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From the President: Closing the Door on Closing Accounts: Ending the Damaging Impact of De-Banking

By Rick Jones

Read more From the President columns.

In 2015, five defendants pled guilty to multiple felony counts, including the rigging of interest rates, the manipulation of currency prices and the manipulation of the LIBOR rate.1 The pleas for two of the defendants came in the wake of previous deals with the Department of Justice, signed in 2012, that allowed them to avoid prosecution.2 Earlier this year, related to a separate incident, another defendant pled guilty to a charge of conspiracy to defraud the United States. Despite multiple warnings by the Treasury Department, they allegedly failed to adequately monitor suspicious transactions likely tied to the Mexican drug trade.3 In addition to the lack of jail time faced by any of these defendants, however, was the notable fact that none of the plea deals barred them from continuing to operate in the same commercial business arenas where they were purported to be repeatedly running afoul of the law.

But these defendants are large, multinational banks. And to highlight the disparity in treatment between banks and individuals, both the Obama and Trump administrations granted waivers to several of these repeat offenders that allow their asset management divisions to sidestep rules that would have prevented them from managing pension and retirement accounts.4 David Enrich, the finance editor at the New York Times, commented on the perceived inconsistency:

The biggest takeaway from all of this is the yawning gap between the way big powerful corporations and banks are treated by the criminal justice system and the way individuals have been.5 

Indeed, individual citizens are unlikely to benefit from such latitude. In a cruel irony, individuals similarly situated with criminal records might not even be able to continue banking at the very institutions that have criminal convictions themselves. Formal statistics are difficult to pinpoint, but there are indications that individuals with records of criminal convictions are finding it increasingly difficult to open and maintain bank accounts. With no redress, they are left with few options when notified by their bank that their account is being closed.

The conviction need not have anything to do with banking and other offenses, and the extent to which a released citizen has re-integrated into society seems to matter little. LG,6 a former client at the Neighborhood Defender Service of Harlem (NDS), was a young woman with tremendous potential when she was arrested for agreeing to carry her boyfriend’s gun in her purse. This lapse of judgment would eventually lead to charges that she was part of a drug conspiracy.

The good news is that, with NDS help, LG graduated from college and managed to successfully put her ordeal behind her. Despite all her success, six years after the incident, LG had her bank card declined at a restaurant. After speaking to several people at Chase Bank and receiving conflicting stories, she learned that her account was being closed because of an “ethics clause.” A letter announcing the closure was never received: LG had been away at college. For two weeks, LG lived off her credit card as she waited for a check from Chase with her account balance. The anxiety and uncertainty of a service we all take for granted — a safe place to keep our money — was coupled with the shock and anger that all her efforts to win her life back were still not enough to put her past behind her. “It made me feel very insecure,” she recalled. Fortunately, LG has had no further difficulty with banking, but her experience lingers in her mind. LG described the emotional toll the uncertainty has had on her: “It makes me very nervous because it could happen again. In the future, would it be a problem with other banks? What if I apply for a mortgage? A loan?”

LG’s story is not unique. Richard Lipsky, a lobbyist who pled guilty to bribery and served three months after cooperating with the authorities, thought he had paid his debt to society. Within eight months of his publicized case, however, Chase sent him a letter. He had 30 days to conclude all business with the bank before his account was closed. No explanation was provided. Within two years, Citibank followed. Then, inexplicably, Bank of America sent him a similar letter a full seven years after his arrest. Mr. Lipsky described the frustration and uncertainty he felt: “What is unfair about how the process works … is that you don’t know why. The bank is not required to tell you and you are left to wonder what you did wrong. If it is because you were previously incarcerated, there should be some sort of redress to make sure you do not continue to be punished long after you have served your sentence.”

Banks, for their part, are likely just doing what they are told. In 2013, as part of President Obama’s Financial Fraud Enforcement Task Force, the Department of Justice initiated “Operation Choke Point,” an effort to deny perpetrators of consumer fraud the places needed to store and move their money.7 Related to Operation Chokepoint, the FDIC issued guidance at various points in time that listed categories of “high-risk” industries. Included in its list were merchants engaged in the sale of drug paraphernalia, pyramid-type sales, and Ponzi schemes.8 While the basis for government action was arguably reasonable on its face, many complained that several legitimate lines of business were caught in the net. In 2014, the House Committee on Oversight and Government Reform found that the DOJ “lacks adequate legal authority for the initiative”9 and, furthermore, the FDIC was “inject[ing] personal moral judgments into the bank examination process.”10 Some industry insiders identified a deeper issue. Charles Calomiris of Columbia Business School and the Hoover Institute wrote that Operation Chokepoint and FDIC guidelines were part of a larger problem with regulatory guidance:

In recent years regulators across the federal government have shifted from issuing formal rules to providing guidance. Financial regulators find regulatory guidance particularly expedient because it spares them the burden of soliciting comments, holding hearings, defining violations, setting forth procedures for ascertaining violations, and defining penalties for ignoring the guidance. Regulators prefer this veil of secrecy because it maximizes their discretionary power and places the unpredictable and discriminatory costs on banks and their customers.11 

