When Nigel Farage’s bank accounts with Coutts were closed it threw the spotlight on an issue that has affected others for years – debanking. Edvards Margevics, Co-partner of CONCRYT, looks at why debanking is on the rise, the consequences of the
practice, and how to protect yourself against it.

Recent
UK figures show 2.7% of accounts held by small businesses have been closed by their banks in the last year, equating to more than 140,000 business accounts. MPs on the Treasury Committee collected this information as part of an inquiry into how many small-to-medium
businesses face being cut off from banking services. 

It would be nice to provide a definitive list of reasons that businesses get debanked. Banks including Lloyds and NatWest have cited fears over financial crime and fraud as the reason for most closures, and HSBC UK stated about two-thirds of the 26,000+
accounts it shut in the year up to the end of October were due to concerns over customers’ “financial viability”, or because the accounts were dormant. Unfortunately, the reasons cited in the inquiry were varied and sometimes vague. ‘Risk appetite’ ‘financial
crime concerns’ and ‘lack of information-sharing’ were among the explanations given for closing business accounts, often without notice.

This data has not only highlighted the risk of being debanked, but raised questions around the ethics of what seems to be an increasingly common practice.

Ethics of de-banking

The inquiry has raised questions about whether some customers are being wrongly categorised and wondering why their accounts are shut down unexpectedly, and some have even drawn the worrying conclusion that banks are more driven by profit and reputation
than tackling financial crime when they decide to debank a customer.

In defence of these institutions, increasingly arduous regulation in the years since the financial crisis has led banks to intensify their risk profiling operations to protect themselves against penalties where, for example, they are found to have facilitated
money laundering by clients. 

But since such profiling relies heavily on third-party due diligence databases, which have in certain cases been found to include inaccurate and defamatory information, it’s far from an exact science. Consequently, debanked individuals and businesses can
feel unfairly victimised. 

It’s easy to see why, when there are cases of individuals and organisations that are involved in politically sensitive issues, such as criticism of human rights abuses in certain states, being debanked as a result of their campaigning. 

And although all banks deny closing accounts based on a customer’s political or personal beliefs, there are

reports that the practice has also had a disproportionate impact on marginalised communities, including the Muslim community.

While banks enjoy broad discretion to end client relationships as they see fit, the increase in debanking sets a dangerous precedent for access to banking services. This is not a simple matter of a financial relationship ending; it has the potential to impact
issues around discrimination, data protection and defamation law.

It can be incredibly difficult for a business affected by debanking to prove it is a victim of discrimination, as banks rarely disclose details of their decision-making process, but the consequences are all too clear.

Consequences of being de-banked

Aside from struggling to handle transactions, not being able to receive funds, and encountering difficulties meeting financial obligations like paying employees and settling bills, debanked businesses face ramifications go beyond immediate financial inconveniences.

There is the risk of long-term reputational damage, and the possibility of being unable to open business accounts elsewhere. This is because in a predominantly online banking environment, financial institutions can access everything from transactional data
to behavioural insights. This data, including the reasons for debanking, could potentially be shared with other financial institutions, leading to one financial ostracisation to become systemic and impact the ability to open accounts or secure loans elsewhere.

How businesses can protect themselves from debanking

For those who fear they are at risk of debanking, there are protective steps that can be taken. 

Ensuring you have compliant policies and procedures in place; and that you register with the appropriate body for any applicable AML supervision, if required by law is an important first step.

Implementing good practices, such as keeping detailed information on source of funds to hand, is also important. This includes, where possible, official documentation that can be provided to any financial institution, if requested.

It’s a good idea to diversify accounts and services among multiple banking partners and maintaining positive, longstanding relationships if possible. Incorporating a company to take the individual’s place as an account holder, or a parent company to take
the place of an existing company, can also help. 

Businesses can also consider using alternative, crypto-based services, although these often work best alongside traditional banking services rather than replacing them entirely.

It’s important that businesses are aware of the risk of debanking, but there is a wider issue to be addressed. While institutions have the flexibility to implement their own debanking policies, there will always be the risk of differences in interpretation.
The lack of standardised criteria could be leading to inconsistencies in how debanking decisions are made and unfair practices. 

While businesses should act to protect themselves, the wider banking community should consider the effect debanking has on the integrity of the financial system.

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• Source: https://www.finextra.com/blogposting/26031/how-debanking-threatens-both-businesses-and-banks?utm_medium=rssfinextra&utm_source=finextrablogs