Deputizing banks for citizenship verification could halt America’s financial greatness

A few weeks after he was confirmed as Treasury secretary last year, Scott Bessent delivered a message to the American Bankers Association that regulatory relief was coming, especially for small and midsize banks. Bessent stated, “Community bankers can make America great again—if the government will let you.”

In many ways, Bessent and his fellow regulators from the Trump administration have kept that promise by reducing regulatory barriers to let banks help make America great. The Trump financial regulators have started to remove longstanding red tape from the Obama era hindering the formation of new – or de novo – banks while moving away from the burdensome international Basel III capital regulations the Biden administration attempted to foist on American banks. Trump regulators also reversed harmful Biden-era anti-merger policies that would have blocked smaller banks from combining, preventing failures in the banking industry similar to Spirit Airlines’ collapse in the airline sector.

Unfortunately, an executive order (EO) reportedly under consideration by the Trump administration would deliver a harmful blow to banks’ ability to keep America competitive internationally and serve Main Street customers and small businesses. The potential EO could effectively deputize banks to enforce immigration laws by requiring them to obtain from new and existing customers documents such as passports and birth certificates to prove citizenship or residency status.

Banks are already required to verify the identities of their customers through the know-your-customer mandates of laws such as the Bank Secrecy Act (BSA). Banks must collect Social Security numbers from customers and require IDs such as driver’s licenses to open new accounts. They are also required to file a “currency transaction report” (CTR) for every cash transfer of $10,000 or more and “suspicious activity reports” (SAR) on transactions suspicious activity reports” on all transactions of $5,000 or more if they have – as described by vague and broad regulatory language – “no … apparent lawful purpose or are not the sort in which the particular customer would normally be expected to engage.”

The lack of focus of these mandates has drawn bipartisan criticism over the years because innocent Americans can become targeted in a process that sometimes leads to debanking. Conservative lawmakers such as Senate Banking Committee Chairman Tim Scott (R-SC) have sponsored bills to raise thresholds for reporting requirements of SARs and CTRs to reduce paperwork and allow for more targeted data collection. In his address to the bankers’ group, Bessent promised to “advocate for changes” to the BSA framework “to truly focus on national security priorities and higher-risk areas and explicitly permit financial institutions to de-prioritize lower risks.”

Yet the potential EO would do the opposite of this. It would double down on a broad dragnet approach that spreads discomfort to everyone rather than pursue a focused approach that targets lawbreakers and national security threats. According to the Wall Street Journal, “The action, which is primarily under review by the Treasury Department, could ultimately task banks with asking for an unprecedented new category of documents, such as a passport, from both new and existing customers who want to maintain a bank account in the U.S.”

Many harmful consequences could result from requiring banks to conduct this unprecedented level of surveillance of their customers. First, it could hinder the ability of banks to attract legitimate international business. Not only is it not illegal for banks to have foreign depositors, it is actively encouraged by federal law. For decades, the tax code has exempted the bank accounts of “nonresident alien” depositors from interest taxation.

Foreign deposits give banks more cash to boost their ability to lend to American businesses and consumers. In Florida, for instance, small and large banks have significant deposits from residents of Latin American countries. Coral Gables magazine reports that “there’s an international side to nearly every bank in the area.”

Subject to national security restrictions, the US government has treated – and should continue to treat – American banks selling financial services to foreign customers as a net benefit for the economy in the same sense as American automakers selling cars to foreign drivers. Any broad disruption to this market process that discourages legitimate international business for US banks would make America less globally competitive.

Ironically, the greatest harms of the EO under consideration could be visited on US citizens of rural communities that have never left US borders. Many rural Americans do not have passports or easy access to birth certificates stored in distant courthouses. Requiring them to cut through mounds of red tape to collect these documents might prompt Americans already suspicious of government overreach to simply withdraw from the US banking system. These withdrawals would have ripple effects in rural communities, harming community banks and the businesses they lend to.

An analysis from the center-right think tank American Action Forum concludes that a sweeping verification system like the one this EO proposes “could result in anywhere from 33.1–73.3 million additional paperwork hours and $2.6–$5.6 billion in additional costs.” That doesn’t seem like a cost worth paying given the many tools already available to target lawbreakers and national security threats, and that American banks – including community banks and innovative de novo startups – are essential to American dynamism and prosperity.

Main Street banks can’t play their role in keeping America great, to borrow phrasing from Bessent, if they are weighed down by mandates that would make them lose many legitimate depositors. Let’s focus on catching the bad guys and removing barriers that inhibit the good guys from doing more good.