TAIPEI (Taiwan News) — Recent events in the U.K. should give Taiwan’s financial institutions (FIs) valuable lessons on the need to exercise caution with account closures.
Recent developments in the U.K. show the potential downsides of unilateral closure of accounts, especially where account closures are due to politically linked motives and where senior banking executives have allegedly erred in data privacy breaches.
In response, the U.K. government has proposed new rules for FIs requiring more transparency regarding account closures. FIs would be required to delay account closures by 90 days and provide a notice to customers explaining why their account is being closed. Currently, U.K. FIs are only required to provide a 30-day notice period for account closures.
Whilst the Financial Supervisory Commission (FSC) does, in some of its regulations, discuss the issue of account closure and reporting of suspicious activity by a client, it would be prudent for the FSC to watch developments in the U.K. with close interest as they illustrate very clearly the difficulties that FIs face in an increasingly regulated environment.
The U.K. closure of an account belonged to a politically exposed person (PEP). A PEP can include, but is not limited to, a head of state, the head of government, ministers, and deputy or assistant ministers, members of parliament, members of the courts, government auditors, central bank officers, ambassadors, and high-ranking officers in the armed forces. Typically, FIs extend the definition to the immediate family members of the above mentioned and their close associates.
PEPs pose special risks for FIs as they are at a higher risk for corruption, money laundering, terrorist financing, and bribery related to the nature of the influence they hold (or held) based on their position. Dealing with a PEP, even a former one, requires caution. Decisions surrounding a PEP should always involve an FI's most senior management.
Whilst the aim of the new U.K.’s plans is to provide customers with more transparency and recourse to appeal closure decisions, there are quite valid reasons why an FI would choose to close an account, whether it is a PEP, retail, or commercial account, especially in light of financial crime risks and related regulations.
Off-boarding a client, also known as client termination or client off-boarding, is a decision that must be taken seriously by an FI and should follow certain criteria to ensure ethical and legal considerations are met.
Situations when it may be appropriate for an FI to off-board a client include:
- Compliance and Regulatory Reasons: If a client is involved in activities that violate laws, regulations, or the institution's compliance policies, off-boarding becomes necessary. This could include cases of money laundering, fraud, or financing illegal activities, but this requires very careful balancing and is discussed in greater detail below.
- Risk Management: If a client's business or financial activities pose a significant risk to the FI, it may warrant off-boarding. High-risk clients could be those engaging in speculative investments, highly leveraged positions, or other activities that could expose the institution to substantial financial or reputational risk.
- Failure to Comply with Due Diligence: If a client fails to provide the necessary documentation or information required for proper due diligence, the FI may be forced to off-board them to ensure they comply with anti-money laundering (AML) and know-your-customer (KYC) regulations.
- Uncooperative or Difficult Client: If a client behaves unprofessionally, becomes abusive or difficult to work with, and their actions impede the FI's ability to provide effective services, off-boarding may be considered.
- Change in Business Strategy: Sometimes, FIs may undergo strategic shifts, leading to the discontinuation of services that no longer align with their focus. In such cases, clients may be off-boarded if their needs no longer match the FI's new direction.
- Inactivity or Low Value: If a client has been inactive for an extended period or does not contribute significantly to the FI's bottom line, the FI might decide to off-board them to focus on more profitable clients.
- Unstable Financial Condition: If a client's financial situation significantly deteriorates, and there are concerns about their ability to fulfill their financial obligations, off-boarding might be considered to minimize potential losses.
It is essential for FIs to handle client off-boarding with care and professionalism. The process should follow internal policies and legal requirements, ensuring that clients are notified appropriately and given sufficient time to find alternative financial services. Communication with the client during the off-boarding process is crucial to maintaining trust and minimizing any negative impact on the client and the FI's reputation.
However, it is also correct to argue that there is an inherent tension between the rights of a client and an FI’s anti-financial crime obligations. Sudden account closure could amount to “tipping off”. “Tipping off” is the act of alerting someone that they are under investigation or that their financial activities are being scrutinized by law enforcement or regulatory authorities and is usually a criminal offense. No FI, or its employees wants to be subject to a “tipping off” criminal proceeding.
Indeed, it is crucial to deliver a good customer experience in line with a risk-based approach to anti-financial crime compliance. This perennial challenge will remain relevant as FIs, including Taiwan's FIs, seek an effective and balanced risk management approach.