The approach that banks and other wealth management industry players take for handling politically exposed persons (PEPs), know-your-client (KYC) tasks and the vexed topic of "de-banking" is discussed by this news service and Moody's Analytics.

People want to be able to open bank accounts in minutes rather than days or, in some cases, several weeks. And yet, as geopolitical clashes remind us, compliance with know-your-client rules means rapid account-opening can be difficult for those in the public eye. And in this environment, the closure, or “de-banking” of certain clients is an important issue.

The storm of controversy caused this summer when Coutts’s closed broadcaster and former UKIP leader Nigel Farage's account, and revelations that several other banks have closed accounts for seemingly political grounds or drawn-out opening procedures on those linked to political figures, have hurt the reputation of the banking sector.

UK Prime Minister Rishi Sunak has called for reforms. The UK's Financial Conduct Authority has scrutinized the matter. It even turned out that the UK Chancellor of the Exchequer, Jeremy Hunt, was denied an account, he was reported as saying. Political issues intrude around the world: in Hong Kong, opposition leaders have criticized HSBC (which is listed in the Asian city, and London) for reportedly closing accounts. (See here for an editorial commentary on de-banking.)

In the US, new financial transparency legislation for beneficial ownership of companies takes force from the start of next year, and that adds to the compliance workload. And politics is arguably a problem in banks as well. The National Committee for Religious Freedom (NCRF) – a nonprofit advocacy group – opened a JP Morgan Chase checking account last April. A few weeks later, the bank shut down the account without explanation, the NCRF said. Republican attorneys general from 19 states accused JP Morgan of closing accounts and discriminating against customers due to their political or religious beliefs. The bank reportedly replied: "We have never and would never exit a client relationship due to their political or religious affiliation."

However, it’s not just new rules or politics that matter. At the same time, technologies such as artificial intelligence, and its famed ability to detect patterns and raise “red flags” over certain clients, feeds into the mix. Tech can, so advocates hope, make the chore of keeping abreast of compliance less of a grind and speed up processes. However, AI could increase the potential for fakes and threats.

A Moody’s view
With the Russia-Ukraine and Israel-Hamas conflicts grabbing headlines, the focus on getting KYC and compliance will sharpen, Keith Berry, general manager of KYC Solutions at Moody’s Analytics, told this publication. 

“More broadly, we have a lot going on in the world geopolitically now and our work helps our customers protect the financial system,” Berry said. “The biggest thing is understanding whom you are doing business with.”

“As consumers, you want to be able to open a bank account in minutes rather than days, weeks, or months. That’s the challenge that this industry faces,” he continued. 

Since Russia’s invasion of Ukraine on 24 February 2022, the number of sanctioned Russians and related entities has skyrocketed. This affects every company, not just banks, Berry said. 

"Ownership [of companies, other entities] is really important," he said, citing the US Treasury's Office of Foreign Assets Control (OFAC) 50 Percent Rule. 

“My guess is that it will see sanctions coming out of what is happening in the Middle East right now,” he said, adding that such turmoil means that risks of bribery and corruption are heightened.

And to go back to the Farage and similar cases, it brings up the term “politically exposed person.” In the UK, for example, many respondents to a survey don’t even know what a PEP is, Berry said. 

For a person who is designated as a PEP, it does not and should not necessarily mean that the PEP is blocked from financial services; it means that the due diligence process and monitoring will perhaps take longer and be more detailed than for a non-PEP.

Berry agreed that rules shouldn’t deter people from entering public office if they fear their normal financial life, and those of their families, will be ruined. 

“We shouldn’t be penalizing people for serving in politics and in public office,” Berry said. 

According to Moody’s Analytics Grid database, there are 2.7 million and more profiles of individuals classed as PEPs, rising 32 per cent. 

Regulations for PEPs vary across jurisdictions.

“Providing [financial firms] the best terms is the only way to keep up and to automate as much of this [work] as possible,” Berry said. Moody’s research, he said, shows that 79 per cent of compliance professionals think new legislation to regulate the use of AI in compliance is important. Also, 83 per cent of respondents to Moody’s surveys expect risk and compliance functions to adopt AI widely in the next one to five years.

“[AI] is a tool in the box,” Berry concluded, noting that “AI should not be making final decisions.”