To Truly Fix Debanking, We Need Structural Reforms

Trump’s new executive order addresses political discrimination in banking, but we need deeper reforms to money-laundering laws and the Bank Secrecy Act to truly protect freedom and privacy.

Sometimes individuals, organizations, or entire industries are abruptly excluded from the financial system without any explanation or ways to resolve the issue. This is known as debanking. Several conservative organizations and crypto assets companies have claimed that financial regulators under the Biden administration debanked them as part of a political agenda. 

President Donald Trump has echoed these allegations. He has said that after his first term, JPMorganChase gave him 20 days to withdraw more than $1 billion from the bank. Donald Trump Jr. has similarly said, "Once we got into that political sector…we were getting de-banked, we were getting de-insured, we were getting de-everything. It was brutal."

To address this issue, Trump signed an executive order on August 7, stating that "some financial institutions participated in Government-directed surveillance programs targeting persons participating in activities and causes commonly associated with conservatism." It proposes solutions with the aim that no American is "denied access to financial services because of their constitutionally or statutorily protected beliefs, affiliations, or political views." 

While Trump's action is a good step, substantially deeper reforms are needed if his administration wants to end the weaponization of America's financial system and financial regulatory framework. Trump's executive order, as well as recent actions of the Federal Reserve Board and ongoing legislative proposals in Congress, address only the tip of the iceberg when it comes to the manipulation of banking regulations for either political or economic gain.

To truly fix debanking, Congress has to propose structural changes to America's anti–money laundering (AML) framework. These regulations can be weaponized given their lack of objectivity, transparency, and due process. Congress should also reform the Bank Secrecy Act (BSA), which allows the collection and sharing (even to foreign competitors) of virtually all the financial and private information of Americans without their knowledge or consent.

Current AML regulations give financial supervisors broad discretionary authority to impose substantial fines on financial institutions and hold senior executives personally accountable based on subjective criteria - such as perceived inadequacies in customer due diligence processes or alleged deficiencies in risk management frameworks - rather than concrete evidence of wrongdoing. This gives regulators considerable latitude to interpret AML standards according to individual or institutional biases, enabling them to (purposefully or not) discriminate against certain industries, geographies, and types of customers.

Consequently, banks are pushed toward extreme risk aversion, preemptively stopping cooperation with any customer who might pose regulatory risks. This not only leads to the debanking of political organizations but also businesses operating internationally and companies at the cutting edge of technological innovation, diminishing the global competitiveness of American firms. It also reduces the number of correspondent banks cooperating with the U.S., weakening the global dominance of the U.S. dollar.

This no-risk approach is also undermining America's ability to combat money laundering and illicit finance. Last year, American financial institutions collected about 4.7 million Suspicious Activity Reports and more than 20 million currency transaction reports, the MIT Technology Review noted. This imposes considerable costs on the private sector and creates a framework where law enforcement agents are flooded with low-value information, and as a result, cannot focus on the big issues.

Given the lack of data about the effectiveness of these tools, Congress should request an investigation into them. It should also establish a Financial Exclusion Monitoring Unit to track account closures and denials across the banking sector, investigate patterns of debanking, and publish periodic reports on the state of financial access in the country. So far, all we know is that about 12,000 complaints have been filed with the Consumer Financial Protection Bureau in the past two years. 

There is a separate issue related to financial surveillance. Most people would assume that law enforcement interested in accessing someone's financial information, for example, would require an official court order. But this is not the case. Since Congress enacted the Bank Secrecy Act (BSA) in 1970, the U.S. has established numerous mechanisms allowing 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 limitation on scope. This is especially true after the introduction of recent cybersecurity conventions.

Worse still, foreign governments and their proxies can access the information collected through the BSA, as American banks are required to comply with the guidelines of the Financial Action Task Force (FATF)—the international organization in charge of establishing global standards to combat illicit finance. Virtually every country is part of the FATF system, including the U.S.

While this is a new area of policy research, there is evidence that certain governments and their proxies are abusing the FATF system to obtain private information from other jurisdictions, including the United States. This is because FATF Recommendation 29 urges countries to cooperate with each other by sharing information and supporting the efforts of foreign law enforcement authorities. It also results from the fact that banks operate internationally, so they have to comply with the regulatory guidelines of other countries.

This all creates a framework where foreign governments can obtain our private information. In today's age of growing trade wars and intense technological competition, these data vulnerabilities represent a serious threat to American businesses, as their weaknesses can be easily exposed to their foreign competitors.

International guidelines are also involved in banks' inability to explain the reasons behind debanking decisions. One company executive told me that he found it "surprising" that 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 explicitly prohibited from disclosing the reasons behind account closures. The argument is that financial institutions should not disclose compliance procedures to maintain their effectiveness.

Trump's executive order is an important step forward and creates momentum for this policy reform agenda. But to truly restore fair access to financial services in the U.S., Congress must reform the entire AML framework so financial institutions are not bombarded with endless rules that are complex, subjective, and ineffective by design. It should move forward with reforms to the BSA to ensure people's privacy, and it should task the Treasury Department to initiate reforms at the FATF level. Together, these reforms will ensure people's fair access to financial services, and protect Americans from privacy violations.