PEP. I despair…

Several people and companies that I know are being driven out of business.

They are losing their businesses because the Banks are refusing to allow them bank accounts. The banks argue that in view of the increasingly stringent regulations applied to them, they feel it prudent to avoid business that is considered high risk.

Recently, ‘de-risking’ as it is called, began to impinge upon our esteemed Members of Parliament. MPs are ‘Politically Exposed Persons’ (PEPs) in compliance-talk, and therefore high risk. In actual fact, ‘close associates’ of MPs are high risk – including their families.

The PEP regime is one part of anti money laundering regulation that is particularly poorly conceived and drafted. Without getting too technical, it’s as clear as mud.

I therefore welcomed the attention being brought to the matter by the inconvenience being experienced by our MPs, or ‘law-makers’ as I have heard them called. Surely now, I should expect a review to be undertaken and guidance issued that makes this well-meaning but cumbersome measure straightforward, proportionate and fair?

Hurrah! Amendments have been tabled.

However, rather than sort out this ridiculous, nonsensical, badly drafted, and impossible to implement concept of the PEP – the Houses of Parliament have engineered an amendment that will exclude MPs and their families from the PEP definition.

The rest of us will just have to cope.

It is a rare day indeed that I am rendered speechless.

National Risk Assessment

In October 2015, HM Treasury and the home Office published the UK’s first money laundering and terrorist financing national risk assessment (NRA). This is an obligation under the obligations of the Financial Action Task Force (FATF), to which the UK is committed.

The report is a fairly long read, running to a hundred plus pages, but it does give us an indication of how the authorities are looking at the risks and the sector.

A full text can be downloaded from the website. (Link below)


A tempting headline to make is that where Banks are assessed as an overall risk level of High, Money Service Businesses are assessed as Medium. Perhaps MSBs should consider whether they want to continue to work with banks.

The report does acknowledge the impact of bank Derisking and the potential vulnerability created by increasing breadth and scope of agency agreements.

The report contains a detailed assessment by sector. I have lifted the section below from the sector related to MSBs.

6.104 The threats and vulnerabilities in the MSB sector are:

  • the transfer of criminal funds overseas
  • the use of currency exchange services to convert criminal cash into high denomination foreign notes
  • the control of MSBs by organised crime groups;
  • The use of complicit employees within MSBs by criminal groups
  • third party payments
  • the transfer of cash into other payment methods such as digital currency and electronic money
  • levels of compliance with the regulations and POCA

It would be sensible to bear this assessment in mind when completing risk assessments within the business.

How exposed is your business to these risks, what is your policy and procedure for mitigating such risks?

Sorry, we are closing your account.

I came across this article the other day. It is by Scott Paul who works for Oxfam.

Oxfam on Derisking

It is well worth a read. In case you are pressed for time – I have copied one paragraph below.

Though banks should make individualized assessments of the risks their clients present, governments are primarily responsible for turning the tide of de-risking. The declining risk appetites of banks are largely tied to enforcement, prosecution, regulation, and a general political climate that discourages serving clients perceived as high risk and dealing with high-risk jurisdictions generally, while offering little to no incentive to serve clients that are providing valuable services to poor, vulnerable, and financially excluded populations. Ironically, as high-risk clients lose their accounts with major banks, they turn to smaller banks with less capacity to manage risk and other less regulated channels –increasing the total amount of risk in the global financial system.

Perhaps understandably – ire about derisking has been focused on the banks. The paragraph above is, in my opinion, a superb summary that gets right to the heart of the matter.


LIME works with a number of MSBs.

As the UK banks have adjusted their appetite for risk, they have made it impossible for many MSBs to continue trading in the regulated sector.

Whether one believes that phenomenon is driven by law enforcement, regulators or the banks themselves, the closure of many legitimate businesses is bad news. It is bad news for consumers, in that reduced competition and increased costs will drive up fees and it is bad news for law enforcement and regulators. Threatened with closure, it is unsurprising that businesses are looking at more and more elaborate structures that might be used to continue trading.

HMRC and SOCA had a degree of success in bring FX and money remittance into the light throughout the ‘noughties’. Where business had been carried on with no paperwork, on a nod and a handshake, companies registered, opened bank accounts and we began to see some transparency and competition in the market place. Suddenly it was possible to produce more accurate statistics and to work with the industry to increase compliance.

