NEW LINK INSIGHT
When Reputational Risk Management Causes Reputational Harm
Politically Exposed Persons (‘PEPs’).
Financial institutions are required to have controls in place to identify PEPs (and their family members and ‘close associates’). PEPs include individuals who hold or have held public office. When PEPs are identified, financial institutions are required to conduct higher levels of due diligence and to ensure senior management approve the relationship.
The rationale is that PEPs may present a greater risk of abusing their public positions for private gain and using the financial system to launder the proceeds of this abuse. The focus of PEP requirements should be on kleptocrats, oligarchs and serious organised crime groups. However, many low-ranking officials are caught by the definition and, in our view, needlessly subjected to greater scrutiny and increased ongoing monitoring.
The FCA provided guidance in July 2017 which stated that ‘firms should only treat those in the UK who hold truly prominent positions as PEPs and not to apply the definition to local government, more junior members of the senior civil service or anyone other than the most senior military officials’.
Financial institutions typically use screening tools to identify PEPs and, in our experience, do little to differentiate between prominent officials and those whose influence and opportunities for corruption are very limited.
The documents reviewed in relation to Mr Farage suggested that he was a ‘low-risk’ PEP (because he was an MEP and leader of the Brexit Party – and its successors) but he was on the cusp of being removed from the PEP register at the bank.
Most financial institutions use systems to identify adverse media (sometimes referred to as ‘negative news’) in relation to their new and existing customers. It is no surprise that Mr Farage has attracted huge amounts of news coverage that could be regarded as adverse. Articles considered cover his views on (and alleged financial gain from) Russia, comments on Putin and the war in Ukraine, his relationship with Donald Trump and a wide range of other topics. The ones of most concern to the bank appear to be alleged racist, misogynistic, xenophobic and anti-LBGT comments.
Which specific items of adverse media tipped the balance for Coutts in making their decision will never be known – and of course it may have been the cumulative effect of several or the totality of the adverse media.
This case, albeit probably rather extreme, illustrates how difficult it can be to make decisions regarding individuals with a high media profile. Financial institutions will have adverse media policies, screening tools (though some rely on search engines) and procedures. However, despite this, positive matches require manual scrutiny, and their materiality will be assessed by an individual’s judgement, or, as in this case, by an appropriate committee. If we consider criminal conduct as a potential match, firms will need to consider whether it is an allegation, a current court case or a conviction. The reliability of the media source will require consideration – is there a risk of bias in reporting? Is the information in a reliable and trustworthy media report or in often less reliable social media?
Source of Wealth and Funds
Where there is PEP involvement, and in other high-risk cases, financial institutions are required to identify, and to an extent verify, how the client accumulated their wealth and where the specific funds in the account came from. Monitoring activity on the account, to identify anything suspicious is also a requirement.
In this case, Coutts investigated allegations (which were not substantiated) that Mr Farage (and his associated businesses and political parties) received funding from Russian oligarchs and media outlets.
Source of Wealth / Funds is always problematic for financial institutions and their customers. The fine is a bit lost in the mists of time, but Coutts was fined by the FSA in 2012 for serious failings in anti-money laundering systems and controls. Failings included failure to identify PEPs, failure to consider or identify adverse intelligence and failure to identify sources of funds/wealth. This event demonstrates that lessons have been learnt!
- Financial Institutions should ensure that they have robust but proportionate risk-based controls in relation to due diligence and ongoing monitoring of PEPs.
- The firm’s approach to identifying and addressing adverse media should be clearly defined with procedures for escalation to senior management.
- Source of Wealth needs to be determined at onboarding stage and enhanced monitoring of higher risk accounts should identify transactional activity.
Our services include:
Independent expert review of KYC related policies and procedures, including on-boarding, off-boarding, PEPs, adverse media and ongoing monitoring.
Drafting policies and procedures to comply with new rule on account closures.
Expert resources to independently review past decisions to close accounts and to handle peaks in subject access requests and other account closure complaints.
Investigations into high-risk clients and transactions to supplement public source information.
For further information, or to arrange an initial discussion, please contact the Practice Lead for Compliance and Anti-Financial Crime, Peter Brooke [email@example.com]