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Hard Cases Make Bad Law – and more Layers of Compliance

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The old legal maxim, “Hard Cases Make Bad Law,” has wide application. It reflects the difficulty of legislating in response to unusual or extreme circumstances. Often the result is a law that doesn’t serve well in general application, or it might come with unintended consequences. This is especially relevant now,  in the context of the UK’s Money Laundering and Terrorist Financing (Amendment) Regulations 2023. The changes affect the treatment of Politically Exposed Persons (PEPs) in the UK. The regulations, effective from January 10, 2024, aim to streamline customer due diligence by assuming UK domestic PEPs—such as Members of Parliament, senior civil servants, and their families—pose a low risk, by default.

Nuance in PEP Compliance – and Unintended Consequences?

The backdrop to this are efforts to mitigate the perceived excessive scrutiny that some UK PEPs and their families have faced in normal financial dealings – setting up bank accounts, and arranging mortgages, for example. In reality, the issue may not have seen much publicity, and even less action, were it not for Coutts (a bank known for its high net worth clientele) refusing banking services to Nigel Farage – a controversial figure, although currently not an elected politician, allegedly for his political views.

It’s a good example of the maxim above. Efforts to alleviate challenges for this specific group might inadvertently complicate compliance processes in the UK by creating dual standards. By differentiating the due diligence required between domestic and non-domestic PEPs, these regulations risk diverging from Financial Action Task Force (FATF) recommendations. They also establish a two-tiered risk assessment system. This could, potentially, heighten the vulnerability of UK PEPs to external pressures – precisely because they will, at least initially, be deemed to have lower risk profiles.

Inherent Complexity Calls for more Automation

The story underscores the inherent complexity in legal and regulatory frameworks around compliance. Solutions designed to address particular issues can inadvertently spawn new challenges. For compliance officers, it highlights the necessity of staying abreast of regulatory changes within and across jurisdictions. It’s a daunting task, both in scope and scale.

The evolving nature of compliance regulations points to the necessity of process automation. Customizable systems that keep track of regulatory changes are crucial to help compliance teams make informed decisions based on up-to-date information. Compli from Essiell Compli fits the bill perfectly: it’s designed to assist financial services businesses in managing due diligence and regulatory compliance with efficiency, reliability and ease of use – and an exceptionally high level of detail. It offers a suite of tools tailored for the nuanced requirements of due diligence, including the monitoring and assessment of PEPs. In a nutshell, Compli helps brands streamline compliance processes, maximise efficiency, and minimise risk.

Effective Compliance Requires Balance

Recent legislative adjustments in the UK aim to make more equitable specific aspects of financial compliance. But they exemplify the hard-case / bad-law conundrum. The UK’s approach to domestic PEPs serves as a cautionary tale: unintended consequences really can arise from well-intentioned legal reforms. It reinforces the critical role of adaptable, technology-driven solutions like Compli in ensuring effective compliance in every context – including regulatory change.

By Declan Morton, staff writer at Essiell Compli.


For reference: Adapting to change: How the UK’s latest money laundering amendments impact PEPs, Fintech Global, January 24, 2024

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