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Domestic Politically Exposed Persons: Money Laundering Rules

Volume 604: debated on Wednesday 20 January 2016

Motion made, and Question proposed, That this House do now adjourn.—(Charlie Elphicke.)

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.

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.”

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.

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.

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.

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.

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.

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.

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.

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.

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.

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

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.

I warmly congratulate my hon. Friend the Member for Broxbourne (Mr Walker) on securing the debate. His speech featured both the clarity and the oratory that regularly win him awards as a parliamentarian.

My hon. Friend has raised an issue that I know has caused a great deal of frustration and anger with our banks, particularly when not just we but our families, by association, experience the same difficulties. I am grateful to him for putting a range of examples on the record, because I regularly inform my officials and the bank representatives whom I meet that my ears are bent every time I go into the Tea Room or the Lobbies, and now they will know that I am not exaggerating. I hear Members’ frustration loud and clear, and I assure them that, along with my right hon. Friend the Minister for Small Business, Industry and Enterprise, who is present, I am keen to enhance the action that we are already taking to deal with this example of red tape. I shall return to that subject shortly, but let me begin by setting out the broader context of our anti-money laundering and counter-terrorist financing regime, of which the issue of domestic politically exposed persons is just one part.

This year will see the most comprehensive review ever of our regime to deal with illicit finance. At a global level we are taking action to improve our response to the threats of organised crime, international corruption and new and evolving forms of terrorism. As the Prime Minister set out in Singapore last year, that is exactly why he will be hosting a major anti-corruption summit in the UK this May.

The Government are also committed to securing the hard-won growth in our economy. In order to maintain this momentum, we need to create a business environment that fosters innovation and investment and that is supported, not hindered, by regulation. That is why it is so important to get the regulatory regime right, and why we are carrying out a red tape review of our current anti money laundering regime, seeking views from the private sector on areas of the regime that it finds unnecessarily burdensome. The aim of this is to help us to fine-tune our legislation so that we have an effective regime that works for our country. That review will report in the coming months, and I look forward to working with my colleague the Minister for Small Business, Industry and Enterprise and to receiving the analysis.

I turn now to the specific issue of domestic PEPs. I recognise that this is the key concern of the debate, and that it is a concern not only of my hon. Friend the Member for Broxbourne but of many others in this House and the other place. As he states, the current global rules on anti-money laundering require that, in cases of high risk, banks and regulated businesses carry out enhanced due diligence on all PEPs—that is, those individuals entrusted with a prominent public function, be it politicians, high-ranking members of the military, senior members of the judiciary or others. Indeed, I myself got caught by this when I held an account with an American firm. There is solid reasoning behind this when it comes to PEPs outside the European Union, because political corruption is something we have seen time and again across the world on a truly astonishing scale.

Let me give three examples. The first is the James Ibori case. He was a state governor in Nigeria from 1999 to 2007. In that time he stole tens of millions of pounds of public money. With an official salary of £10,000 he was somehow able to buy a £2.2 million house in Hampstead, one in Regent’s Park, a house in Dorset and a flat in St John’s Wood, and it was not just Ibori himself who was ultimately convicted and imprisoned: so was his sister, as well as other associates including his UK solicitor. That is because they conspired with Ibori to conceal the origins of his wealth through a complex web of transactions and shell companies.

Another striking example is that of the former Secretary for Transport and Public Works of Macau. He was convicted of 40 counts of corruption and 13 counts of money laundering and sentenced to 27 years’ imprisonment. Since then the UK alone has recovered over £28 million of his corrupt assets and returned them to Macau.

Another example is that of the late Frederick Chiluba. He was Zambian President between 1991 and 2001. On 4 May 2007 he was found guilty of stealing $46 million of assets in a civil case in the Royal Courts of Justice, and used UK-based solicitors to launder money. In 2008 it was reported that about $60 million had been recovered by the Zambian authorities.

There is therefore a reason that we treat foreign PEPs differently under the existing regulations, and that is why families and close associates are also looked at in more detail.

All the examples the Minister has cited are of people who had some Executive power. How can Opposition legislators be regarded as having Executive power? I certainly do not feel as though I have any.

The right hon. Lady is right to highlight that, and I will be coming on to it. Clearly the degree of risk in terms of political engagement will vary not only by country, which is one factor that needs to be taken into account, but also with reference to the role of the individual.

We have heard how the regime works currently, but we have also heard from my hon. Friend the Member for Broxbourne that the regime will be changing in the coming year. The overarching framework is set at a global level by the Financial Action Task Force, which is a collection of 36 countries, including the US and Australia. It includes both domestic and foreign politically exposed persons in its standards. The motivation for these global standards is that in many countries domestic PEPs actually present a higher risk than foreign PEPs, and so one person’s domestic PEP is another person’s foreign PEP. The level of risk is not the same for all countries or all individuals, as has been pointed out, which is why the risk-based approach set out in the standards is crucial.

Of course the UK supports a risk-based approach across the EU to identify and deal with PEPs, especially domestic ones. That is why we were supportive of the fourth anti-money laundering directive, which enacts these global standards. We are now faced with transposing the EU directive into UK law by June 2017, and it will extend the regime so that domestic PEPs will also be subject to enhanced due diligence across the board. Despite the fact that the new regime does not come into effect until next year, I know that some banks—we have heard some examples and some names today—particularly international ones, have already chosen to implement these changes. They are very much applying a one-size-fits-all process, as we have seen in the examples we have heard this evening. I know that for some individuals affected this has caused enormous frustration.

Let me be clear: this change should not prevent any Member of this House, or any other individual in this category, from gaining or maintaining a UK bank account. We are looking at exactly how we can encourage the banks to implement these measures domestically in the most risk-based manner possible. My officials discuss this issue with their international partners on a regular basis, and we are seeking views on this as part of our public consultation on the updated money laundering regulations and how we transpose the fourth anti-money laundering directive into UK law. I am already regularly raising this issue with not only the banks but the regulator.

I have already mentioned the red tape review of our current anti-money laundering regime, and today’s debate is helpful in that context. I know this is an issue of significant concern in this House, as we have heard clearly this evening, so I will report back to hon. Members as this work develops over the coming months. My goal is to have a banking system that is hostile to illicit finance and to terrorists, but which allows ordinary law-abiding and law-making citizens to move easily from one bank to another for better rates and better service. This debate has been very valuable for getting on the record the heavy-handed way in which banks are already applying these new rules. I would like to reassure my hon. Friend, and all other colleagues, that I am on his side, and I am grateful to him for bringing this issue to the House’s attention.

Question put and agreed to.

House adjourned.