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Customers with blocked accounts are the ones being stung in the fight over money laundering ǀ View

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No one, of course, is in favour of people using the facilities of banks and building societies to launder money, finance terrorism or breach financial sanctions. This is why the EU has such an increasingly strict and complex set of rules to combat such things, which the UK has not merely followed but gold-plated and made enforceable by way of criminal penalties. The fact that legitimate customers of banks face the red tape of due diligence checks, and even risk being turned away or their accounts being closed or frozen when banks suspect criminal activity, is generally held to be a regrettable but necessary side-effect of the system. Better for a few innocents to face a little injustice, surely, than for the guilty to be able to abuse the banks’ services for nefarious purposes.

There are two major problems with this received wisdom, and they are both problems that, in the UK at least, are getting worse over time. The first problem is that, with the exception of the well-resourced and increasingly professional compliance sector in the major banks, more or less every other piece of the UK’s anti-money laundering infrastructure is creaking and crumbling from years of financial neglect. This in turn is creating a dangerous mismatch between the laudable ambition of the system on one hand, and the ability of those running it to do so efficiently and intelligently on the other.

How does this work in practice? A compliance officer in a bank is alerted, perhaps by way of a clever algorithm that detects unusual activity on a customer’s bank account, or matches the name of a counterparty with a similar name on a blacklist, to something that just might conceivably be thought to present a risk that some money in the account might represent the proceeds of crime.

The fact that legitimate customers of banks face the red tape of due diligence checks, and even risk being turned away or their accounts being closed or frozen when banks suspect criminal activity, is generally held to be a regrettable but necessary side-effect of the system.
John Binns
Lawyer

Under UK laws, this does not even need to be a serious crime, and the threshold for the bank to be guilty is not knowledge or even suspicion, but ‘reasonable grounds to suspect’ – so they have every reason to be cautious. A Suspicious Activity Report (SAR) is sent to the National Crime Agency (NCA), perhaps with a request to consent for the bank to receive funds or to transfer them in a way that the customer has asked it to do.

What ought to happen at this point of course is that the NCA, and indeed all the many other law enforcement bodies we have in the UK, immediately swing into action and work out what the SAR means and how it should be dealt with. That may involve a criminal enquiry, a civil one or neither, and the result should be that while any real miscreants are brought to justice or have their assets seized, those who just happen to have had an unusual payment into their account are swiftly allowed to go about their lawful business.

What happens instead is that the SARs go into a characteristically poor public-sector IT system, where they are available for viewing but very often go literally unread by anyone. Consent requests are an important exception, because the NCA have statutory time limits by which they have to respond or else the transaction is deemed to have consent. But even these are (from a customer’s perspective) quite long – seven working days initially then another 31 calendar days, after which a further extension would need to go to court. So, the system is burdensome on everyone, to the extent that collecting management information – the sort of data that could help us weigh up the costs and benefits of that system in the interests of making it better – tends to be seen by government as a dispensable luxury.

The other main problem is that, because consent requests are optional, and the banks have a statutory protection where they block accounts for what turns out to be an unfounded suspicion, a practice has developed whereby a bank may lodge a SAR but rather than request consent for something it would rather not do anyway, simply sits on the money indefinitely. Because its policies are designed to prevent any risk of “tipping off” a suspect about a criminal enquiry, a bank will typically tell its customer nothing at all about why they find themselves suddenly unable to access their funds, and peremptorily deprived of banking services (potentially by other banks as well, thanks to an industry alerting service called Cifas).

Why are we accepting a system in which banks use or abuse the trust people place in them, and the protections they are given, to hold on to their customers’ money indefinitely and, worse, decline to engage in any discussion or expend any effort to resolve the problem?
John Binns
Lawyer

Customers in this position are often understandably furious, particularly where they have a long-standing relationship with their bank, which appears to have turned suddenly hostile. Legal advice can sometimes help to understand and occasionally fix the problem, and may be prudent in case law enforcement does later become involved. But the practical reality is that for most people, taking legal action against their bank to recover their funds – a very expensive business – is simply not an option, a fact of which the banks, of course, are very well aware.

Why, then, are we accepting a system in which banks use or abuse the trust people place in them, and the protections they are given, to hold on to their customers’ money indefinitely and, worse, decline to engage in any discussion or expend any effort to resolve the problem? Like many injustices of the legal system, the answer is that most people will tend to see it as a problem that affects someone else – a class of people, perhaps, presumed to be criminals – until, of course, one day it happens to them. As the number of customers affected by this aspect of the system increases, the pressure to do something about it will eventually become irresistible.

  • John Binns is a partner at BCL Solicitors LLP in London, specialising in financial crime and money laundering.

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