Debanking (and debunking?)

He writes about two times when banks closed his accounts:

When these events happened, it was very annoying. I did not contemporaneously understand why they were happening. They required me to take time away from life, my day job, and business to make more phone calls, learn more things about the financial industry, and ultimately open new accounts.

That is the typical end to a debanking story. “And then, I opened a new account.”

Immigrant communities keep lists of which banks most want their business. So does the community of people who run small software businesses online. And so, while immigrants and small software companies deal with substantially more banking friction than the typical American working for Google or a university does, they are both very bankable.

I guess the moral of the story is that banking system is pretty opaque and shopping around is annoying, but it can be done? At least, if you are able to get information about the right banks to use.

He then writes about why some businesses have a hard time:

Running a money services business (MSB) is virtually universally called out as a high-risk activity by banks’ internal AML policies. Explaining why would require explaining the entire history and object of AML. Please just take as writ for the moment: all banks have a list, those lists rhyme with some variation, and MSBs are on all the lists.

Some banks have built out so-called enhanced due diligence (EDD) programs under which they will bank MSBs. Many banks have not; if a business banking at one identifies itself as an MSB, or if their ongoing monitoring of transactions suggests one is probably an MSB (for example, if there are ACH pull from Western Union for tens of thousands of dollars, which will suggest to an analyst that the business is probably a Western Union agent transaction above the de minimis threshold), the bank intends that business to get a letter [closing the account].

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It will often say that this decision is final. The decision is probably not actually final. That is an opening negotiating position, like “We don’t negotiate salaries.” If you don’t argue the point, it has achieved its objective. The grain of truth within it is “We probabilistically think that talking with the typical recipient of this letter is negative expected value.”

Why doesn’t the bank want to talk with the typical recipient about it? Because the typical MSB is a bodega with a sideline in alternative financial services.

But people who know more about banks will find a bank that's willing to have that kind of business as a customer:

Some MSBs are fintechs. They have teams of people who are extremely aware of financial regulation. Those professionals intentionally chose a bank which was capable of banking at least some MSBs. They then had a laborious bespoke conversation about risk tolerance and mutually agreed-upon compliance procedures.

He then writes about the Kafkaesque system that sometimes results in banks closing accounts for a mysterious reason: suspicious transactions.

No, the bank cannot explain why SARs triggered a debanking, because disclosing the existence of a SAR is illegal. 12 CFR 21.11(k) Yes, it is the law in the United States that a private non-court, in possession of a memo written by a non-intelligence analyst, cannot describe the nature of the non-accusation the memo makes. Nor can it confirm or deny the existence of the memo. This is not a James Bond film. This is not a farce about the security state. This is not a right-wing conspiracy. This is very much the law.

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It’s not just illegal to disclose a SAR to the customer. It is extremely discouraged, by Compliance, to allow there to be an information flow within the bank itself that would allow most employees who interact directly with customers, like call center reps or their branch banker, to learn the existence of SAR. This is out of the concern that they would provide a customer with a responsive answer to the question “Why are you closing my account?!” And so this is one case where in Seeing like a Bank the institution intentionally blinds itself. Very soon after making the decision to close your account the bank does not know specifically why it chose to close your account.

So I guess you find another bank.

Then he talks about cryptocurrency companies:

Perhaps a founder might ask a friend: “I run a legitimate business which happens to be in crypto and suddenly found my personal accounts closed. Why did this happen? I did nothing wrong.”

Playing the odds? The bank thinks there is an unacceptable risk that you will use your personal accounts to launder money on behalf of the business (and/or its customers, etc). The bank has insufficient controls to give them an appropriate level of certainty as to whether you’re doing this or not. They are disinclined to find out the hard way, so they invite you to find another bank.

Why do they think you might launder on behalf of the business? In part because of the extensive history of crypto companies laundering funds through the accounts of their founders and employees, specifically, and the banking industry’s highly-evidenced belief that businesses and their owners routinely commingle funds, generally.

Tether maintained access to the banking system by, among other mechanisms, having their executives establish accounts in their own names, stashing funds in the name of a lawyer, and using their non-executive employees as money mules. SBF had many talents but one of the main ones was money laundering. A major mechanism for that was loaning money (mostly customer assets and mostly sham loans) to employees then representing to banks (and others) that the employee was making an independent transaction not affiliated with FTX/Alameda/etc.

