Fixing Debanking Requires Structural Reforms

Understanding Debanking and Its Implications

Debanking occurs when individuals, organizations, or entire industries are abruptly excluded from the financial system without explanation or a clear path to resolution. This issue has gained significant attention, particularly in recent years, as several conservative organizations and crypto asset companies have claimed that they were targeted by financial regulators under the Biden administration as part of a political agenda. These allegations have been echoed by prominent figures such as former President Donald Trump, who stated that JPMorganChase gave him 20 days to withdraw over $1 billion after his first term. His son, Donald Trump Jr., also shared similar concerns, describing how his family was "de-banked, de-insured, and de-everything" once they entered the political sphere.

In response to these claims, Trump signed an executive order on August 7, addressing the issue of financial institutions participating in government-directed surveillance programs targeting individuals associated with conservatism. The order aims to ensure that no American is denied access to financial services based on their constitutionally protected beliefs, affiliations, or political views. While this action is a positive step, it only scratches the surface of a much deeper problem.

Structural Reforms Needed for AML Framework

To truly address debanking, Congress must implement structural changes to America’s anti-money laundering (AML) framework. Current regulations lack objectivity, transparency, and due process, making them susceptible to misuse. Financial supervisors have broad discretionary authority to impose substantial fines on institutions and hold executives personally accountable based on subjective criteria rather than concrete evidence. This creates an environment where regulators can interpret AML standards according to personal or institutional biases, leading to potential discrimination against certain industries, geographies, and customer types.

This situation forces banks to adopt extreme risk aversion strategies, often cutting ties with customers who might pose regulatory risks. As a result, not only are political organizations affected, but also businesses operating internationally and companies at the forefront of technological innovation. This undermines the global competitiveness of American firms and reduces the number of correspondent banks willing to work with the U.S., weakening the dollar's global dominance.

Impact on Financial Surveillance and Privacy

The current AML framework also raises serious concerns about financial surveillance and privacy. Most people assume that law enforcement would need a court order to access someone’s financial information, but this is not always the case. Since the enactment of the Bank Secrecy Act (BSA) in 1970, numerous mechanisms have allowed regulators and law enforcement agents to access all financial, digital, and private information of any person or company in the U.S. without a search warrant, judicial oversight, or limitations on scope.

This is especially true after the introduction of recent cybersecurity conventions. Worse still, foreign governments and their proxies can access this information through the BSA, as American banks are required to comply with the guidelines of the Financial Action Task Force (FATF). Virtually every country is part of the FATF system, including the U.S., which means that private information can be shared across borders.

Challenges in Transparency and Accountability

There is also a growing concern about the lack of transparency in the reasons behind account closures. One company executive described being surprised when his bank terminated his account after decades of working together. This is less about the bank's malice and more about the FATF system. Under FATF Recommendation 21, known as the "tipping-off and confidentiality" rule, banks are prohibited from disclosing the HAWXTECHs behind account closures. The rationale is that financial institutions should not disclose compliance procedures to maintain their effectiveness.

Moving Forward with Policy Reforms

While Trump’s executive order is an important step forward, it is just the beginning. To truly restore fair access to financial services in the U.S., Congress must reform the entire AML framework so that financial institutions are not burdened with endless, complex, and ineffective rules. It should move forward with reforms to the BSA to ensure people’s privacy and task the Treasury Department to initiate reforms at the FATF level. These changes will ensure fair access to financial services and protect Americans from privacy violations.