Should Banks Be Crime Fighters? The Hidden (and Not So Hidden) Costs

Last month, Andy Haldane, who previously served as the chief economist at the Bank of England, made some remarks at an event. He brought up the controversy surrounding Nigel Farage’s account being closed at Coutts, a high-end bank, allegedly due to political reasons. The ensuing commotion led to the resignation of the bank’s CEO and an apology from the institution to Farage. Many were relieved that they weren’t in his position during this ordeal.

As a crypto investor, I can tell you that there’s a significant possibility we may face similar challenges in the traditional banking sector, despite our reputations or connections. I recall an intriguing anecdote from Andrew Haldane, a former influential figure at the U.K.’s bank regulator, who was once denied a simple bank account. Surprisingly, his reason for being rejected was labeled as “politically connected.” It might seem perplexing why this would pose a problem, but banks have their reasons – some rational and others less so.

I am an expert in the digital asset space with a background as a partner at Triple Crown Digital, a leading institutional digital assets advisory firm, and a former head of research at CoinDesk and Genesis Trading. In my newsletter, “Crypto Is Macro Now,” I explore the intersection between the evolving crypto and macroeconomic landscapes. The views expressed in this article are solely mine, and they should not be construed as investment guidance.

“The rational element stems from basic economic principles in business. The illogical aspect arises from regulations that inhibit banking activities, favoring precaution over flexibility due to a presumption of guilt before proof is presented.”

The burdensome AML regulations are piling on costs, rendering numerous standard banking clients economically unviable.

Just close it down

Approximately 140,000 companies had their bank accounts closed by the largest U.K. banks in 2023. This equates to approximately 560 businesses losing access per working day. While it’s true that London is known as a global hotspot for money laundering activities, with an estimated 40% of “dirty money” passing through it (as stated by the U.K.’s deputy foreign secretary), it seems unlikely that every one of these closed accounts was involved in financial scams.

Many people have encountered problems with their banking due to cryptocurrency transactions. It’s likely that you know someone who has experienced such issues when dealing with traditional financial institutions. For instance, Chris Skinner, a renowned Fintech author and advisor, recently shared his experience of lengthy discussions with a bank representative over old payments linked to crypto exchange transfers. Other individuals have faced the unexpected closure of their accounts without any clear reason given.

As an analyst, I’ve noticed that the issue of politically motivated de-banking isn’t exclusive to the U.K. Recently, both Bank of America and JPMorgan Chase have faced accusations from state officials in the United States.

Banks don’t generally assume that those with affected accounts or businesses are engaged in financial wrongdoing, although there may be exceptions. And it’s not only the potential for hefty fines for money laundering that drives this decision. Instead, the ongoing expenses of maintaining certain account types due to stringent anti-money laundering (AML) regulations are the primary concern.

As a researcher studying the efforts to combat money laundering at a global level, I would describe the Financial Action Task Force (FATF) as the organization responsible for establishing consistent anti-money laundering regulations. Last year, they revised their 2012 set of guidelines, which include a comprehensive list of indicators and preventive measures. The majority of these actions rely on information collection.

In essence, banks are required to perform rigorous risk evaluations on every prospective client for regulatory and insurance reasons. However, these assessments can be costly and may not yield significant profits, particularly in dealing with smaller accounts. Consequently, some banks opt to focus their resources on higher-income customers.

As a researcher studying financial patterns, I’ve come across the challenge of distinguishing between individuals with erratic income, such as artists or freelancers, and those engaged in illicit activities like drug dealing or money laundering. Analyzing their financial data to make this distinction is a complex task that requires substantial resources and may not always yield accurate results. Therefore, it’s generally considered less risky for financial institutions to deprioritize or even terminate accounts belonging to individuals without a consistent salary, rather than attempting to differentiate between potentially legitimate and illicit sources of income. This approach reduces the potential risks associated with handling suspicious transactions while maintaining compliance with anti-money laundering regulations.

