Debanking May Be a Problem for Melania Trump and Many Others
In her new memoir, former First Lady Melania Trump reveals that she was abruptly dropped by a bank with which she had a long-standing financial relationship. She also discloses that her son, Barron, was blocked from opening a new account at the same bank, the name of which she does not reveal.
It’s unclear from the memoir if the bank harbored concerns about the legality of her deposits, or if bank associates were motivated by animus against the Trump family, since banks and not required to alert customers about either of those things. But Melania believes the refusal to open an account for Barron, at least, was driven by political discrimination.
Banks, like other private businesses, have the right to refuse service to would-be customers —whether for reputational risks, financial risks, or compliance concerns. However, there is a growing sense that financial institutions are being “nudged” by state regulators to act in line with political priorities.
Debanking is an alarming problem in the banking industry. It is the practice of financial institutions refusing services for political reasons to individuals, companies, or organizations. The relationship between a firm’s discretion, preference, and behind-the-scenes governmental pressure on financial firms has grown more intertwined since the 2008 financial crisis. Following the 2008 crash, a host of new laws and regulations were introduced around the world, such as the Dodd-Frank Act and Basel III, respectively, increasing regulatory scrutiny on banks’ risk management and corporate governance practices.
Most notoriously, the Obama administration’s “Operation Choke Point” targeted specific industries, such as firearms and ammunition manufacturers, by pressuring banks to cut off financial services. The initiative received blowback and revealed how government regulatory power can be misused to limit financial access. More recently, regulators have pressured banks to deny financial services to crypto-related businesses in what is being called Choke Point 2.0.
Debanking is a bipartisan concern. Earlier this year, Sen. Elizabeth Warren (D-Mass.) and other prominent Democrats sent a letter to the J.P. Morgan Chase CEO expressing concern that the firm was disproportionately closing accounts belonging to Muslim Americans and other minority groups.
Since the 1990s, the Bank Secrecy Act (BSA) has required financial institutions to file “Suspicious Activity Reports” (SARs) when they observe potentially illegal activities. The reports can also be filed for a wide net of activities, from large cash transactions to dealings with countries and their nationals that the government deems high-risk.
Indeed, “Know Your Customer” rules – a policy dropped as a formal regulatory requirement due to public outcry but still informally pushed by regulators — demand that banks treat their customers as objects of suspicion or face large penalties. It’s no surprise banks serve the interests of the regulators before those of their customers, as regulators can shut them down.
Lawmakers are aware of the problem and have introduced bills aimed at curtailing regulators’ overreach. In 2021, HR 3502 Protecting Access to Credit for Small Businesses Act aimed to prevent federal agencies from pressuring financial institutions to deny services to legal businesses. Similarly in 2019, S 563 Financial Institution Customer Protection Act sought to prevent federal regulators from ordering or pressuring financial institutions to terminate customer accounts without a material reason, essentially preventing debanking based on reputational risk alone. Although neither bill became law, they show that some legislators are interested in preventing regulators from influencing a bank’s right to associate, or not associate, with their customers.
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