Education combined with regulation will be key to solving the nation’s ‘debanking’ debacle
By Jeremy Asher
Jeremy Asher explains that the issues involved in the recent debanking scandal are wide ranging and complicated, particularly in regard to the role of HM Treasury in combatting the problem
The recent media attention surrounding the de-banking of certain high-profile politicians has helped to highlight the concerns for the thousands of ordinary citizens who are the innocent victims of de-banking. What is the economic harm caused to the country when viable, profitable businesses and economically successful individuals are debanked? What are the risks and responsibilities of the banks in this regard, and the options available to HM Treasury in combatting the problem?
As was recently revealed by the Financial Conduct Authority (FCA), more than 1.1 million people in the UK are currently unbanked. I will explain the distinction between those that are unbanked and those that are debanked later in this article.
HM Treasury does not regulate the banks or financial services industry – that role falls to the FCA, which works alongside the Prudential Regulation Authority, the regulator of approximately 1,500 banks, building societies and other financial organisations. HM Treasury’s powers to do anything at all about the numbers who are debanked or unbanked is limited, and it is conflicted in any concerns it may have about the wider economic impact of debanking by the government’s pledge to reduce fraud.
The House of Lords’ Fraud Act 2006 and Digital Fraud Select Committee reported in November 2022 that 41 per cent of criminal offences were fraud related, and fraud costs the economy billions of pounds every year. The problem of fraud and money laundering is so vast that even the National Crime Agency (NCA) cannot put a figure on its impact to the economy. The committee found that during the course of the covid-19 pandemic, fraud had increased by 25 per cent. That must be an obvious cause for concern for HM Treasury, but it can do little alone to combat the problem.
Banks are viewed as the first line of defence in the fight against fraud and money laundering. They use fraud databases run by Cifas, National Hunter and Synectic Solutions to warn other members who subscribe to these fraud databases when financial crimes are suspected, for example when they see suspicious activity on accounts or when fraudulent applications are made for financial products and services. Once they have marked the data subject in question, that person is effectively prevented from obtaining credit or banking facilities with other members of the fraud databases for up to six years. Fraud markers are important tools because they disrupt criminal activity. Banks are under a duty to report those suspected of money laundering to the NCA. In the past six years, more than 2 million Cifas markers have been loaded, although Cifas apparently has been unable to confirm how many individuals have been affected by such markers.
Commonly, once a data subject’s details have been loaded into a fraud database, their associated bank accounts start to close and they have applications for credit and banking facilities rejected. Therefore, people marked in this way are at risk of becoming debanked. The issue is particularly serious and relevant to those with their own businesses and those employed in financial services, accountancy and the law. I have advised many employees who have been sacked instantly following spot checks. I have seen businesses fail, people lose their homes, jobs and careers, becoming economically unviable in the process.
While such markers are important, and most correctly flag criminal activity, it is the case that many are loaded incorrectly or against those who have done nothing wrong. Should a bank or other financial organisation refuse a direct request to remove a marker, there are prescribed lines of appeal following arbitration routes to Cifas and the Financial Ombudsman Service (FOS). The FOS can only consider cases which fall within certain criteria as directed by the FCA. Cifas only upholds 16.5 per cent of complaints and is only concerned with whether or not members have followed the procedure correctly. The FOS will conduct investigations of its own, is independent, and given its greater understanding of the practices used is a better arbiter than the court, which has limited experience of such cases. The FOS is also free to use with no liability for costs, so it is safer and cheaper than court if a case is eligible.
HM Treasury has little scope to interfere with these appeal processes other than to press for a revision of the standard of proof used to load markers to Cifas, the test for which since late 2022 has been set at a low civil rather than the previous criminal standard of proof, and to force Synectic Solutions and National Hunter to provide arbitration systems. There is a legal presumption that the interest of the state will override the interest of the individual. Cifas and Synectic Solutions are authorised as anti-fraud organisations under section 40(3)(a) of the Immigration Act 2014. An anti-fraud organisation is defined by section 6(8) of the Serious Crime Act 2007 as ‘an organisation which enables or facilitates any sharing of information to prevent fraud or a particular kind of fraud or which has any of these functions as its purpose or one of its purposes’. Therefore, these organisations have long been ingrained into the state’s methodology in policing fraud and money laundering and are also integral to the government’s Economic Crime Plan 2 and its Fraud Strategy.
The risks to the banks should they allow financial crimes to be committed through their accounts are well reported. Take NatWest Bank’s £264m fine for allowing money laundering through its accounts as just one of many examples. In response, it is reported that NatWest now spends 9 per cent of its budget on counter-fraud measures and has invested more than £750m in technology. The FCA considered in its recent ‘Proceeds of Fraud – detecting and preventing money mules’ report that there are weaknesses and inconsistencies between firms in the way they investigate fraud and collate data. It revealed that in 2022, more than 39,000 accounts were reported to Cifas as linked to mule activity. Given the high levels of interconnectivity between mule-controlled accounts and the sophistication of criminals, this figure is likely to be the tip of the iceberg, bearing in mind that there were 3.9 million reports of fraud last year. There was particular criticism of poor onboarding processes, poor use and understanding of machine learning tools, and there were instances of banks failing to respond quickly enough to alerts. Challenger banks were criticised when compared with the performance of larger banks. While it is a good thing that the FCA is taking its responsibilities seriously in conducting these investigations and providing guidance, and no doubt placing pressure on banks to ensure that they invest and train to a sufficiently high standard, however the role of the banks is only one arm in the fight against fraud.