Operation Choke Point and the FDIC guidance were more than mere suggestions for financial services providers. If a bank continued to do business with customers deemed a risk by the government, they left themselves exposed to “unsatisfactory Community Reinvestment Act ratings, compliance rating downgrades, restitution to consumers, and the pursuit of civil money penalties.”12 If ease of winning regulatory approval for certain business transactions was the carrot for banks to fall in line, the stick came in the form of “reputation risk,” fines and added operation costs if they did not.13 

These federal guidelines affected a diverse group of Americans. Gun shop owners were grouped in the same FDIC category as escort services, causing both to receive account closure letters with little notice.14 Members of the adult film industry and payday lenders similarly had their accounts abruptly closed without explanation.15 

Perhaps counterintuitively, financial institutions often shut out potential customers with criminal histories partly as a result of the overcriminalization of financial rules. Under the Bank Secrecy Act, which is an amalgam of vague and confusing laws regulating financial institutions both small and large, financial institutions and their employees can be held criminally liable for taking inadequate steps to prevent risky or suspicious customer transactions. For example, Western Union recently agreed to criminally forfeit $586 million after being prosecuted for, among other things, not doing enough to exclude risky customers from its services.16 Out of fear of such heavy-handed enforcement, many financial institutions, including both formal banks and informal money services businesses, simply exclude “risky” customers.17 An easy substitute for a genuine evaluation of risk involves looking at a person’s criminal history.

Because of this effect, NACDL has consistently opposed efforts to increase the punitive limitations on the types of customers financial institutions serve. For example, one of NACDL’s core points of opposition to recent “anti-money laundering” legislation is that it would encourage institutions to systematically exclude entire classes of customers for fear of liability.18 Financial institutions should not be threatened with criminal consequences for doing business with deserving populations.

Operation Choke Point was unceremoniously ended in 2017. The FDIC, for its part, issued revised guidance in 2015 encouraging banks to evaluate risk on an individual basis, not over broad categories.19 But the practice of putting pressure on an unfavored group through financial services continues. One such group is the rapidly expanding legal cannabis industry. Though legal in 29 states, marijuana is still illegal under federal law.20 National banks subject to federal guidelines, therefore, are reluctant to lend to marijuana businesses for the risk they would assume.21 Even credit unions and banks located wholly within states that have legalized marijuana are proceeding with caution. One executive of a Los Angeles-based credit union told the LA Times that, although his institution did business with the marijuana industry, the institution had a strict policy of not doing business with anyone with a criminal record.22 

The number of collateral consequences of those with criminal records is staggering. In 2014, NACDL released Collateral Damage: America’s Failure to Forgive or Forget in the War on Crime. In the report, we note the challenges faced by those with records — a group estimated at 25 percent of the adult population — as they try to re-enter society.23 Even if people have managed to overcome the significant hurdles a record creates in finding housing and securing a job, then they must find a bank willing to accept their business. We must challenge regulators on the wisdom of policies that force banks to make it harder for those released from prison to avoid going back.

A quick search for information on this quiet problem reveals a host of support communities and blogs with people searching for legitimate financial services that will accept them or their family members with criminal records. Some banks are addressing this need with pre-paid options and reduced service accounts.

But regulators can do more. They can reduce liability for banks and providers who work with those previously incarcerated. Changing the risk calculus for banks, making it so a criminal record is no longer prohibitive, will encourage them to serve a segment of the population very much in need of support. Lawmakers must also address the shortcomings in notice and lack of recourse that many experience. A form letter a week before an account closes — with no explanation provided and no procedure for contesting — can throw an individual and her family into emotional distress and financial uncertainty. The criminal justice system forgives the largest, most powerful banks of their misdeeds and welcome them to remain in the community. Surely the system can do the same for the most vulnerable individuals among us.

