“Debanking” was once a neutral term. It is shorthand for freezing an account or denying bank services to an individual, business or other entity. Normally, the practice is a straightforward matter of de-risking. It reflects the current state of regulations as well as a bank’s efforts to avoid entanglement in financial crimes, frauds and other risky behavior. In today’s hyper-partisan environment, though, debanking is under fire as a politically-motivated practice.
How discriminatory is debanking?
The issue of politically motivated debanking appeared in Europe several years ago, and now, it has surfaced in the United States. Earlier this month, the White House issued an executive order which described a new category of “‘politicized or unlawful’ debanking.”
“Financial institutions have engaged in unacceptable practices to restrict law-abiding individuals’ and businesses’ access to financial services on the basis of political or religious beliefs or lawful business activities,” it reads.
The order goes on to cite examples of discrimination, and it lays out detailed requirements for the removal of “reputation risk or equivalent concepts that could result in politicized or unlawful debanking” from a bank’s written guidance.
That seems straightforward enough. But in the broader context of frozen bank accounts, the number of complaints alleging political or religious discrimination is vanishingly small.
The U.S. government has required banks to file Suspicious Activity Reports with the federal Financial Crimes Enforcement Network since 2014. In March, Reuters reviewed the network’s data for 2024 and concluded that about 4.5 million Suspicious Activity Reports were filed last year, about the same as in 2023.
In terms of political discrimination, a survey of records kept by the U.S. Consumer Financial Protection Bureau over the past 13 years reveals scant trace of subjective decision-making on the part of banks.
“Out of the 8,361 detailed complaints with the Consumer Financial Protection Bureau since the agency began taking them in 2012, only 35 include the terms ‘politics,’ ‘religion,’ ‘conservative’ or ‘Christian,’” Reuters reported earlier this week.
So, what’s the problem?
The new executive order on banking raised concerns that banks will be forced to allow some money laundering activity and other potentially criminal activities to slide past their Suspicious Activity Reports radar, while burdening banks with new requirements to review their past transactions. On the other hand, the order could have the opposite effect, as banks review their guidelines and tighten up their training procedures.
Suspicious Activity Report documents are complicated, and filling them out correctly is partly an art as well as a science. The reports enable federal law enforcement agencies to identify and investigate potential crimes that are particularly egregious, but regulators have long warned that common errors in reporting can mask the extent of a problem.
In 2023, for example, the Federal Deposit Insurance Corporation updated its list of common errors that can hamper law enforcement efforts. Many are simple fill-in-the-blank omissions, such as failing to identify the appropriate federal regulator, failing to specify an occupation or type of business, or failing to indicate if the bank has already contacted law enforcement.
These reports also include a crucial “free-flow” section in which banks provide a narrative description of the activity. “The Suspicious Activity Report narrative is often the basis for sophisticated data mining, as well as crucial decisions regarding whether to investigate a suspect further,” according to the Federal Deposit Insurance Corporation. “Incomplete, incorrect, illogical, or disorganized narratives can make analysis difficult and adversely affect users’ decisions.”
As Reuters reported in March, suspicious activity reporting indicates that political considerations are far and away in the background when a report is filed. The analysis of 2024 data reveals that the top reasons for filing a Suspicious Activity Report involve a suspect source of funds, check fraud, and transfers by electronic or wire means. The absence of any lawful purpose for the funds is another common trigger, as well as credit or debit card fraud, identity theft, account takeover, elder abuse and forgery.
Reuters’ findings strongly suggest that law enforcement should continue to prioritize financial crimes according to their impact. “The Financial Crimes Enforcement Network tracks more than 90 types of financial malfeasance, from Ponzi schemes to human trafficking, so opportunities for wrongdoing abound,” according to the analysis.
The response of banks
The executive order and accompanying fact sheet indicate that U.S. President Donald Trump’s administration seeks to shield other forms of wrongdoing. The documents cite participants in the January 6, 2021, insurrection among those harmed by “politicized or unlawful debanking,” as well as President Trump, who previously accused J.P. Morgan of refusing his business.
Nevertheless, the response from banks so far is muted-to-favorable. The Consumers Banking Association, Bank Policy Institute, American Bankers Association, and Financial Services Forum issued a joint statement thanking the administration for “its efforts to protect access to banking and rein in runaway regulations.”
The organization America’s Credit Union also reacted favorably, noting that the executive order requires regulators to “remove the use of reputation risk or equivalent concepts from their guidance documents.” The new requirement is in accord with America’s Credit Union, which advocates for removing reputational risk from supervisory exams.
It will be particularly interesting to see how America’s Credit Union and its members respond to the new executive order moving forward. Credit unions typically serve unmet needs in their communities, but many consumers and businesses are not familiar with credit unions in their area. In March, 12 credit unions in 10 states formed a new coalition aimed at raising awareness about the role that credit unions play in their communities.
