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Money Laundering and Financial Exclusion

Speed Read: Jonathan Fisher QC discusses the House of Commons inquiry into the anti-money laundering and terrorist financing regime and focuses on one problem with the regime – the rise of derisking leading to financial exclusion.

The House of Commons Treasury Committee is presently conducting an inquiry into the application of the anti-money laundering and counter-terrorist financing regime. Amongst the areas to be examined, the Treasury Committee has indicated it will explore the impact of the current regimes on individuals, firms, and the wider economy, including unintended consequences, such as the removal or refusal of financial services from or to individuals and firms.

On any view, the anti-money laundering and counter-terrorist financing regime aggravates financial exclusion by systematically excluding certain groups of people and businesses from products and services offered by financial institutions. The significance of the problem cannot be under-estimated, since financial exclusion can have a devastating impact on individual lives, the business community, and society in general. Exclusion from the formal financial system exacerbates inequality and leaves marginalised groups at a severe disadvantage. A lack of access to basic financial products drives people to participate in cash economies where illegal activities flourish and customer protections are non-existent. From a business perspective, the denial of financial services to legitimate businesses stunts innovation and overall economic development.

To some extent, the withdrawal of services by financial institutions is readily understandable. Emphasis of risk management in statutes and guidance targeting financial crime in the UK has seen the rise of a ‘de-risking’ culture by financial services providers and the business community in recent years. Eye-watering fines imposed by regulators for breach of anti-money laundering risk management requirements and controls are a contributing factor. In February 2018, the Gambling Commission fined bookmaker William Hill £6.2 million for anti-money laundering breaches. In January 2017, Deutsche Bank was fined £163 million by the Financial Conduct Authority (“FCA”) for failing to maintain an adequate anti-money laundering framework. HMRC is also taking more enforcement action against estate agents for anti-money laundering breaches. Concerned about compliance with anti-money laundering requirements, as many legal practitioners working in the area will have seen, some banks have opted to terminate business relationships with customers or not to commence relationships with prospective customers at all. There are examples of case by case service withdrawal as well as the wholesale cessation of relationships because of concerns about a geographical region or sector.

The move towards de-risking undermines the objective of the UK’s anti-money laundering framework – to ensure that firms carrying on business in UK manage and mitigate a client’s risk when that client is taken on and during the client relationship. If a client is not taken on or the relationship is terminated, there is a risk that transactions will be pushed underground or routed through jurisdictions where systems and controls are weaker. This is wholly counter-intuitive to the anti-money laundering regime in the UK and globally. 

The Treasury Committee must grapple with these issues. First, the Committee should recommend that HM Treasury develops comprehensive guidance for banks as well as actual and potential customers which addresses the problems of de-risking. Some efforts have been made but practical experience and reports of clients being declined in unclear circumstances suggests that much more could be done. Secondly, the Committee should suggest a strengthening of the mandate of the Financial Ombudsman Service to prioritise cases involving de-risking and financial exclusion. Thirdly, the Committee might also consider the larger project of establishing a comprehensive digital identification system. These systems have the potential to help financial institutions conduct de-risking procedures without unnecessarily excluding vulnerable populations.

There remains much work to be done. Whilst focusing on the challenges presented by the abuse of the UK’s financial system by professional money launderers and organised criminals, if Parliament wishes to value fair treatment for individuals as well as small and medium enterprises operating in an open market-place, it would be extremely unfortunate if the casualties of financial exclusion were to be overlooked on this occasion.

This piece was originally published as the General Editor’s Quarterly Comment for Lloyds Law Reports: Financial Crime Issue 6 of 2018. It is based on a paper submitted by the White Collar Crime Centre to the Parliament’s Treasury Committee’s Inquiry into Economic Crime which is available at: http://data.parliament.uk/writtenevidence/committeeevidence.svc/evidencedocument/treasury-committee/economic-crime/written/82429.html

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The views expressed in this article represent those of the author and not Bright Line Law.

The White Collar Centre