Debanking, PEPs, KYC, & AML

How three-letter-acronyms have fouled up corporate finance

In a past life, I’ve acted for PEPs.

PEPs are “politically exposed persons”. Associated in the public mind with Russian oligarchs and superannuated Nigerian dictators, when one of them rolls up to one’s law firm offices, then the AML (“anti-money-laundering”) and KYC (“know your customer”) checks are guaranteed to take days, and sometimes weeks.

I retired from full-time practice in 2016, and the legislation has only become more draconian since then. The PEP system came into force in this country under the Money Laundering Regulations 2007, which referred to people with a prominent public position “other than [in] the United Kingdom”.

In other words, it was meant to identify powerful people from various highly corrupt nations—places where political power and bribery go together like eggs and bacon. Unfortunately, the financial institutions here immediately applied it to members of our own Parliament—even though this didn’t become mandatory until the Money Laundering Regulations 2017 (after I retired).

This has led to a situation, incredibly, of MPs being debanked and then unable to open bank accounts elsewhere. Sometimes, even their family-members are stymied. The treatment of Dominic Lawson’s daughter was probably the worst single incident of this type:

In 2016 we decided to open a bank account for her. She has Down’s Syndrome; this was not something she could do herself. But when my wife Rosa went to the Barclays in our nearest town (where Rosa had had an account for many years), she was told it would not be possible for Domenica to have an account. No reason was given.

Fortunately Rosa knew the manager there — the position now no longer exists, and the branch itself is about to close — and he said that he would look into the matter.

He came back to Rosa: ‘I’m really sorry, but it’s out of our hands. It’s because of money-laundering risks.

‘I know this sounds ridiculous, but it’s because of Domenica’s grandfather. He is a politically exposed person.’ This was a reference to Nigel Lawson, my late father, the former chancellor, who was by then a member of the House of Lords.

And as the Lords is a legislative assembly, that counted under the regulations. As, absurdly, did his granddaughter, who was of course oblivious to the bank’s implication that she might be a link to money laundering, or the funding of an international drugs cartel.

Washing dirty money clean through depositing large sums of cash with no obvious source has always been a thing, and lawyers and bankers are trained to be on the lookout for it. However, this sensible precaution has now been folded into the wider “war on cash,” which means small businesses paid in cash are routinely denied banking facilities, and sometimes directly debanked.

I first became aware of the latter when it was done to Traveller-owned window- and roof-cleaning firms. HMGov makes a lot of noise about encouraging Travellers to work honestly instead of setting pitches up outside villages and towns and stealing anything that isn’t nailed down. Doing a useful job of work, funnily enough, requires a bank account, sometimes even a business bank account. Meanwhile, most people don’t pay their window-cleaner with a credit card.

HMRC needs to accept that a bit of lost tax revenue is a bloody sight better than Travellers up and down the country actively pushed into a life of crime.

Meanwhile, a small hint of what “life without a bank account” looks like is disclosed in Nigel Farage’s email to Coutts when—as a PEP—he couldn’t get any other bank to provide him with an account:

On current course I will be at your branch on [REDACTED] the final date with a security van to collect [REDACTED] approx in cash.

It’s now known you need a million quid to open an account at Coutts. Assume, for the sake of argument, this is the sum of money Farage is talking about. How many of you have seen a million quid in the flesh? If you’re an Edinburgh resident, you can go to the Museum on the Mound and take a look. It’s quite a large pile.

The million-quid money-pile in Scotland’s Museum on the Mound

Of course, all this bad behaviour has only become widely known in the wake of Nigel Farage’s debanking, so in that sense he’s done the country a favour. He’s been joined in the fight more recently by anti-Brexit campaigner Gina Miller, which is not a sentence I ever expected to write.

Not only did Farage expose his own—politically motivated—debanking, but also flagged up the issue of debanking cash-based businesses, debanking thanks to sexually transmitted debt, and a now widespread tendency for banks to deny people trust account facilities—even extending to firms of solicitors (forcing us to manage large sums of money in-house).

Miller, meanwhile, told Monzo she was setting up an account for a registered political party, even providing its website. Her party was then allowed to bank with them for over a year, before it, too, was summarily debanked. No reason was given until she alerted the media, as Farage had done. In response to press inquiries, Monzo claimed it “doesn’t provide accounts to political parties”.

Why let her open it in the first place, then?