One would have to be very new or very incurious to be interested in crypto companies and be unaware of this history. Banks were rarely incorporated yesterday, and certain varieties of incuriosity-with-benefits are extremely frowned upon.

So, I guess the lesson is: don't work for a cryptocurrency company unless you're okay with banks being extremely suspicious of you?

This part is about legal philosophy:

[Advocates] believe they are entitled to something like individualized attention and a presumption of innocence. This assumption is deeply embedded in our legal system.

We do not have this assumption embedded in our banking system.

It would be laughable for credit accounts: “I have never defaulted on a loan from you, and therefore, you must give me the benefit of the doubt, and issue this loan.” No intellectually serious person expects that from banks. No, we construct probabilistic models about who is likely to repay based on observable factors, less some factors which society has disallowed us from using under the law. If we deem you insufficiently likely to repay the loan, even if you are still very likely to repay the loan, you don’t get the loan. Finance is not high school; 92% is not an A- anymore. We don’t have to wait for you to default, or have any individualized suspicion about you, or conduct a years-long fact-finding process.

And perhaps surprisingly, opening a bank account, though it's a debit account, it's also a credit risk:

For one thing, typical deposit accounts in the U.S. are actually credit products. It's baked in and can't be baked out without making them unfit for purpose.

This is due to how checks work, as he explained in a different article:

The capability to write checks requires a credit extension. The capability to accept checks requires a credit extension. Checks, by existing, promiscuously distribute credit.

He then writes about how doing business with shady cryptocurrency firms can be a very large credit risk.

Anyhow, when a crypto founder couldn’t find a bank in 2011, one could be excused for blaming reflexive banker conservatism and low levels of technical understanding. Crypto has had a decade and a half to develop a track record to be judged on. Crypto is being judged on that track record.

The next section seems to be about how political influence on the banking system can sometimes work, using an example from the Obama administration when they went after debt collectors:

The Obama administration didn’t like debt collectors, for very similar reasons to why I don’t like debt collectors. And so they broadened the critique: the risk in banking bad guys was broader than the (known, accepted, controlled, and certainly not existential) risk of ACH reversals. Those customer complaints, those complaints could harm the bank’s standing in the community. That could result in e.g. a withdrawal of customer deposits. This would imperil the bank, for the usual reason. And if something could imperil banks, why, that should naturally cause the FDIC to make its opinions known.

He talks about a creative legal theory used by the Obama administration's Department of Justice:

[T]heir thought was that if you provide rails which facilitate fraud, such as giving a fraudster a bank account, you are affecting a financial institution: yourself. And so, the DOJ can go after you, for self-harm. Note that you do not need to lose money, oh no, the DOJ can also go after you because the way you affected yourself was to cause your regulator to like you less. When you settle with the DOJ, it will extract an enforceable promise in writing that you will stop your campaign of self-harm, and also stop banking specifically enumerated industries, like payday loans.

And not just debt collectors:

As it turns out, the Obama administration had many diverse policy preferences.

It wasn’t particularly in favor of guns, for example.

Eventually this became a very public controversy:

Operation Choke Point, once it came to light, caused a media and Congressional furor, because it was arbitrary and lawless. (I am using that in the ordinary sense of an American who took civics, not in the specialized sense of a DOJ lawyer, who might bristle for being called “lawless” when they had three court cases and one 25 year old statute which are clearly explained in the memo as adding up to them being able to do everything they did.)

The architects of Operation Choke Point steadfastly denied it was designed to do what it was manifestly designed to do. They denied it did what it manifestly did.

The agencies were then pointedly accused of lack of candor with Congress. If you tell a Congressman he isn’t reading the WSJ right, but internally your bosses are high-fiving themselves over WSJ article, and they are high-fiving themselves because finally the WSJ is covering their important work accurately, Congress will not be pleased. Then they will show you a copy of your bosses’ emails, which they can subpoena, because they are Congress. (House Oversight Committee report, ibid, pg 10)

So I guess the point here is that Operation Choke Point was real, but "Operation Choke Point 2.0" is not real in the same way:

Unlike Operation Choke Point, which actually was a centrally directed operation with written project plans, status meetings, ongoing progress reports, and a code name decided by the participants (who, in hindsight, should have talked to their own Comms department and picked something that didn’t sound nefarious to describe their plans), Choke Point 2.0 stretches like taffy to attach to any recent regulatory activity crypto advocates don’t like. So we’ll have to review quite an involved history of very disparate issues to give advocates a fair hearing.