Banks’ heightened concerns about their own exposure for facilitating client activities that could be claimed to constitute money laundering have resulted in what has become a very common new collateral consequence for individuals and small to mid-sized businesses that are touched by white collar criminal or regulatory investigations. There is a very high likelihood that they will be “fired” as a customer by their bank: told that their business is no longer wanted, and directed to close and transfer their accounts within two weeks or thirty days.
These account terminations have been seen in cases where the client was a locally based business that maintained run-of-the-mill accounts at the same branch for decades. They have occurred in cases where the client has not been found to have engaged in, or has even been accused of, any improper activity; where there has been no allegation that the client’s bank account has anything whatsoever to do with the potential wrongdoing; and where the wrongdoing consists entirely of income tax violations for maintaining an undeclared offshore bank account that had no connection to the client’s U.S. bank accounts. And in none of these instances was there even a hint of a financial transaction with an organization with ties to terrorism or to a country subject to U.S. economic sanction.
On one level, such account terminations are understandable from the bank’s standpoint. Particularly since the passage of the USA PATRIOT Act following 9/11, financial institutions are subject to a host of statutory and regulatory requirements requiring them to maintain “know your customer” programs, to establish anti-money laundering programs, and to file suspicious activity reports with regulators. These laws are all intended to push banks to take reasonable steps to avoid being used to move illegal payments through the financial system, and to alert law enforcement when they may have unwittingly been so utilized. While the specific legal requirements of bank anti-money laundering programs are for the most part vaguely defined, there are strong incentives, particularly in the current environment, not to test the boundaries. For a bank, the reputational harm of having its name mentioned in a publicized criminal or regulatory case can be significant, even if there is no allegation that the bank bore any culpability. Of course, no financial institution has a legal obligation to do business with any particular customer if it chooses not to.
But from the standpoint of the client, there are troubling aspects. One is the lack of process and judgment that is often brought to bear. It is apparent that in most cases, institutions are relying upon software systems that run database or news searches and sound an alert when a client’s name is mentioned in connection with an investigation. The client’s account activity is then typically reviewed against standardized criteria. If some undisclosed threshold is crossed, the account is designated for termination.
What is too often seen thereafter is that the client is unable to obtain meaningful review of this determination, even in cases where the client is able to provide some basic facts that should alleviate any real concern for the bank. First, in many cases, the termination notice from the bank appears to be intentionally crafted to make it as difficult as possible to locate any actual person responsible for the decision. Then, if that hurdle is cleared, the difficulty in getting a timely response, or a stay of the account termination while any “appeal” is under consideration, often makes the process untenable. Finally, if any appeal is permitted, often the individual conducting the review evidently has insufficient familiarity with the criminal or regulatory process to properly consider the matter.
While banks are understandably risk averse in this area, it is too simple to say that they avoid all risk by terminating the client when any law enforcement activity is afoot. Whenever any business enterprise terminates a client based on innuendo in the press or investigative activity wholly consistent with innocence, it risks harming its reputation by acting unfairly and bureaucratically. A well-run bank would endeavor to ensure that it has a sufficient process to intelligently consider proposed client terminations on a case-by-case basis and thereby minimize this kind of risk as well.
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