The current state of play
The headline figures provided by Cifas in its most recent quarterly report indicate that the incidence of fraud is starting to fall a little. Detection rates are on the up, but still a paltry 1 per cent of police time is dedicated to fraud investigation. The scale is so vast that the police cannot arrest their way through it. Tougher sentences are all very well, provided the criminal justice system has the capacity to process those investigated and charged, which is woefully lacking with no hope of improvement in the near future according to the outgoing Director of Public Prosecutions, Max Hill KC. The government’s Fraud Strategy is very much victim focused, with banks forced into reimbursing the victims of fraud, although the creation of a national fraud squad is welcome provided it is properly funded, directed and the criminal justice system is sufficiently supported to cope with the anticipated influx of cases. It is clearly within HM Treasury’s power to commit the funds required provided the political will exists.
However, in my view education is the best way to combat fraud and turn the tide, particularly in relation to money mules. The Economic Crime Plan recognises that money mules are integral to moving the proceeds of fraud. Without money mules and associated mule herders, those in the criminal fraternity will struggle to cash out their ill-gotten gains through money laundering. The Fraud Strategy sets out to ensure that young people have key anti-fraud and cyber security skills. By teaching young people to become more fraud aware and tech safe, their knowledge filters through to their parents. This is important because people in their 30s and 40s are now increasingly targeted as money mules. However, there is currently much inter-governmental department wrangling over who should take responsibility for the issue.
In my work with Robert Brooker, Chairman of the United Kingdom Fraud Forum, and Alex Wood, a reformed criminal who is assisting government and the police to better understand how money laundering operates, we have had high-level discussions with both the Home Office and Department of Education. We are promoting compulsory age-appropriate fraud awareness training, presented face to face by a police/public partnership consisting of counter-fraud professionals and academics, as part of the school national curriculum. While there is much good work being done by individual organisations, there is no consistent approach, much to the chagrin of those engaged in law enforcement. There is a lack of political direction on the issue too. Not enough is being done. The adverse impact of fraud on the economy is a national emergency, and it should be treated as a national security threat. HM Treasury could get behind this project.
The unbanked and/or debanked
But HM Treasury has another problem to overcome that is not fraud based, the 1.1m people in the UK that are unbanked. Of those 1.1m, approximately 700,000 have no banking facilities whatsoever and half of those did not want an account, with many putting forward valid reasons for their decisions. The 400,000 hinterland cases included those with savings accounts or Post Office accounts. Others reported that they used crypto currency or FinTech payment provider services instead. It is almost impossible, due to human trafficking legislation, to obtain employment without having a recognised bank account. There is clearly a huge number of people who may be economically stagnant or reliant on the black-market economy as a result of being voluntarily unbanked, or debanked, as a result of alleged criminal activity. But refusing to provide benefits to those without accounts would be unpalatable since many in that situation require cash to survive, either because they may be voluntarily unbanked or have become debanked. Unfortunately, the FCA has not distinguished between those who have been debanked due to suspected criminal activity and those who are unbanked, but that is possibly because Cifas has been unable to distinguish the number of individuals who are currently marked.
Forcing all FinTech payment providers to become regulated may be one way forward for HM Treasury. After all, why should unregulated FinTech businesses provide unsafe banking-type facilities that potentially enable criminals to benefit from their activities? The government is keen to see cryptocurrency become regulated by the FCA. There is little risk appetite for banks to accept payments from cryptocurrency providers, with some now using assumptions to block and mark accounts that allow such payments to come in. There is nothing new in this approach. For years the banks have used assumptions to mark and block the movement of Naira, emanating from Nigeria, where it is from unregulated sources. In both instances, it is incumbent on the customer to prove that the source of funds is untainted by criminal activity. However, by forcing all FinTechs to become regulated, many debanked/unbanked people may be denied access to banking completely.
Therefore, HM Treasury’s ability to do anything about the economic hazards caused by debanking and unbanking is complicated. A concerted, conjoined and consistent approach dictated by political will with education at the heart is the only way forward to future proof the UK from the national emergency of the fraud threat.
Jeremy Asher is a senior consultant regulatory solicitor at Setfords
You can listen to an interview with Jeremy Asher talking about the role of education in tackling fraud on Episode 2 of ‘Open Matters – The Setfords Podcast,’ which is available on all popular podcast platforms from 17 November. Listen here: Spotify Apple Podcasts