“We are all Nigels now.”
That was former chief economist for the Bank of England Andy Haldane speaking at an event last month. He was referring to the closure last year of right-wing politician Nigel Farage’s account at upscale bank Coutts, for what Farage insisted were political reasons. In the resulting fuss, the bank’s CEO lost her job, Farage got an apology, and we all breathed a sigh of relief that we weren’t in his shoes (for many reasons besides the bank issues, I imagine).
There’s a strong chance we will be, however, at least in terms of banking struggles. Haldane was talking about his experience of being denied a bank account. Yes, a well-respected former high-ranking official of the U.K.’s bank regulator was not an acceptable bank customer. The reason given was that he was “politically connected.” It may be puzzling why that would be a problem, but the bank in question (any bank, really) had reasons that are both reasonable and nonsensical at the same time.
Noelle Acheson is a partner at Triple Crown Digital, an institutional digital assets advisory, and the former head of research at CoinDesk and Genesis Trading. This article is excerpted from her Crypto Is Macro Now newsletter, which focuses on the overlap between the shifting crypto and macro landscapes. These opinions are hers, and nothing she writes should be taken as investment advice.
The “reasonable” part comes from simple business economics. The “nonsensical” part is from rules that prevent banks from doing banking business, because of a “guilty until proven innocent” preference for prevention over freedom.
The culprit is anti-money laundering (AML) rules that have added layers and layers of costs, making many “normal” bank customers unprofitable.
Earlier this year, a parliamentary committee determined that, in 2023, the U.K.’s largest banks closed the accounts of more than 140,000 companies – that’s roughly 560 registered businesses losing banking access per working day. Many of these were no doubt financial scams, since the U.K. is a global haven for money laundering activities (in a speech a couple of weeks ago, the U.K.’s deputy foreign secretary claimed that 40% of the world’s “dirty money” passes through London). But all of them? I don’t think so.
Individuals are getting hit as well. By now we probably all know at least one person who has had banking issues because of crypto asset activity. Fintech author and advisor Chris Skinner published a post last month detailing the hours of back-and-forth with a bank representative questioning every payment going back years, because of some transfers to and from a licensed crypto exchange. Others have had accounts simply closed with no explanation.
This is not just happening in the U.K. Over the past few months, both Bank of America and JPMorgan Chase have been accused by state officials of politically motivated de-banking.
It’s not that the banks suspect the affected individuals or businesses of committing financial crime (okay, maybe sometimes, but usually not). And it’s not just the fear of a whopping fine for allowing money laundering (although this is a real and reasonable concern). It’s the running cost of certain account profiles, imposed by questionable AML rules.
The Financial Action Task Force, the global body entrusted with establishing coherent anti-money laundering rules, last year updated its 2012 “recommendations” which set out a long list of flags and prevention measures, the bulk of which relies on information gathering.
Essentially, for compliance and also insurance purposes, banks need to do a risk assessment on each client. These are not cheap and are often unprofitable, especially on small accounts, making it a better business decision to just not serve low-income customers.
Artists, authors, actors, freelancers and many others have erratic income. Drug dealers and money launderers also have erratic income. How can you tell them apart? Well, that kind of analysis will cost a lot of money, and you might get it wrong, so it’s less risky to just de-bank anyone without a steady salary.
And charities that accept foreign donations. How can you tell which transfers are legitimate and which might be from entities not subject to the same rigorous KYC? A bank could run diagnostics on each and every donation, or it could take the simpler and safer route and de-bank charities.
What about citizens living overseas? The rules require additional AML scrutiny on these, so it’s easier to not serve them (Barclays, to pick one example, stopped serving expats last year).
“Politically exposed” people are an official client category unto themselves, with additional risk assessment as well as surveillance requirements given the possibility of corruption. This category is not just limited to politicians – it also includes military officials, judges, executives of state-owned corporations, board members and senior management of international institutions, etc. Oh, and their families. If, say, your partner or your mother gets promoted to head of a regional aid organization, you could get de-banked. As I mentioned above, Andy Haldane was denied a bank account because he was “politically connected.” At the time, he was chief executive of the Royal Society of Arts.
British MPs are starting to protest the potential damage to national security. A Treasury Select Committee disclosed earlier this month that over 300 accounts belonging to “public administration and defense” companies were closed last year.
Zooming out, entire countries have had to cope with local branches of foreign banks closing en masse, cutting off access to the dollars or euros needed to pay for imports. This is especially acute in small islands with a tax-haven reputation. There may be heightened money laundering risk in servicing these communities, but this blanket “de-risking” policy hurts all sectors of the economy by blocking trade, foreign investment, remittances, borrowing capacity and more.
Even in developed economies, prioritizing crime prevention over equal treatment and opportunity is making it increasingly difficult to get and maintain a bank account, just as it is becoming increasingly impossible to participate in the economy without one. It’s not even a case of whether or not an individual or business is part of the digital economy. Just try paying taxes in cash.
And to highlight the hypocrisy, just over a year ago “financial inclusion” was made a priority for the G20 group of leading global economies.
