The UK is no slouch when it comes to protecting against financial crime. It follows the relevant European directives, which require that banks have sufficient anti-money-laundering controls in place to prevent criminals opening and using accounts to launder money or fund terrorism.
It is also a member of the Financial Action Task Force (FATF), an inter-governmental organisation that was created in 1989 to combat these kinds of criminal activity and protect the integrity of the international financial system.
Despite all this, the UK-based HSBC found itself at the centre of an investigation for alleged criminal activity in 2011, culminating in a fine for nearly $2bn (£1.3bn) from the US authorities.
The alleged activities investigated by the US authorities included laundering money for Mexican drug cartels and for sanctioned nations such as Iran and Sudan. The firm blamed insufficient compliance policies and procedures in its Mexican arm for these failures and promised to get its house in order.
And this week, it has been revealed in leaked accounts that in the years leading up to 2010, the bank’s Swiss private-banking arm also had a host of unsavoury characters on its books. They included arms dealers, dictators and their families, blood-diamond traffickers, and hundreds of other clients who were allegedly helped to shift chunks of money out of their country of employment to avoid tax liabilities.
Industry rules for opening accounts
According to the UK financial services regulator, the Financial Conduct Authority (FCA), the process by which customers open bank accounts should be “a simple and efficient” one.
A potential customer will be asked to provide the bank with documents verifying their identity and address as part of the FCA’s requirements. The bank will perform a credit check to ensure the potential customer is creditworthy (universal practice, though not actually legally required).
The UK’s banks are also required to carry out various additional checks to prevent criminal activities ranging from money laundering to terrorist financing to sanctions evasion, bribery and corruption, fraud and tax evasion. This would include identity checks, fraud database checks, and questioning on the source of funds where an account has been opened with a large amount of money.
And banks have to determine whether an applicant falls into the “special category of client” list, which includes non-residents, high net worth individuals, high-profile politicians, clients in high-risk countries and companies offering foreign exchange services.
On top of this, banks must monitor their customers’ business activities and report anything suspicious to the National Crime Agency. Additionally HMRC publishes a list of financial sanctions targets in the UK, which lists people and entities that have had restrictions placed on their financial activities by the government.
Banks will use software to carry out this monitoring, though the activities of account holders in the “special category” might be checked regularly by a dedicated relationship manager – looking for large deposits and withdrawals, to give one obvious example.
Control over choice of customers
A financial institution can refuse to open a bank account for a customer, and does not have to give a reason why – so long as it doesn’t discriminate on grounds of race, sex, religion, disability or sexuality.
The main reasons to decline business, other than illegality, are adverse information such as poor credit history or fraud markers; certain business sectors a bank wants to avoid for commercial reasons; and a fear that the client could end up damaging the bank’s reputation.
Accounts that have been opened can also be subsequently closed for the same reasons. For example in 2004, following the airing of a BBC documentary which showed British National Party (BNP) followers confessing to racist hate crime, Barclays closed a number of accounts linked to them. At the time the BNP claimed this was due to pressure from a national newspaper which threatened to run a national campaign against the firm unless the accounts were closed.
On the reputational question, another high-profile case has been RBS’s involvement with producing oil from Canada’s tar sands. It was the butt of a long and loud campaign from environmentalists on the subject.
This may be some distance from Mexican drug cartels, but RBS chairman Sir Philip Hampton still felt obliged to make public the fact that the bank had not lent money to these projects for a number of years (albeit some campaigners disagreed over the semantics).
Equally, banks’ reputations can be at risk for refusing or withdrawing business. HSBC itself came under fire in the summer of 2014 for closing the accounts of customers with ties to Iran and Syria, for instance. The firm was accused of racial profiling when it undertook systematic account closures with little explanation, some of which had been open for a number of years or were held by students or refugees. But in the end, the complaints went nowhere – perhaps highlighting the wide discretion that banks have in this area.
In short, banks have a great deal of control over who they choose to take on as customers, and they all have scrupulous checks and balances in place to avoid people who are criminal or undesirable.
During my time with HSBC for example, which included a period working in branches, there was a lot of emphasis on due diligence and regular anti-money-laundering training. Front-line staff were trained to identify individuals that may pose a risk, though ultimately these were passed to a specially trained team to be dealt with. Whatever the conclusion on HSBC’s practices turns out to be, I never saw anything amiss at the front end.
Having said all of this, we have to bear in mind that the current HSBC case is about events that took place at the Swiss subsidiary. While the UK division is accused of facilitating (and possibly even encouraging) the hiding of money to avoid UK taxes, those seeking to open bank accounts are only subject to the rules in the country where the account is held. Switzerland notoriously permits far greater secrecy for its bank customers than most other countries.
So in the end this is a story about how the standards that UK companies are expected to follow at home are not necessarily followed abroad. It ends up making a mockery of all the strict rules about customer handling at home when it is possible to behave so differently in other jurisdictions nearby. HSBC is trying to counteract this with the introduction of global standards to ensure that the highest level of security compliance is followed in every jurisdiction in which it operates. All eyes will be watching closely to see if it works.