New regulations are now in force to counteract money laundering, but they are a bureaucratic headache for charities, discovers Patrick McCurry.
When Abbey was fined £2.3m last December, it was a warning to the banks that they had to take anti-money laundering rules seriously. The penalty, from the Financial Services Authority, was imposed because Abbey had been failing to follow tough anti-money laundering rules. Fines had previously been levied on the Royal Bank of Scotland and the Bank of Scotland.
This action by the regulator is forcing banks to get tough with new customers in areas such as proof of identity. However, for charities the new demands can seem laborious, particularly as separate documents may be required for each of the charity's trustees.
In all, the legal requirements imply more bureaucracy for charities and banks. Money-laundering regulations have been in place since 1994, but tougher regulations and enforcement became the norm when the FSA was created in 2001, and particularly after the terrorist threat following 11 September that same year.
The tough new rules were partly a response to fears that terrorists could use UK bank accounts to launder cash, and partly to prevent other criminals from directing ill-gotten funds through the UK financial system. One of the high-profile cases at the time concerned the Nigerian president Sani Abacha, who shifted £1bn through 23 UK bank accounts.
Critics of the anti-money laundering regulations say that forcing ordinary, and sometimes long-standing, bank customers to jump through hoops evades the real problem. Even the FSA's large fines for some UK banks were not issued as a result of actual money-laundering activities taking place, but because the banks breached rules on opening new accounts or did not have adequate processes in place for monitoring accounts and reporting suspicious transactions.
The size of the money-laundering market is unknown but, according to the Government, around £25bn could be being laundered each year. Although no charities are thought to have been convicted of money laundering, they are regarded by some as a prime target because of their unique status and because they often bank large amounts of cash. Another risk is that charities with large branch networks could be vulnerable to accounts being opened without the authority of the charity's head office.
Before the new regulations were introduced, it was possible for a charity representative to give the bank a Charity Commission number, an explanation of the charity's mission and then open an account. But banks are currently expected not only to verify the charity itself but also all those individuals, including trustees and employees, involved in operating and running the account.
Probably the most important change that has been introduced by all banks in the past year or two is that anyone opening an account be subjected to rigorous identity checks. These include authenticated copies of identity, such as a passport or driver's licence, and proof of residence.
It has taken a while for banking clients, and in particular charities, to accept the necessity for such regulations, says John Barwick, head of charities at private bank Coutts, which is owned by the Royal Bank of Scotland. Some trustees or charity officials become frustrated by what they see as the imposition of extra bureaucracy, he says.
"We've had problems with people who should know better, including members of the House of Lords and judges. We've even had a couple of bishops connected to charities who have used most un-Christian language," he says.
Peter Mitchell, head of banking at CAF Bank, a subsidiary of the Charities Aid Foundation, says that charities are feeling particularly hard-done-by. "They feel they've had to bear the brunt of the changes because it's not just those operating the account who may have to be verified but also any 'beneficial owners' of funds, which includes anyone who is authorised to act on behalf of the charity with respect to the bank account."
However, James Niven, spokesman for Triodos Bank, says that the regulations, while sometimes onerous for charities and banks, do have a positive side.
"The emphasis on building relationships with customers, to understand their banking needs and their account profile, is something that we've been doing for a long time and it fits in with the anti-money laundering regulations." In this way, says Niven, regulations can add value to the bank-customer relationship.
The kinds of checks that banks require vary. John Barwick of Coutts says that in theory it should extend to all trustees and any other account signatories, but that in practice it will depend on the size and sophistication of the charity.
"For a large, national charity such as the RSPCA we wouldn't check all 35 council members, because they delegate the handling of accounts," says Barwick. "We would verify those signatories plus perhaps the members of the finance sub-committee and investment committee. However, for a small charity we'd probably verify all the trustees."
This can obviously cause problems for charities whose trustees often hold down full-time jobs and may live in different parts of the country.
"Members of the 'great and the good' who are charity trustees are often very busy people in high-level jobs, so it can be a challenge for the charity to get hold of all the documentation," says Barwick.