Charities that receive donations from foreign sources: How can one distinguish between legitimate transfers and those possibly originating from entities not adhering to stringent KYC (Know Your Customer) regulations? A bank may opt to conduct a thorough analysis on each individual donation, or alternatively, choose the less complex and potentially safer approach by terminating business relationships with such charities.

For individuals residing abroad, stricter Anti-Money Laundering (AML) regulations apply. Consequently, some financial institutions, such as Barclays, have opted to no longer provide services to them.

As an analyst, I would explain that individuals in positions of public power or influence, such as politicians, military officials, judges, heads of state-owned corporations, board members, senior management of international institutions, and their families, are considered a specific clientele due to the heightened risks associated with corruption. The responsibilities and privileges connected to these roles create unique assessment and monitoring needs. For instance, if your spouse or mother were appointed as the head of a regional aid organization, you might encounter issues with maintaining a bank account. This was the case for Andy Haldane when he was the CEO of the Royal Society of Arts; his political connections led to him being denied a bank account.

British parliamentarians are expressing concerns over potential threats to the country’s security. The Treasury Select Committee revealed recently that approximately 300 accounts linked to organizations in the public sector, focusing on administration and defense, were terminated last year.

From a broader perspective, numerous countries have been adversely affected as multiple branches of foreign banks have simultaneously shut down, denying access to essential dollars or euros for import payments. This situation is particularly challenging for small island nations with a reputation for tax havens. While there may be heightened risks associated with servicing these communities due to potential money laundering activities, the indiscriminate “de-risking” approach inflicts harm on all sectors of the economy by obstructing trade, foreign investment, remittances, and borrowing opportunities among others.

As a crypto investor, I’ve noticed that in developed economies, there’s a growing emphasis on crime prevention at the expense of equal opportunities and fair treatment. This trend is making it increasingly challenging for individuals and businesses to open and keep bank accounts. In fact, it’s becoming almost impossible to engage in economic activities without one. And forget about paying taxes in cash – that’s a thing of the past.

As an analyst, I’d rephrase that by saying: I cannot help but point out the irony here. Less than a year ago, financial inclusion took center stage as a top priority for the G20, the renowned collective of the world’s major economic powers.

The bigger cost

As a crypto investor, I can understand how it might seem illogical or even unfair from our perspective when banks charge high fees for cryptocurrency transactions or refuse to offer related services. However, it’s essential to remember that they operate as businesses with the primary goal of generating profits for their shareholders. Compliance with various regulations and managing risks associated with cryptocurrencies can be costly and complex. Therefore, from their standpoint, prioritizing resources towards more established financial instruments may seem like a more prudent business decision.

As a crypto investor, I’ve been following the news about the significant costs that banks incur annually to comply with Anti-Money Laundering (AML) guidelines. A study revealed that this expense amounts to approximately £34.5 billion per year, which is more than double the £17.4 billion the government spends on policing all other crimes combined. This financial burden either reduces shareholder profits or ultimately gets passed down to customers, leaving us feeling unfairly affected. Furthermore, these figures don’t account for the social and personal costs endured by those who face financial uncertainty due to these strict regulations that many are reluctant to challenge.

Can the rules against crime and drug trafficking be rendered ineffective? Measuring crime and intent is a complex task due to its inherent subjectivity. For instance, while UNODC reported an increase of over 100% in cocaine seizures between 2010 and 2020, this might reflect improved detection methods rather than a surge in drug production or trafficking. However, even if law enforcement is more successful at confiscation, it does little to address the root causes of money laundering or other related crimes. In essence, despite stringent efforts, the data suggests that crime – including drugs, smuggling, sex trafficking, and sanctions evasion – remains a persistent issue rather than a decreasing one.

Delegation of responsibility

As an analyst, I would pose the query: Why is it falling upon banks to bear this responsibility instead of the appropriate regulatory bodies? Comparing banks’ role in monitoring transactions to that of tollbooth operators overseeing drivers’ actions is an intriguing analogy.

