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Banks have clashed with the UK government over a new scheme designed to use cash from accounts frozen over suspected links to criminality to fight fraud and money laundering.
The “suspended accounts scheme” would be introduced as part of the Criminal Justice Bill and would allow banks to transfer the trapped funds to the government to finance its efforts to crack down on economic crime.
At least £220mn is locked away in suspended accounts, according to 2022 research by trade association UK Finance, with another £30mn to £40mn more being suspended annually.
Banks have called for years for a scheme that would let them release funds suspended because of suspected links to criminality. But they say that the current proposals would leave the risks related to the suspended accounts on their balance sheets even after the funds were transferred to the government, said people familiar with the matter.
This would be a “double liability” for banks, said one.
“There isn’t anyone at the moment that would be willing to take on that risk,” said another, who added that banks see the proposals as unworkable. They said the scheme amounted to asking banks to make “donations” to the government because accounting rules meant lenders would still be unable to unlock the suspended assets.
Accountants have been called in to try to resolve the impasse, said two people familiar with the matter. But one added that no easy solution has been identified.
Banks must suspend accounts or transactions that they suspect involve criminal funds. But many accounts are suspended indefinitely because authorities neither authorise the bank to unfreeze the account or investigate the case fully.
The new scheme, which would be voluntary for lenders, would cover bank accounts that have been suspended for at least seven years and would apply where the owner had not come forward, which often happens in economic crime cases.
Banks’ objections centre on ministers’ insistence that liabilities relating to the transferred funds would remain with the financial institution rather than passing to the government as happens with similar schemes, such as one for dormant accounts.
Unlike dormant accounts, suspensions follow a proactive decision by a lender and it is “not practical” for the government to take on liability for potentially unfair suspensions or adjudicate on customer complaints, said a person familiar with officials’ thinking.
The Home Office plans to pay banks a rebate if a customer later makes a claim to recover funds that have been transferred to the government, but these reimbursements would be subject to a cap.
“At present, the proposals for the release of these funds do not come with a proportionate level of risk transfer, due to issues with liability and accounting treatment,” said Aminah Samad, director of financial crime at UK Finance. Banks would continue to work with the government in search of a solution, she added.
The Criminal Justice Bill is at report stage in the Commons but much of the detail will be set out later in regulations.
Alex Norris, Labour’s shadow Home Office minister, said he backed the principle of a suspended accounts scheme to channel “money obtained by illicit means to good use”.
But he added: “The government have given strong undertakings that they have secured the buy-in of our financial institutions. Once again it seems reality doesn’t match the press releases.”
Norris argued that a Labour government would work with financial institutions to implement a “workable” scheme as soon as possible.
The Home Office said: “Criminals should never benefit from the proceeds of crime.”
It added that it was “committed to developing a scheme that works for industry, whilst protecting the rights of innocent customers” and would “continue to work closely with the financial sector and technical accounting experts” on the details.