A bill (HR 2706) intended to address concerns about federal bank regulators pressuring banks to limit or drop customers passed the House Financial Services Committee on Oct. 12, 2107 on a 59-1 vote. Arising from a dispute over the controversial “Operation Choke Point” during the Obama administration, the bill would require regulators to have a “valid” reason to tell banks to drop a customer or class of customers, and require customers be given notice of the reasons. If passed, the bill could impact nonprofit organizations (NPOs) that need financial services for international programs by allowing derisking without notice or the requirement of a “valid” reason when based on vaguely worded “national security” considerations.
Beginning in 2013, Operation Choke Point targeted certain bank customers, such as gun dealers and pay day lenders, as high-risk. This caused some banks to limit services to them rather than risk enforcement action. This trend in banking, dubbed “derisking,” has also affected NPOs with international programs, as shown in the 2017 report Financial Access for U.S. Nonprofits. Republican members of Congress pushed back against the program, which was formally discontinued in August. Obama administration officials defended it as valid anti-fraud enforcement.
HR 2706 is the response to this controversy. As amended by the committee, it would restrict federal banking agencies from formally or informally requesting or ordering a bank to “terminate a specific customer account or group of customer accounts” or discourage them from “entering into or maintaining a banking relationships” with them unless “the agency has a valid reason for such request” and the reason is not based solely on reputation risk. It then requires written notification of the reasons for the bank’s action and citation to “specific laws or regulations the agency believes are being violated…” unless the action is based on national security considerations.
The potential problem for NPOs is that the “valid reason” standard does not apply to cases where a customer “poses a threat to national security” or “is involved in terrorist financing.” These terms are not defined, and are so vague that a legitimate NPO working to provide humanitarian relief or other important programs in a global hot spot could lose banking services based on the same kind of vague, “high-risk customer” generalizations that critics say led to banks to drop customers identified as risky by Operation Choke Point.
The apparent justification for the national security exception to the notice requirement is that providing notice would tip off bad actors that their operations are under investigation or surveillance. However, under this bill, if an NPO or anyone else loses their bank account and is not given a reason, it will be clear that the national security exception has been invoked.
If this bill moves forward it should be revised to:
require national security reasons to be “valid,” case-specific, and
provide reasons to be given. If classified information is an issue, it could be dealt with using existing procedures established in the Classified Information Procedures Act.