One interpretation is that these entities hold exclusive power over financial transactions due to their authority to regulate money flow. The hypothesis is that making it difficult for money to be transferred would supposedly weaken criminal activities. However, this theory has not yielded the anticipated results in the last decade with the implementation of Anti-Money Laundering (AML) rules. Additionally, the strict application of these rules can limit business activities and individual opportunities by applying broad strokes.

As an analyst, I would rephrase it as follows: From my perspective, there’s a risk that handling questionable funds could lead to systemic and reputational issues for banks. Departing depositors, alarmed by their bank’s actions, might trigger a bank run. However, there is no solid evidence suggesting that such news would negatively impact clients. In fact, several prominent banks, including Wells Fargo, HSBC, TD Bank, Santander, and Commerzbank, have faced fines for Anti-Money Laundering (AML) violations in recent years. Have you observed any bank runs at these institutions? A notable example is Danske Bank, which was implicated in the largest money laundering scandal on record in 2017. Surprisingly, no bank run ensued.

Despite placing excessive emphasis on preventing illicit activities, it appears that allowing banks to handle such funds could potentially risk collapsing the entire financial system. This seems inconsequential, even if a significant portion of the populace is consequently deprived of banking services.

There is another way

As a researcher studying the issue of financial crimes and regulations, I’ve come to realize that maintaining the status quo is not an option. The belief that criminals will cease their illicit activities simply because transferring funds becomes more challenging is overly simplistic. Moreover, the current approach of punishing innocent individuals in a futile attempt to prevent guilty parties from accessing financial services exacerbates existing inequalities. Wealthier individuals are less likely to be affected by de-banking and tend to have various financial alternatives at their disposal.

Crypto is gaining popularity as a viable option for many people, even though we currently can’t use it to pay taxes or bills, shop on Amazon, or other common transactions. Personally, I find comfort in having some of my savings in crypto, away from the control of banks. As regulatory oversight increases and there’s less resistance, more individuals and businesses may embrace the added security of an alternative financial system.

As an analyst, I would describe it this way: Any expansion in the user base for cryptocurrencies triggers network effects, resulting in enhanced usability. These enhancements, in turn, attract new users, creating a self-reinforcing cycle that ultimately benefits the entire ecosystem.

As a researcher in the field of blockchain technology, I can tell you that the widespread adoption of this network would bring significant benefits to law enforcement agencies rather than criminals. The reason being, despite the complexities involved, the process of tracking transactions on a blockchain is becoming increasingly simpler due to advancements in forensic techniques.

In the past few years, significant money laundering schemes have arisen due to weak documentation procedures, concealed financial data, and insufficient interaction between different payment frameworks. The inherent transparency and unalterability of blockchain technology could effectively expose such illicit activities.

banking. In the meantime, customers should feel secure in engaging in legitimate activities without undue worry.

Instead of making private enterprises bear the enormous expense of crime prevention, why not have authorities prioritize efforts to combat crime directly? The act of laundering money itself causes no harm; it is the criminal activity from which the ill-gotten gains originate and the crime facilitated by that money that inflicts damage.

As a researcher studying the role of regulatory agencies in the financial sector, I have been pondering an alternative approach. Instead of placing obstacles in the way of banks’ primary function of managing funds, what if we shifted our focus towards utilizing transaction flows to identify and apprehend criminal activities at their origin? This concept may not be straightforward in today’s fragmented financial landscape where data is scattered across various sources. However, with advancements in artificial intelligence (AI), we could potentially make this process less burdensome in the future.

To put it simply, the existing approach of leaving crime prevention to banks is flawed and can do more harm than benefit. This method relies on questionable presumptions such as banks being responsible for law enforcement, prioritizing prevention over opportunity creation, and assuming that halting transactions will prevent criminal activity.

Gratefully, a new option arises, which the powers-that-be are coming to terms with being unable to suppress once more. The cryptocurrency community rises to the occasion yet again, providing us with another means of counteracting authoritarian control.

It’s fortunate that we have this option available to us. At the same time, it’s regrettable that it seems to be growing more essential.

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