UPDATE 1-Lax UK bank oversight aids Nigeria graft -watchdog
* Report says banks took funds from corrupt politicians
* Urges tighter enforcement of money laundering rules
* HSBC says Global Witness findings are misguided
(Adds mention of RBS purchase of NatWest, paragraph 4)
LAGOS, Oct 11 (Reuters) - Britain needs to enforce money laundering regulations more strictly after some of its leading high street banks accepted millions of pounds in deposits from corrupt Nigerian politicians, a graft watchdog said on Monday.
Global Witness said in a 40-page report that five banks had taken millions of pounds between 1999 and 2005 from two former Nigerian governors accused of corruption, but had failed sufficiently to investigate the customers or the source of their funds. ( www.globalwitness.org )
It said that in failing to do so, Britain's Barclays (BARC.L), NatWest (NWB_pa.L), Royal Bank of Scotland (RBS) (RBS.L) and HSBC (HSBA.L), and Switzerland's UBS UBSN.VX, might not have broken the law but had helped to fuel corruption in Nigeria.
HSBC said the allegations were "misguided". The four other banks and Britain's regulator, the Financial Services Authority (FSA), declined to comment. RBS took over NatWest in 2000.
"The FSA needs to do much more to prevent banks from facilitating corruption. As yet, no British bank has been publicly fined or even named by the regulators for taking corrupt funds, whether willingly or through negligence," Global Witness said in the report.
"This is in stark contrast to the United States, where banks have been fined hundreds of millions of dollars for handling dirty money."
Global Witness acknowledged that British regulation might have moved on since 2005, but said there were still gaps in the system, particularly regarding funds from "politically exposed persons" (PEPs) deemed to pose a higher money laundering risk.
"As a bank that has been at the very forefront of developing global PEP guidance over the last decade, we are deeply disappointed with these misguided allegations," a spokesman for HSBC said when asked about the report.
"Rest assured, rigorous and robust compliance procedures were followed diligently. To ignore this is to ignore the facts," he said.
Barclays, HSBC and UBS are all members of the Wolfsberg Group, an international body set up in 2000 to try to improve global anti-money laundering procedures.
An industry source said HSBC was one of the few banks to have had a PEP policy in place since 2001, before regulators introduced any such requirement.
Global Witness said its findings were based on court documents from cases brought in London by the Nigerian government to get funds returned that it said had been stolen by two former state governors -- Diepreye Alamieyeseigha of Bayelsa state and Joshua Dariye of Plateau state.
Alamieyeseigha was accued of corruption in 2005 when he was caught with almost a million pounds in cash in his London home, and was briefly jailed in Nigeria after pleading guilty to embezzlement and money laundering charges two years later.
Dariye was arrested in 2004 in London and was found to have purchased properties worth millions of pounds even though his legitimate earnings amounted to the equivalent of 40,000 pounds ($63,500) a year.
He returned to Nigeria, where the anti-corruption agency has accused him of looting public funds. He has denied wrongdoing.
Global Witness did not provide evidence that the funds accepted by the banks were the direct proceeds of any crime.
Africa's most populous nation is regularly ranked one of the most corrupt countries in the world.
Most of its 150 million people survive on $2 a day or less, yet the country is one of the world's top champagne importers and its wealthiest residents are among Africa's richest.
The former head of its EFCC anti-corruption agency, Nuhu Ribadu, has estimated that corruption and mismanagement swallow about 40 percent of Nigeria's annual oil income.
"Without access to the international financial system, it would be much harder for corrupt politicians from the developing world to loot their treasuries or accept bribes," Global Witness said in its report.
Britain's coalition government plans to revamp its financial sector, scrapping the FSA by the end of 2012 and replacing it with a regulator that will operate as a subsidiary of the Bank of England; a new white-collar crime agency; and a new consumer protection and markets authority. [ID:nLDE65F1L4] (Additional reporting by Kate Holton in London; Editing by Kevin Liffey)