Earlier this month, President Donald Trump signed an executive order titled “Guaranteeing Fair Banking for all Americans,” which aims to eliminate so-called “debanking,” where individuals are targeted to lose banking services based on vague factors such as “reputational risk.”
In a July white paper, think tank America First Policy Institute noted that the practice began in 2011.
“In 2011, federal regulators began issuing informal guidance encouraging banks to consider ‘reputational risk’ associated with their current and prospective clients (FDIC, 2014). Reputation risk is the risk arising from negative public opinion (FDIC, 2008),” AFPI wrote. ‘Such considerations are inherently subjective. That subjectivity gives regulators great latitude; that, in turn, allows regulators biased against certain industries (such as gun manufacturers or cryptocurrency firms) to grade those industries as too risky, warning banks against doing business with them.
“Neither the Constitution nor any Congressional statute grant powers to the regulators to decide which lawful businesses deserve access to banking services. And yet, through vague terms like ‘reputational risk’ and the implicit threat of audit or enforcement action, regulators have coerced financial institutions into becoming the enforcement arm of an ideological agenda.”
Indeed, earlier this week, Fox News Business reported “major bank executives … were under pressure by the Obama and Biden administrations to deny services to individuals and businesses for political reasons.”
According to Fox News, debanking refers to the practice of banks closing accounts or denying services to individuals or businesses, often with no explanation. The practice originated as part of federal anti-money laundering laws and regulations.
“An entity can be de-banked after its transactions are marked suspicious, but in recent years, conservative and religious groups have accused banks of discriminating against them for their beliefs,” Fox News wrote.
Two bank executives speaking on condition of anonymity told Fox that banks were pressured to deny services to specific industries as part of operations Choke Point and Choke Point 2.0.
“When there’s ambiguity in the law, beauty is in the eye of the beholder, and for a long time, the beholder was the Obama and Biden administration,” the official said.
Debanking effort initiated by the Obama administration
A House Oversight Committee report found that “Operation Choke Point,” a DOJ task force whose aim was to “choke out” legal companies disfavored by the Obama administration, worked with bank regulators to label certain industries, including firearms sales, as “high risk.”
Trump ended “Operation Choke Point” in 2017 during his first term. However, a House Financial Services Committee hearing last week heard accusations that former President Joe Biden had rebooted the initiative and targeted crypto firms for debanking as part of “Operation Choke Point 2.0.”
According to AFPI, the earliest examples of debanking were in 2011, “when the U.S. Justice Department (DOJ) unsealed an indictment and civil complaint against executives at PokerStars, Full Tilt Poker, and Absolute Poker (also known as Ultimate Bet). Known as “Black Friday,” the Justice Department alleged that the executives of these online platforms had defrauded players of hundreds of millions of dollars (U.S. Attorney’s Office, Southern District of New York, 2011). The DOJ froze the assets and domains of all PokerStars and Full Tilt Poker’s U.S. accounts in an attempt to return lost funds. It took many individuals nearly a decade to recover their losses.
“In the wake of failed firearm legislation, the federal action to debank continued with ‘Operation Choke Point’ in 2013, which was an initiative authorized by the DOJ under the guise of investigating financial institutions believed to be conducting business with ‘firearm dealers, payday lenders, and other companies believed to be at a high risk for fraud and money laundering’ (U.S. Attorney’s Office, Southern District of New York, 2011).”
President Trump’s EO specifically points out Operation Choke Point.
“’Operation Chokepoint,’ for example, was a well-documented and systemic means by which Federal regulators pushed banks to minimize their involvement with individuals and companies engaged in lawful activities and industries disfavored by regulators based on factors other than individualized, objective, risk-based standards.”
The order requires banking regulators — and thereby banks — to remove “reputational risk” as a criterion for doing business with individuals or companies.
The order requires banks — among other requirements — within 120 days to “makes reasonable efforts to identify and reinstate any previous clients of the institution or any subsidiaries denied service through a politicized or unlawful debanking action … or any requirement in a Standard Operating Procedures Manual or Policy Notice related to a program or function of the Office of Capital Access, with notice of the reinstatement sent to the victim.”
Additionally the EO requires that “within 180 days of the date of this order, the Secretary of the Treasury, in consultation with the Assistant to the President for Economic Policy, shall develop a comprehensive strategy for further measures to combat politicized or unlawful debanking activities of financial regulators and financial institutions across the Federal Government, including consideration of legislative or regulatory options to eliminate such debanking.”
Kansas Bankers Association President and CEO Doug Wareham said his organization was pleased with the new EO that prohibits debanking.
“We applaud the administration’s Executive Order for addressing unlawful regulatory practices that have unfairly targeted law-abiding businesses and individuals based on their beliefs, ensuring fair treatment for all consumers and businesses, a goal shared by the Kansas banks,” Wareham said. “Banks should be free to lend to, invest in, and do business with any legal entity or activity without government interference, while also retaining the freedom not to engage, provided they comply with all laws, including fair lending and anti-discrimination laws.
“Regulatory overreach has too often hindered banks’ ability to serve as many customers as possible. We remain committed to a free-market approach where banks can assess risks individually and objectively, free from mandates that undermine sound banking practices or exclude lawful customers. We thank the administration for protecting access to banking and curbing excessive regulations.”