Then ‘Boom’. The banks pulled out. Accounts started getting closed, first in money remittance and now increasingly for all sorts of MSBs.

Money remitters are coalescing into loose networks around MSBs that have been able to preserve bank accounts. I sat in a presentation recently where NCA stated, with no visible sign of irony, that these extended networks represented a greater risk of money laundering. Other companies have reverted to an old and ancient style of business, undoing all of the work previously done.

That’s gone well then.

Trade organisations are fighting as best they can, but MSBs are going to struggle to match the spending power of the Banks.

Right now, a cartoonist would have a banker, a regulator, a politician and a policeman all pointing at each other. Meanwhile, the man with the AK47 will be moving his money through a shadowy disguised operator not licensed or regulated by anyone.

Banks and the MSB Sector

This article originally appeared in the National Pawnbroker Association magazine in September 2015.


“Derisking” in the Money Service Business Sector. “What is it? What does it mean for my business?”

If you are running a business in, or touching on, the MSB sector, then the chances are that you have heard the term derisking. If you have not heard it, then it is likely that you soon will.

Worldwide, banks are undertaking a risk assessment by market sector of their customers.

In simple terms the banks are weighing the revenue to be made from a sector versus the risk that the Bank takes on by dealing with that sector. Alarmingly, a frequent outcome of this consideration appears to be;

“Close all accounts in sector x. Too risky.”

Sectors currently being viewed as ‘toxic’ are foreign exchange and money transfer.

Ostensibly, derisking is driven by compliance concerns around those types of business. Some commentators have speculated as to whether there might be other more mundane motivating factors, such as the good, old-fashioned profit motive.

Organisations such as the NPA are working extremely hard to build an understanding across the regulators and the banks on how to ensure that legitimate well-run business is not adversely affected by the phenomenon.

Whatever the motivation behind derisking, the reality is that many pawnbrokers find their business under intense scrutiny from their bankers; particularly those pawnbrokers that offer either money transfer or foreign exchange as an ancillary service.

Regrettably, there is no ‘silver bullet’, no magic formula, that will guarantee that your bank partner is happy to continue servicing your business.

One absolute certainty though, is that your bank will expect you to be fully compliant with all Anti Money Laundering, Counter Terrorist Financing and Sanctions legislation, with detailed documentation in place to demonstrate that compliance.

One senior account manager at a well-known high street bank said to me;

“Excellent compliance is seen as a given. Any customer that seems in any way non-compliant is straight out.”

That is nothing, if not clear!

Excellent compliance is the expected base standard. The bar has been set much higher. “Excellence as standard” as they say in the car manufacturing business.

Even if your business does not offer foreign exchange or money remittance and is not currently under the microscope, it will be under that microscope soon.

“London is not a place to stash your dodgy cash” said the Prime Minister on July 28th 2015, in a speech on property that had London estate agents (and doubtless their bank managers too) reaching for their compliance manuals.

What does an effective compliance program look like?

It is very likely that it looks a lot like the one that you already have in place. At its core, effective compliance is about knowing your customer. It is about understanding who your customer is, where his assets come from and why he is using your service. In short, it looks like many of the things that you already focus on as an integral part of running your business.

Your compliance program begins with your policies and procedures (P&P). These are the foundation stones upon which all else is built. Your policies outline to your staff, your partners and yes, your bank, how you are going to deter, detect and disrupt money laundering.

Your policies and procedures should be documented, signed off by senior management and read and understood by every member of staff. Here, you spell out how you are going conduct your business and how you are going to monitor your business. You provide an outline of how you will train your staff and how you will test them. You explain how you will report suspicious activity and how you will assess, review and improve your regime.

A dusty old folder on the top shelf will not cut it any more. Your P&P must be at the heart of what you do. You and your teams must know them, understand them, believe and practice them. When something changes in the way that you do business, your P&P change too. As financial crime methodologies evolve, so do your measures to counter them.

The age of the tick box has passed. Effective, meaningful compliance is a state of mind, it is a culture that should run through the heart of your business.

Will an effective compliance culture guarantee success for your business?

No, I am afraid it will not. However, without an effective compliance culture your business will almost certainly struggle to function for long in 21st century Europe.