What do Melania Trump, the Pacific island nation of Nauru, and Christian missionary charity Timothy Two have in common? All have been recent victims of de-banking (also called de-risking), which is the closure of bank accounts by banks which perceive the customer to pose an unacceptable regulatory, legal or reputational risk. De-banking has been around for a while and is becoming more prevalent throughout the world, with some government agencies now stepping in to examine what is an increasing societal problem.
Banks and other financial institutions are wary of ever increasing sanctions and anti-money laundering regulations from their financial regulators, and failure to comply with these regulations can result in enormous fines, embarrassing headlines and tattered reputations. Last month it was announced that TD Bank will pay a $3 billion fine as a result of what the U.S. Justice Department said were “long-term, pervasive and systemic deficiencies” in its procedures to monitor suspicious transactions. These regulatory failures by TD Bank allowed drug cartels to launder hundreds of millions of dollars through TD Bank accounts, transactions which should have been reported as suspicious to the U.S. Treasury Department. The fine is the largest ever issued to a bank by its regulator for anti-money laundering failures. In order to avoid the bad headlines TD Bank is experiencing, many banks are being overly cautious and closing the accounts of those who pose a risk that they feel is outside of their tolerance, sometimes not even providing an explanation to the customer as to why their accounts are being closed.
News reports out of the United Kingdom last year revealed that British banks were closing more than 1,000 bank accounts every business day, a trend which has increased markedly in recent years. In 2016-17, 45,000 accounts were shut down by British banks, while in 2021-22, over 343,000 accounts were closed. The most publicized of these was the closure of the Coutts account belonging to U.K. politician Nigel Farage, one of the key figureheads behind the 2016 referendum in which the U.K. voted to leave the European Union. The bank closure was widely reported in the media and sparked outrage from political supporters of Farage. It also resulted in the resignation of several top executives at Coutts’ parent company due to the perceived de-banking of Farage for his political views.
Former (and future) first lady Melania Trump has also opened up about her own experience with de-banking. In her recent memoir she states that, after the Trumps left the White House in 2021, she was shocked to learn that her long-time bank decided to close her account. In addition, the bank also refused to open a new bank account for her son Barron. She alleges that the bank was engaging in political discrimination. One issue may have been that Melania is deemed to be what financial institutions call a politically exposed person, or PEP for short. A PEP is an individual who holds a high-level political position or someone who has a close association with such a person. Due to the fact that PEPs hold positions that can be abused for offenses such as bribery or corruption, they are deemed to be high-risk for money laundering purposes, and as such many banks will see them as a money laundering risk that is not worth whatever financial benefit the bank may get from maintaining them as a client. Many PEPs, especially those from higher risk jurisdictions that are known for high levels of corruption, may struggle to maintain the access to the banking system that most of us take for granted.
While the de-banking of certain individuals due to their high risk profile is a problem that needs to be addressed, the issue is taken to the extreme when considering that an entire nation may lose access to the global banking system. Nauru is a small island nation in the middle of the Pacific Ocean with a population of around 12,000. Australia’s Bendigo Bank is the only bank in Nauru, and last year they announced that they would cease their operations in the country in December 2024, a date which has since been pushed back to June 2025. This presents a numbers of problems for Nauru, the main one being that all monetary transactions in the country will need to be made in cash. Employers will need to pay their employees in cash, and cash will be the only form of payment available for goods and services, including the payment of taxes. This scenario also brings up major complications when considering how to settle international trade deals. Why is Bendigo Bank pulling out of Nauru? Chalk it up to the unwillingness of banks to deal with money-laundering risks and going with the easier alternative of simply not providing banking services. Correspondent banks, which are the large, international banks (think JP Morgan Chase and HSBC) that facilitate international financial transactions with smaller banks such as Bendigo, are leery of processing transactions with Nauru, and as such international transfers to and from Nauru can go through Australia only. These correspondent banks are likely put off by Nauru’s reputation as an unregulated haven for money laundering which was earned due to the nation laundering billions of dollars for Russian criminals in the 1990s and early 2000s and subsequently being blacklisted by the global financial crime watchdog the Financial Action Task Force. Even though Nauru has cleaned up its act since that time, bad reputations can be very hard to shake, and the compliance departments at banks will see transacting with Nauru as high risk/low reward and thus not worth the trouble.
One type of bank customer that has had many problems of late in having its banking services restricted is the non-profit sector. Charities are finding increasing difficulties with their banks, as shown in a recent survey conducted by the U.K.’s Charity Commission in which 42% of British charities experienced bad service from their banks in the past year. The survey also revealed that 6% of charities had their bank accounts either frozen or closed. This presents enormous organizational problems for charities. The problem is two-fold – banks don’t see most charities as profitable customers, and also see them as a potential money laundering risk, and this high risk/low reward scenario means that the easy business solution for the bank is to cease providing the charity with banking services. There are several reasons why a bank may deem a charity to be high risk from a money laundering perspective:
- Their source of funding can often come via donations from anonymous individuals, sometimes coming from numerous countries, which can make it difficult for charities to identify and report suspicious activity;
- Many charities operate in poor, impoverished countries which lack the solid anti-money laundering laws and regulations that developed countries have introduced;
- Charities may have directors or trustees that are based overseas, and thus difficult for the bank to contact and verify their identity.
How do charities deal with being an undesirable customer in a time of increasing regulatory standards for banks? The solutions for some charities is to open accounts with more than one bank, thus having a back-up bank ready to turn to in case they should face unexpected closure. Another is to work on developing their relationship with the bank, perhaps in having a relationship manager there that they connect with regularly in order to develop trust and help the bank understand the charity’s operations. However, it’s still an uphill climb as banks see their compliance costs and burdens increasing, and will sometimes deal with this by eliminating a relationship that they simply see as too risky.
