17 May 2024

Overzealous regulation is causing debanking


‘Debanking’ entered the popular imagination a year ago when Nigel Farage announced that Coutts had closed his account because its managers disapproved of his political opinions.

It soon emerged that Farage was merely a prominent example of something that happens all the time, albeit usually for different reasons. In 2021/22, UK banks closed a total of 343,000 accounts, but rarely because of the customer’s political views. About half of these accounts were closed because banks couldn’t satisfy themselves that the customer was not laundering money.

The government responded to Farage’s debanking by imposing yet more regulations on banks. It required them to tell customers the reason their accounts are being closed and to give them 60 days’ notice. But these new rules do not address the underlying problem, which is caused by an abuse of governmental power.

To understand what the abuse is and why it causes debanking, imagine the government decided to create a legal duty to determine whether your friends have committed crimes and, if they have, to report them to the police. Every year, a police officer interviews you to assess your efforts. If deemed inadequate, you are fined £100,000. If a friend is convicted of a crime, and you haven’t reported them, this is also strong evidence that you weren’t trying hard enough.

Such a policy would result in mass ‘defriending’. I might keep my most honest friends, but I would get rid of any friend who strikes me as potentially dodgy or whose job puts them in temptation’s way – a politician or police officer, for example. Especially if I didn’t value the friendship very highly.

Of course, this would never happen in the UK. We’re not pre-unification East Germany. We don’t have a totalitarian government whose police coerce us into spying on each other.

Except in banking. Banks operate under a legal obligation to detect money laundering by their customers. If the Financial Conduct Authority deems a bank to have made insufficient effort to detect money laundering, it will fine the bank, potentially billions of pounds. Debanking is the inevitable result.

The risk is acute for professionals who take payment in cash, such as sex workers and car-washing businesses. For all banks know, anyone making frequent cash deposits could be banking the proceeds of illicit activity. The bank could investigate to discover the true source of their cash. But if an account is worth only £500 to the bank and the investigation would cost more than this, the profitable way to obey anti-money laundering (AML) regulations is simply to close the account.

Cash-based workers and others, such as charities and expats, do not suffer the penalty of having their accounts closed because the evidence proves beyond reasonable doubt that they are guilty of money laundering. They are penalised because the cost of gathering evidence that proves their innocence is too great in relation to the value of their accounts. This is why banks close 170,000 accounts a year in response to AML regulations when only 1,000 people are convicted of money laundering.

Some say it is better that 10 guilty men go free than one innocent man be punished. When it comes to money laundering, the UK government apparently believes it is better that 169 innocent people be punished than a single guilty man go free. And that twice as much should be spent on policing money laundering as is spent on policing all other crimes put together. While the government spends £17bn a year on the police, UK banks spend £34bn complying with AML regulations – a cost ultimately borne by bank customers through higher fees and interest rates on debt.

The problem arises from ideological corruption. A legal obligation for private citizens to act as police should be anathema to British politicians. But British politicians have abandoned even the pretence of being committed to liberal principles, including the rule of law.

The UK’s AML regime comes from the Financial Action Task Force (FATF), established by the G7 in 1989. In a 2012 publication on ‘best practice in confiscation’, FATF advises member governments to steal the property of alleged money launderers even when they have ‘been acquitted of the predicate offence’.

1989 was also the year the Berlin Wall was pulled down. Those few who lament the passing of communist East Germany will be pleased to see that its ways have found favour with British politicians.

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Jamie Whyte is a partner at CAP, a litigation risk management startup and the author of the new Institute of Economic Affairs paper 'Debanked: The economic and social consequences of anti-money laundering regulation'.

Columns are the author's own opinion and do not necessarily reflect the views of CapX.