That Farage’s debanking was politically motivated has become a major national scandal. So many heads have rolled at NatWest and Coutts their respective headquarters must look like ten-pin bowling alleys, no doubt with more to come. However, the treatment of high-profile figures like Farage and Miller has exposed something that’s only recently emerged as a tool in cancel culture’s kit.

Not all manifestations of cancel culture are new. Starting in 1995, I had people try to get me sacked and, a little later, disbarred. Such behaviours are part of the standard cancel-culture playbook and have been since the 90s. However, the idea that someone would try to close my bank account because they didn’t like a novel I’d written or what I wrote in various newspapers didn’t even cross my mind. I also doubt it crossed the minds of those who really, really hated me and wanted me driven out of public life.

Indeed, one of my enduring memories from about 1997 is the deposition of yet another large royalty cheque (yes, publishers used to send paper cheques, it was quite lovely). The following week, I was invited into my local National Australia Bank branch and offered private banking. “Rich writers are rare,” was the manager’s comment.

Debanking is new.

Politicised debanking of the Nigel Farage type (at the time called “withdrawal of banking services”) crossed my (professional) desk for the first time in 2014. In this case the victims were local chapters of the anti-Israel BDS campaign (“Boycott, Divestment, Sanctions”).

Somehow, information both about their activities and where they held accounts had been transmitted to various banks and they’d had their banking services withdrawn. Presaging Farage’s security van parked outside Coutts waiting for a million quid to be forklifted into the back, one young man confessed to me he had twenty thousand dollars—several years’ donations and membership dues—hidden in his flat.

I was honest with the BDS people: I didn’t and don’t support their campaign. I don’t think boycotting entire countries is reasonable (or moral, for that matter). However, BDS advocates—like the rest of us—have both freedom of speech and the duty to engage in debate. So do their opponents. The way to defeat one’s opponents is with argument, not by stealthing around in the background to shut down their bank accounts (or seeking to get them sacked or disbarred).

A threat (never actuated) to contact a friendly MP and raise the issue in parliament pulled the banks into line, and they were able to re-open their accounts. Farage has generated a similar response here: anger and condemnation has come from the PM, LOTO, and Chancellor. Nonetheless, the scale of the problem disclosed thereby means that debanking has now joined arbitrary sackings, social media pile-ons, and the soliciting of professional sanctions as a weapon.

Understandably, the government has moved to amend UK banking regulations: recent changes now force banks to provide reasons for account closure, deprive them of the ability to close accounts for “lawful political opinions,” and mandate providing customers with more time to find alternative facilities. This is all well and good, and I approve.

However, a good half of this problem has roots in legislation around PEPs, AML, and KYC coupled with overzealous interpretation of those laws. Relatedly, things like Magnitsky sanctions—which target individuals rather than countries—make destroying political (and other) opponents professionally and financially rather than in the public square look decent and moral.

Of all these, KYC is probably the most sinister. It is KYC that means the four biggest high street lenders and several others have quietly introduced the right to monitor customers’ social media into their privacy policies. KYC is shorthand for a range of anti-money-laundering safeguards enforced in markets around the world, and which frequently involves “adverse media checks” of precisely the kind Coutts carried out on Farage.

Buried in NatWest’s full, 13-page privacy notice, for example, is a term stating that it may gather “information that you make public on social media”, including Facebook and Twitter. Coutts’s policy is identical.

Other UK banks use similar terms.

Simon Gleeson, Partner at Clifford Chance, told the FT last week that: “Under the guise of ‘de-risking,’ banks have been dropping customers who pose reputational risk for at least a decade.”

The KYC trend emerged after huge fines were levied on banks by US and UK authorities for money-laundering failures. Following a $1.9bn penalty levied on HSBC in 2012 by the US Department of Justice, the bank agreed to spend $700m on a global KYC programme.

Since then, the whole thing has grown like Topsy, with banks getting well out over their skis and now paying the reputational price. Monitoring people’s lawful political opinions has also been folded into the wider DEI scam, where dingbat interns and diversity hires get to write 40 pages of ungrammatical, half-smart nonsense about Nigel Farage retweeting a Ricky Gervais comedy routine poking fun at trans people.

Get a grip. People are allowed not to like you, and are allowed to make you the butt of their jokes.

More broadly, regulators and tax authorities are just going to have to accept that, for a lot of businesses, cash remains king. That means accepting a bit of “revenue leakage”. Wind your necks in on the AML front. Leave Magnitsky sanctions to the politicians. Banks can be legal arbiters when it comes to financial transactions. They can’t, however, become moral arbiters, withdrawing accounts from people for wrongthink.