Arnold & Porter Discusses “Debanking” Executive Order

President Trump recently signed an executive order[1] (the Order) aimed at preventing the so-called practice of “debanking,” which refers to actions taken by banks and other financial services providers to restrict the ability of certain individuals, groups, or industries to access financial products and services for reasons seemingly unrelated to the individualized risks presented by each customer. Specifically, the Order seeks to limit “politicized or unlawful debanking” by ensuring that clients are not denied access to financial services products and services because of their constitutionally or statutorily protected beliefs, affiliations, or political views and that banking decisions are instead made on the basis of “individualized, objective, and risk-based analyses.” Although the Order’s legal authority is dubious, banks that seek to end or have previously ended relationships with clients in the cryptocurrency industry or clients with conservative-leaning beliefs will need to be vigilant — even if the relationship was terminated for apolitical reasons (e.g., Bank Secrecy Act or Anti-Money Laundering Act concerns).

The Order defines “politicized or unlawful debanking” as

an act by a bank, savings association, credit union, or other financial services provider to directly or indirectly adversely restrict access to, or adversely modify the conditions of, accounts, loans, or other banking products or financial services of any customer or potential customer on the basis of the customer’s or potential customer’s political or religious beliefs, or on the basis of the customer’s or potential customer’s lawful business activities that the financial service provider disagrees with or disfavors for political reasons.

In theory, the Order would apply neutrally to clients of all political beliefs. In practice, however, it is clear that the Order is intended to end perceived anti-conservative and/or anti-Republican bias on the part of banks.[2]

The Order mandates a multi-pronged approach for the federal banking regulators[3] to address politicized or unlawful debanking.

• Federal banking regulators must conduct a review to identify financial institutions that have engaged in or are currently engaging in debanking. Within 120 days of the Order, each federal banking regulator must conduct a review to identify financial institutions subject to its jurisdiction that have or have had any “formal or informal[] policies or practices that require[d], encourage[d], or otherwise influence[d]” the financial institution to engage in politicized or unlawful debanking. If any financial institutions are identified in that review, the federal banking regulators are directed to take appropriate remedial action to the extent authorized and consistent with applicable law. The Order specifically notes that a federal banking regulator may levy fines, issue consent decrees, or impose other disciplinary measures against any financial institution subject to its jurisdiction.

• Federal banking regulators must amend existing regulations and guidance to eliminate consideration of a potential client’s reputational risk. Within 180 days of the Order, each federal banking regulator must, “to the greatest extent permitted by law,” remove the use of reputation risk or equivalent concepts that could result in politicized or unlawful debanking, as well as any other considerations that could be used to engage in politicized or unlawful debanking, from any guidance documents, manuals, or other materials. The federal banking regulators must also consider rescinding or amending existing regulations that could result in politicized or unlawful debanking and ensure that any customer’s reputation is considered for regulatory, supervisory, banking, or enforcement purposes solely to the extent necessary to reach a reasonable and apolitical risk-based assessment.

• The SBA must notify financial institutions that make SBA-guaranteed loans that the financial institutions must reinstate any customers subjected to politicized or unlawful debanking. Within 60 days of the Order, the SBA must give notice to all financial institutions for which it guarantees loans under its lending programs, that they must, within 120 days of the Order, make reasonable efforts to identify any previous clients “denied access to financial services,” or “denied access to payment processing services” as a result of politicized or unlawful debanking in violation of any applicable statutory or regulatory requirement, and notify and reinstate any client that was “denied service” as a result of politicized or unlawful debanking.

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