Notes

  1. Bill Chappell, Big Banks Pay $5.6 Billion, Plead Guilty to Felonies Over Currency and Rate-Fixing, NPR, May 20, 2015, https://www.npr.org/sections/thetwo-way/2015/05/20/408215382/big-banks-pay-5-6-billion-plead-guilty-to-felonies-over-currency-fixing-scheme. The London Interbank Offered Rate (LIBOR) is the interest rate at which international banks in London lend money to one another.
  2. Press Release, Department of Justice, Five Major Banks Agree to Parent-Level Guilty Pleas, May 20, 2015, https://www.justice.gov/opa/pr/five-major-banks-agree-parent-level-guilty-pleas.
  3. Kristina Davis, Rabobank Admits Ignoring Money Laundering Alerts; Forfeits $369 Million in Settlement, San Diego Union-Tribune, Feb. 7, 2018, http://www.sandiegouniontribune.com/news/courts/sd-me-rabobank-guilty-20180207-story.html.
  4. Andrew Ackerman, Labor Department Grants Banks Multiyear Waivers to Manage Retirement Plans, Wall St. J., Dec. 28, 2017, https://www.wsj.com/articles/labor-department-grants-banks-multiyear-waivers-to-manage-retirement-plans-1514496653?mod=searchresults&page=1&pos=3.
  5. What Will Waivers for Convicted Banks Mean for the Financial System? Knowledge@Wharton, Jan. 16, 2018, http://knowledge.wharton.upenn.edu/article/will-convicted-banks-get-reprieve.
  6. Name changed to protect client’s identity.
  7. Frank Keating, Justice Puts Banks in a Choke Hold, Wall St. J., Apr. 24, 2014, https://www.wsj.com/articles/frank-keating-justice-puts-banks-in-a-choke-hold-1398381603.
  8. Staff of U.S. House of Representatives Committee on Oversight and Government Reform, 113th Congress, The Department of Justice’s ‘Operation Choke Point’: Illegally Choking Off Legitimate Businesses? May 28, 2014, http://oversight.house.gov/wp-content/uploads/2014/05/Staff-Report-Operation-Choke-Point1.pdf.
  9. Id.
  10. Staff of U.S. House of Representatives Committee on Oversight and Government Reform, 113th Congress, Federal Deposit Insurance Corporation’s Involvement in ‘Operation Choke Point,’ Dec. 8, 2014, https://oversight.house.gov/wp-content/uploads/2014/12/Staff-Report-FDIC-and-Operation-Choke-Point-12-8-2014.pdf.
  11. Charles Calomiris, You May Be in a Risky Business If Regulators Find It Distasteful, Wall St. J., Feb. 9, 2017, https://www.wsj.com/articles/you-may-be-in-a-risky-business-if-regulators-find-it-distasteful-1486686512.
  12. Financial Institution Letter FIL-3-2012, Payment Processor Relationships: Revised Guidance (Revised July 2014), FDIC, Jan. 31, 2012, https://www.fdic.gov/news/news/financial/2012/fil12003.pdf.
  13. Frank Keating, Justice Puts Banks in a Choke Hold, Wall St. J., Apr. 24, 2014, https://www.wsj.com/articles/frank-keating-justice-puts-banks-in-a-choke-hold-1398381603.
  14. Robert Gearty, Gun Dealers Bid Adieu to Obama ‘Operation Choke Point’ Program, Fox News, Aug. 21, 2017, http://www.foxnews.com/us/2017/08/21/gun-dealers-bid-adieu-to-obama-operation-choke-point-program.html.
  15. Julia La Roche, Chase Shut Down the Bank Accounts of Some Porn Stars and Didn’t Tell Them Why, Business Insider, May 1, 2014, http://www.businessinsider.com/porn-star-chase-bank-accounts-2014-4.
  16. Press Release, Department of Justice, Western Union Admits Anti-Money Laundering and Consumer Fraud Violations, Forfeits $586 Million in Settlement with Justice Department and Federal Trade Commission, Jan. 19, 2017, https://www.justice.gov/opa/pr/western-union-admits-anti-money-laundering-and-consumer-fraud-violations-forfeits-586-million.
  17. Tracey Durner & Liat Shetret, Understanding Bank De-Risking and Its Effects on Financial Inclusion, Global Center on Cooperative Security, Nov. 2015, https://www.oxfam.org/sites/www.oxfam.org/files/file_attachments/rr-bank-de-risking-181115-en_0.pdf.
  18. Joint Letter from the National Association of Criminal Defense Lawyers and the American Civil Liberties Union to the House Subcommittee on Terrorism and Illicit Finance in Opposition to the ‘Counter Terrorism and Illicit Finance Act,’ Nov. 28, 2017.
  19. Financial Institution Letter FIL-5-2015, Statement on Providing Banking Services, FDIC, Jan. 28, 2015, https://www.fdic.gov/news/news/financial/2015/fil15005.pdf.
  20. James Rufus Koren, Despite Helping Hand from L.A., Drug Offenders Would Face Obstacles in Cannabis Industry, LA Times, Jan. 4, 2018, http://www.latimes.com/business/la-fi-cannabis-banking-equity-20180104-story.html.
  21. Id.
  22. Id.
  23. Nat’l Assn. Crim. Def. Lawyers, Collateral Damage: America’s Failure to Forgive or Forget in the War on Crime, May 2014, https://www.nacdl.org/restoration/roadmapreport.
About the Author

Rick Jones is the executive director and a founding member of the Neighborhood Defender Service of Harlem, which has gained national and international recognition for its early-entry, holistic, client-centered, community-based, team-defense approach to public defense. He teaches the criminal defense externship and a trial practice course at Columbia Law School, serves on the faculty of the National Criminal Defense College in Macon, Georgia, and is a member of the board of the International Legal Foundation.

Rick Jones
Neighborhood Defender Service of Harlem
New York, NY
212-876-5500
www.ndsny.org
rjones@ndsny.org 

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