Following the NatWest and Nigel Farage scandal, banks are still coming under increased scrutiny. The Treasury wrote to the ombudsman in September asking it to provide the complaints data showing a monthly rate of more than 268 complaints per month, made up of 1,351 ‘general’ closure cases and 262 ‘restricted’ accounts. This month, our Editor’s Question explores how banks are leveraging technology to handle the complexities associated with ‘politically exposed persons’ (PEPs), including minimising risks of bribery and corruption while ensuring the integrity of the financial sector.
The Financial Ombudsman (FOS) opened 1,613 new complaint cases about account closures between April and September, as a letter to the Treasury Committee on Monday highlighted a surge in complaints around bank account closures.
In 2022, the monthly rate for the year was around 225 with a total of 2,708 complaints being made across the whole year, highlighting an increase as the Financial Conduct Authority (FCA) investigates whether banks are systemically ‘debanking’ customers for their political views.
The probe was triggered by Brexiteer and former UKIP leader Nigel Farage after his account was closed by NatWest-run Coutts, partly due to his political views and while no signs of systemic ‘debanking’ of political figures were uncovered, the recent inquest into complaint data highlights that investigations into banks are not over.
Wayne Johnson, CEO and Co-founder of Encompass Corporation, commented: “As these latest figures show, the issue of debanking has not been forgotten – far from it, in fact, with banks continuing to face scrutiny. Now, more than ever, institutions must ensure that the treatment of their customers is consistent and fair and be able to prove it at any given time. This only increases the importance of implementing technology-driven processes, which allow banks to act based on verifiable facts, presented by live, authoritative publicly available data – and, crucially, evidence actions taken.
“As banks grapple with the challenges of mitigating risk and keeping up with a fast-moving regulatory landscape, they must ramp up their processes in response.
“Technology exists to establish a customer’s identity, providing real-time profiles, generated on demand, to validate and verify a company with full transparency. By leveraging this approach, banks can not only evidence compliance and preserve reputation with a robust, effective Know Your Customer (KYC) process, but also maximise business efficiency.”
Peter Wood, CTO at Spectrum Search
In my extensive experience as a tech founder and CTO, I’ve observed firsthand how technology is reshaping the banking sector, especially in managing the risks associated with Politically Exposed Persons (PEPs). Banks are increasingly deploying sophisticated tech solutions to navigate the intricate landscape of financial regulations and compliance requirements. This adoption of technology is critical in minimising risks of bribery and corruption, while simultaneously upholding the integrity of the financial sector.
A key area where technology is making a significant impact is through advanced data analytics and machine learning algorithms. These tools are being used to conduct thorough background checks and continuous monitoring of PEPs. By leveraging large datasets and historical information, banks can identify patterns and red flags that might indicate corrupt activities or the potential for such. In my work at Spectrum Search, we have developed proprietary AI and ML technologies that revolutionise client and candidate experiences. Similar principles are applied in banking for PEP screening, where AI algorithms assess risk levels by analysing vast amounts of data, providing insights far beyond the capabilities of traditional manual processes.
Another critical aspect is the integration of technologies like Blockchain and distributed ledger technologies (DLT) to enhance transparency and traceability of transactions. This is particularly relevant in the context of PEPs, as it helps in creating an immutable record of financial transactions, making it more difficult to engage in illicit activities like money laundering. The principles of transparency and accountability I emphasised while scaling my previous cryptocurrency trading platform resonate here – ensuring every transaction is traceable and accountable is key to maintaining financial integrity.
Moreover, banks are utilising technologies such as natural language processing (NLP) and large language models for enhanced due diligence. These technologies help in scanning and analysing vast amounts of unstructured data – like news articles, government reports, and global watchlists – to provide real-time intelligence on PEPs. In my current project, we are building an internal large language model using vector databases for deep data insights. This same technology enables banks to swiftly adapt to new regulations and global compliance standards, ensuring they stay ahead of potential risks associated with PEPs.
In conclusion, the role of technology in the banking sector, particularly in managing the complexities associated with PEPs, is transformative. It’s not just about compliance; it’s about setting new standards of integrity and trust in the financial ecosystem. By harnessing the power of AI, ML, Blockchain and big data analytics, banks are better equipped to identify and mitigate risks, ensuring they play their part in preventing bribery and corruption. As someone who has been at the forefront of tech innovation and strategic leadership, I see this as a pivotal moment where technology is not just an enabler but a catalyst for maintaining the sanctity of the financial sector.
Jem Shaw, Head of Communications, Clarency
Financial compliance requires banks to execute due diligence on many details concerning a transaction’s counterparties. Politically exposed persons (PEPs) are just one aspect of this. This becomes more important in cross-border transactions, particularly those involving regions regarded as high risk.
However, it’s common for these operations to involve a series of enablers, with a potential chain of correspondent banks between originator and beneficiary. Each organisation must carry out its own diligence and make decisions according to its own attitude to risk. These decisions are based on the quality of the diligence data received.
A moment’s thought exposes weaknesses in this construct. The cost and delay of duplicated KYC operations are the most obvious, but there’s also a weakest link effect. The chain breaks if any one participant is working on outdated or inaccurate information. An individual may show as a PEP simply through having the same name or through an outdated media mention. False positives are more common than missed positives, and they frequently prevent or delay international payments.
Clarency, in common with most major payment companies, operates a high level of compliance, using leading providers such as ComplyAdvantage to carry out detailed diligence. That starts the payment chain strongly, but how can we ensure that everyone works from the same quality of information? If full compliance data could be shared throughout the chain, not only would PEPs be more reliably identified, but significant cost and time savings could be made.
Banks communicate via the SWIFT messaging platform. Within SWIFT’s structure is the MT103 message, that provides 140 characters of payment information. While this can pass on basic instructions, it’s unable to contain the potential megabytes of compliance data that’s been gathered by or for the originator. SWIFT has responded with enhanced facilities, but adoption by banks has been slow. What’s needed is a method of sharing data within the constraints of existing technologies.
So how do we extend SWIFT’s data capacity without asking banks to change technology? Clarency has solved the issue by creating a data vault – a discrete extension of its core blockchain. All compliance data is stored here and can be accessed by any authorised institution via a 20-character key embedded in the MT103 message.
Privacy and security are handled by advanced access control, and the outcome is a unified, shared source of truth that improves PEP detection while facilitating international trade.
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