Of course, all this sounds very wrong. But from the banks’ point of view, it makes economic sense. After all, they are private businesses with profit-maximizing responsibilities to their shareholders. And compliance is expensive, especially for certain profiles.
A study last year estimated that following AML guidelines cost banks roughly £34.5 billion a year, double the £17.4 billion the government spends on policing all other crimes put together. This either eats into shareholder profits or gets passed on to customers – neither feels fair. And the numbers don’t take into account the social and personal cost for all those wracked with financial uncertainty, because of futile rules that few dare question.
Are these rules futile? Crime is impossible to effectively measure, intent even more so, which means we have no way of knowing just how much is prevented. But, to pick one example, a United Nations Office on Drugs and Crime (UNODC) report from 2022 showed that cocaine seizures in 2020 were more than double the 2010 level, and 5% higher than the previous year. Of course, this could mean that officials are better at tracing and seizure. But it’s more likely there’s just more drugs moving, and anyway, success at confiscation has little to do with money laundering. In other words, it’s hard to argue that crime – drugs, smuggling, sex trafficking, sanctions busting – is heading down, despite the heavy-handed and punitive approach.
The situation raises the question: why are banks shouldering this burden, rather than the relevant authorities? Holding banks responsible for what money is used for is akin to holding tollbooth operators responsible for what drivers do.
There are two answers. One is that they are the only ones who can, since they control the movement of money. Make the money hard to move by denying access to banking, the theory goes, and crime will crumble. Only, that hasn’t happened in over ten years of AML rules. And business activity as well as individual opportunity is curtailed in the application of generalities.
Another answer is that there could be systemic and reputational risk in handling dubious funds. Depositors shocked that their bank would stoop so low could decide to exit, triggering a bank run. But there is no evidence at all (and plenty of evidence to the contrary) that news of a bank handling illicit funds would upset clients. Over the past few years, AML-related fines have been levied against Wells Fargo, HSBC, TD Bank, Santander and Commerzbank, among many others. Have you heard about bank runs at these institutions? Denmark’s largest bank, Danske Bank, was accused in 2017 of what is probably the world’s largest money laundering scandal to date. No bank run.
And yet, the overbearing focus on prevention suggests that banks handling illicit funds would bring down the whole system. It doesn’t seem to matter if a meaningful chunk of the population is denied banking access as a result.
It’s clear something has to change. The assumption that criminals will stop being criminals because it’s harder for them to send money is, well, naïve. And the current system of punishing the innocent in a futile effort to choke off the guilty exacerbates inequality (the rich are less likely to be de-banked, and tend to have more financial alternatives). In yet another example of over-regulation weakening a sector’s reach, it also incentivizes the search for alternative systems.
Of course, crypto is becoming an increasingly practical alternative. For now, we can’t pay taxes with crypto, or electricity bills or our Amazon orders. But I, for one, feel safer keeping a chunk of my meager wealth out of the reach of banks. It’s likely we’ll see more individuals and businesses realize the relative security in having access to an alternative savings and transaction system, especially as regulatory overreach always spreads in the absence of strong pushback.
And in a virtuous and exponential loop, any increase in the number of crypto users delivers network effects that encourage usability improvements, benefitting the ecosystem as a whole and drawing in even more users.
What’s more, increased use of such a network would be a gift to crime fighters, not criminals, given the relative simplicity of tracing movements. (I’m not suggesting this is simple, “relative” is the key word here, but blockchain forensic techniques are progressing fast).
The large money laundering scandals of recent years were possible because of lax documentation practices, opaque transaction information and a lack of communication between payment systems. The transparency and immutability of blockchain networks should help to identify actual crime.
While greater use of crypto assets would be positive, I live in hope that banking regulators will realize how much damage they’re doing. Blockchain rails are not a feasible solution for most, not yet anyway, and economic activity would be better served by banks focusing on banking, with customers free to conduct legitimate activity without fear.
What if, instead of passing on the colossal cost of crime prevention to private businesses (and ultimately their clients), authorities instead focused on fighting the crime? Money laundering itself does no damage – that is done by the activity that generates the illicit money, and the crime that money facilitates.
What if, instead of impeding the key bank business of handling funds, agencies focused on using flows to trace criminals and prosecute them at the source? In today’s disjointed financial network, it is not easy to bring disparate buckets of data together – but, going forward, AI could make that less onerous.
In sum, the current system of delegating crime prevention to banks draws on faulty assumptions (that banks should be responsible for policing, that prevention is more important than encouraging opportunity, that blocking transfers will stop crime) and does more harm than good.
Mercifully, an alternative is emerging, one that the authorities are finally recognizing they can’t shut down. Yet again, the crypto ecosystem steps up to the plate. Yet again, it helps us resist authoritarian overreach.
We should be glad this alternative exists. We can also be sad that it appears to be increasingly necessary.
Note: The views expressed in this column are those of the author and do not necessarily reflect those of CoinDesk, Inc. or its owners and affiliates.
