the threats of enormous fines. As a consequence the banks withdrew from a variety of remittance corridors. The was entirely predictable: If you look the overall spending of financial institutions on anti-financial crime measures, around two-thirds of the money goes on CDD, so you can see why banks began to wonder if the risk was worth it!
In particular I can remember the specific case of the Somali remittance corridor, because Consult Hyperion was commissioned to study it on behalf of FSD Africa and as their report on the Somali remittance corridor’s problems (and potential solutions to those problems) made clear, it’s all about identity. That particular derisking stands out in my memory because a significant fraction of Somali GDP comes from remittances and in the UK there is a substantial Somali diaspora, so when banking services were withdrawn and people found themselves unable to send money back to their friends and relatives, it caused real hardship. There were even questions asked in Parliament (eg, this one). The law of entirely predictable consequences had been proved accurate once again and it was the poorest people who were hit hardest.
If memory serves, Barclays was the last bank to operate in this corridor and they came under criticism for withdrawing. But what else were they to do? Why take the risk of earning a paltry few quid on some money transfers out of London when you might get fined a few million quid if the due diligence was incomplete or incorrect? Santander was recently fined a hundred million quid for AML failures on its business banking side and let’s not forget that US regulators fined HSBC a couple of billion dollars for the same thing.
The same dynamic applies in the UK right now because of the 5th anti-money-laundering directive (5AMLD), which levies a maximum fine of €5 million or 10% of annual turnover for legal persons. Bank therefore have to assess the risk associated with providing accounts for PEPs in particular. You can see the natural calculus that results.
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Chancellor Jeremy Hunt has been revealed to have been denied a bank account with Monzo amid an ongoing row over ‘laborious’ anti-money laundering rules.
From Jeremy Hunt ‘denied a bank account by Monzo’ amid row over anti-money laundering rules | Daily Mail Online:
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Why take a risk on giving an account to a donkey sanctuary run by the daughter of an MP, when it may subsequently turn out that the donations to the donkey sanctuary came from agents of a foreign power. If you are going to earn £100 in profit over the lifetime of the donkey sanctuary account, but you run the risk of a one in 10,000 chance that the MP turns out to be a wrong ‘un and you get fined 10 million quid then your shareholders will be up in arms, and rightly so. The only economically sensible course of action for the bank is to refuse the account.
It’s easy for the FCA to say that “the decision to accept or maintain a business relationship is ultimately a commercial one” and that there should be relatively few cases where it is necessary to turn down a business relationship “solely because of anti-money laundering requirements” but it doesn’t really matter when they, or MPs, or the Treasury have to say about it. Back in 2016, the FCA commissioned a study on “Drivers & Impacts of Derisking” which noted in its findings that banks perception that the global jurisdiction claimed by the US regulators and courts can place their conduct anywhere under sanction and, therefore, “it is not clear what reliance should rationally be placed on such reassurances from their local supervisors”. Indeed.
(If the Secretary of State steps in and insists that the bank provide the donkey sanctuary with an account, then I suppose that it could be arranged providing that the Secretary of State agrees to accept the liability for any subsequent fines. So if the bank did get shaken down for a few million quid in a US court because the beneficial owner of the donkey sanctuary was Vladimir Putin then the government and not bank shareholders would be on the hook.)
By the way, I fully expect to see another rash of the stories like this in a few months time when the Financial Conduct Authority’s new “Consumer Duty of Care Regulations” begin to bite. Banks will be required to assess vulnerable customers and make additional provisions for supporting these customers. Since these provisions will be expensive and will undoubtedly include indemnifying these customers against fraud and scams of all kinds under the Contingent Reimbursement Model, it seems to me an entirely predictable outcome that banks will begin to drop vulnerable customers like hot potatoes. Instead of journalists complaining about their children not getting accounts, they will be complaining about their parents’ accounts being shut down.
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The second of these will result in account issuers becoming more cautious about opening (or maintaining) marginal accounts because of concerns that they may have to accept 50% of the costs of any APP fraud. As a result, they will be less likely to open accounts for low income, disadvantaged, technologically challenged, older or vulnerable consumers, or close their accounts to limit exposure to this new level of liability. This is counter to our society’sobjectives of including more vulnerable consumers in our financial system.
From POV: Unintended consequences of new policies to reduce APP fraud scams:
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The problem now, as it was then, boils down to identity. An obvious way to tackles the growing cost of CDD is digital identity. We lack even the most rudimentary infrastructure in the U.K. Thousands of bogus companies are created every day at Companies House, billions of pandemic support money is still missing, authorised push payment (APP) scams are commonplace and fraud is completely out of control. Instead of incentivising banks to walk away from the problems, couldn’t we instead incentivise them to co-operate and create an infrastructure that might go some way to tilting the cost-benefit analysis around derisking?
Snippings 