Stephanie Lennon, marketing director at Unity Trust Bank, says: "Getting hold of all the documents can be hard for some charities to co-ordinate, especially if there are several signatories." She believes much of the flak the banks have received from charity customers is down to poor communication by the FSA and other government agencies involved in preventing money laundering.
Acclimatising to change
When some of the key rule changes came into force early last year, says Lennon, customers were unaware that they were part of a money-laundering prevention scheme. "We were blamed for the extra administration, and some people told us they'd go to another bank because they were fed up with it all. Of course, when they went to another bank they found it was the same situation." She acknowledges that a government campaign last summer helped explain to bank clients the new rules, but that it should have taken place earlier. Copies of documents must be certified by a solicitor or other professional specified in the regulations. New account holders at Coutts can get their documents certified at a local branch of the Royal Bank of Scotland or NatWest, says Barwick.
As part of its checking process, CAF Bank uses a credit agency, Equifax, which brings together data, including credit history, from a number of databases.
"We do not take any individuals' credit history into consideration because we do not offer credit facilities and, therefore, it would not be appropriate," says CAF Bank's Mitchell. "Other banks that have credit facilities available may well take a different approach to such information." He adds that using a database agency means that information confirming identity can be gained from a number of sources, including the electoral roll, telephone listings and postal databases.
As well as verifying new customers, the banks are expected under the regulations to confirm existing customers' details. Different banks will have different methods for doing this. A small bank, for example, may do a mail-out once a year asking customers to confirm their details.
"That's not really practical for us, as we have 15,000 customers," says CAF Bank's Mitchell. "Instead, we wait until a charity contacts us to change one of its cheque signatories, which happens fairly often. At that point we'll ask the other signatories to reconfirm their details."
This reconfirmation is needed, says Mitchell, because while trustees will quickly inform their personal bank if they move house but will often forget to inform their charity's bank. As well as these processes, banks such as CAF Bank must report any suspicious transactions to the financial regulators. "If a charity suddenly turns up with £50,000 in cash to deposit, we would make enquiries about the source of that cash," says Mitchell.
Charities and banks have had to introduce more administration to comply with the law. Lennon says that early last year, when many of the changes came into force, she and her staff found themselves spending 30-40 per cent of their time on complying with the regulations.
Things have settled down a bit since then, she says, but the changes have still resulted in more work for the banks. "It's costing us more but we're not making additional charges to recover those costs," says Lennon.
Mitchell, too, says that CAF Bank is absorbing the higher costs. "It has led to higher costs for us, but we're not talking about hundreds of thousands of pounds. We've absorbed that cost - in effect CAF has taken a hit on its investment in CAF Bank. The high-street banks' compliance costs will be proportionately higher. They won't pay for that from their profits - it will come from existing accounts.
"We've been finding out what does and doesn't work. We began by asking charities not to submit all the documentation at the beginning of the process, but then we found it was too hard for us to monitor the situation and were continually chasing people," says Mitchell. "Now, we're clear in saying that they won't be able to use the account before we've received all the necessary documentation."
At the Unity Trust Bank, meanwhile, the learning curve has centred on improving communications with customers. "We've made sure they're much clearer about what they need to do and we try to give them a choice of which documents they can supply to meet the requirements," says Lennon.
The Proceeds of Crime Act, which took effect in February 2003, and the Money Laundering Regulations 2003 place requirements on banks and other financial institutions to put in place processes to combat money laundering.
- Checking identity - banks should check the identity of charity trustees and employees who have access to the charity's account. These kinds of checks may involve seeking certified copies of passports or drivers' licences. Individuals' addresses must also be checked, through, for example, utility bills.
- Reconfirming identity - as well as checking the identity of new account holders, banks are expected to reconfirm the identity of existing customers. It is up to each bank to decide the best way of doing this.
- Know your customer - banks are expected to have 'know- your-customer' processes in place, so that they get to know the banking patterns of customers. This means that they can spot any transactions that are out of the ordinary and that may warrant further enquiries.
- Monitoring transactions - banks should monitor account patterns to pick up on any suspicious transactions. In order to meet this objective, banking staff should be trained to report any suspicions about large cash deposits or other unusual transactions.
For more information on anti money- laundering regulations, visit the FSA website at www.fsa.gov.uk.