Why Banks No Longer Want Your Money
When I was nine years old, I opened my first savings account at a small bank in West Virginia.
I emptied my piggy bank of pennies, nickels, and a few dimes and quarters (the dimes and quarters were still made with 90% silver at the time) and put them into a small satchel. Then I rode the city bus to the stop nearest the bank and walked the rest of the way.
The teller, I suspect, was a bit amused when the small boy at her window announced that he wanted to open a savings account. I filled out a card with my name and address and emptied the contents of my satchel onto the counter. It came to around $20. She gave me a savings book and told me that every month I would be earning five or six cents in interest. (Those were the days when even small savings accounts earned 4% or 5% interest.)
The last step was priceless. To activate the account, the teller told me, “Have your mommy sign this form.” She handed me a single page form for one of my parents to sign.
There was no due diligence procedure. No photo ID required. No “Know Your Customer” formalities. No background investigation to ensure that the proceeds of my piggy bank did not represent laundered funds or would be used for terrorist financing. No computerized analysis to determine if the bank needed to report my cash deposit as a “suspicious transaction.”
A half-century later, times have certainly changed. I suspect that today, no bank anywhere would allow a nine-year-old to open an account without a great deal more scrutiny. And very likely, with a much larger minimum deposit.
Indeed, banks are now actively culling their accounts to end relationships with clients viewed as risky or unprofitable.
The “de-risking” phenomenon has led to banks terminating accounts of customers viewed as presenting financial, regulatory, or reputational risk. Teagan Presley was one of them. In 2014, Chase Bank closed her account. Chase informed her it had closed her account because she was prominent in the “adult” film business, starring in more than 70 movies.
Presley’s experience is merely the tip of the iceberg. US and global banks have closed the accounts of tens of thousands of politically incorrect customers. They include gun sellers, coin dealers, fireworks suppliers, dating services, US citizens living abroad, Muslim students, money services businesses, and diplomats from third-world countries.
All these individuals and businesses, once de-risked, find it difficult or impossible to obtain banking services. I’ve personally experienced de-risking several times when I’ve tried to set up accounts for businesses I own or structures I’ve put together.
“It’s nothing personal, Mr. Nestmann,” one banker told me. “Our compliance algorithm gave your application a higher risk score than we’re willing to accept.”
It should hardly come as a surprise that banks are trolling through their accounts to end “undesirable” relationships. Financial institutions worldwide have been involuntarily enlisted to fight the War on Drugs, the War on Terror, and the War on Money Laundering. Their duty of discretion and care for customers has been replaced by an overriding duty to serve as unpaid spies for law enforcement agencies. Banks that refuse to go along face fines and possible loss of their charters. Individual bankers face imprisonment for failing to detect activities that an investigator later determines should have been flagged as suspicious.
If a bank perceives a customer as “high risk,” it’s safer to close their account – or refuse to open it at all – than to possibly face stiff fines and even criminal prosecution.
Spying on customers, though, isn’t cheap. The cost to comply with just one law – the Foreign Account Tax Compliance Act (FATCA) – is estimated to be between $100,000 and $1 million per bank. And of course banks must pass these costs on to its customers. That’s a big reason why bank fees and deposit minimums are skyrocketing. One bank I deal with in Panama even instituted a $250 annual “compliance fee.”
A natural corollary to de-risking is closing unprofitable accounts, even if they present no regulatory risk. British banking giant Barclays has fired 17,000 of its least profitable clients since 2014. The same software used to identify risky clients can be tweaked to rank customers by profitability. If your account isn’t generating sufficient return on the bank’s investment, you’ll be shown the door.
There are no simple solutions to deal with this trend. We advise clients to hold multiple accounts to avoid having the closure of one account shut down their business or prevent them from maintaining normal banking relationships.
There’s also a tradeoff between the complexity of a structure set up for asset protection and the ability to obtain banking services for it. For instance, if you create a company in the British Virgin Islands owned by a Cook Islands trust, you may find it difficult to obtain banking services. An account in your own name will be easier to open and maintain – although it will also be much less protective.
In the long run, though, technologies will develop to bypass banks altogether. It’s already happening. Need a loan? You no longer need to go to a bank to borrow money; peer-to-peer services such as Lending Club instantly match borrowers with investors who have money to lend. Need to make or receive payments? Blockchain technology used by Bitcoin and similar digital payment systems allows you to securely send and receive payments without a bank.
So if one day you receive a letter from your bank notifying you that your account has been closed, try to smile. In the not-too-distant future, banks will be obsolete.
Protecting your assets (and yourself) against any threat - from the government, the IRS or a frivolous lawsuit - is something The Nestmann Group has helped more than 15,000 Americans do over the last 30 years.
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