Banks mum over millions in costs from stronger due diligence checks

Maltese banks have been tight-lipped over the extra expenses they will incur to perform additional due diligence checks on politically exposed persons and their relatives, as part of the fourth Anti-Money Laundering Directive.

Hundreds of people across the Maltese islands are likely to be affected under tighter rules to fight money laundering, as the definition of a politically exposed person (PEP) will now include not just people with political functions, but also their spouses and close associates and relatives.

Under the new Europe-wide rules, not just PEPs but also family members and business associates, will come under closer scrutiny by banks and financial services providers: opening a bank account will now be subject to enhanced due diligence measures.

Not only politicians, or party executives and directors of government entities will be subject to enhanced due diligence, but also their family members, such as spouses and partners, children, the PEP’s parents, as well as ‘close associates’ who have business relations or joint ownership of companies.

This will mean that institutions such as banks or insurance companies will have to obtain senior management approval to even establish a business relationship with such persons.

One study by Consult Hyperion claims that an average bank in the United Kingdom will “waste” £5 million (€5.6 million) each year in manual know your customer (KYC) checks, which might rise to over €11 million in three years.

Malta’s banks have however been unwilling to put a price tag on these due diligence checks.

Bank of Valletta said that its anti-money laundering policies and procedures are constantly evolving in line with regulatory requirements and market developments. “Both the 4th and the forthcoming 5th AML Directive feature prominently in the bank’s rule book. While we are not in a position to disclose figures, we can confirm that the costs of implementing the directives are substantial in terms of human resources, IT and operational changes.”

HSBC Bank Malta said it welcomed the directives. “They further support our commitment to operate to the highest global standards of financial crime compliance. We believe the effective implementation of this important directive will be beneficial for Malta’s financial system.”

But the bank refused to disclose any quantification of costs.

APS Bank’s money laundering reporting officer Dr Mark Sammut said the bank was still in the process of quantifying the costs to align with the 4AMLD. “Such costs should become clearer once the Directive is transposed into local law and the local Prevention of Money Laundering Regulations are amended accordingly.”

Both 4AMLD and the anticipated fifth directive will increase the required frequency of these essential checks performed by banks and other financial institutions on PEPs and their relatives.

This means that aside from the financial cost of meeting the requirements of 4AMLD and 5AMLD, there is a potentially much greater cost to banks due to the friction that enhanced due diligence might create when handling clients. When such processes become cumbersome, clients may opt to leave.

With some domestic banks already adopting a cautious approach and even putting PEPs’ siblings under enhanced due diligence rules, as per FATF standards, anything up to 2,000 people could theoretically be expected to fall under this new level of scrutiny.

The number could be even greater if banks adopt a strict approach with people whose job in government was granted to them on a ‘person of trust’ basis – even though such placements include low-grade employees on security or cleaning duties.

Under such procedures, entities like banks will have to make sure they can establish the source of wealth and funds that PEPs and their associates have, and then apply ongoing monitoring of the business relationship.

Entities will also have to take reasonable measures to determine whether the beneficiaries of a life insurance or investment policy are PEPs, and inform senior management before the pay-out of any policy proceeds, and carry out enhanced scrutiny of the relationship.

Even after a PEP is no longer entrusted with a public function, banks will still have to continue applying their enhanced due diligence for the next 12 months at minimum, until that person can be considered to be no longer a ‘PEP risk’.

The same will apply to family members and people close to the PEP.

Effectively, this tightens due diligence rules for PEPs entrusted with prominent public functions domestically, as well as those who work for international organisations.