The Treasury Department vs. Fair Access Laws (Pt.1)
The Treasury Department has begun to criticize State Fair Access Banking Laws. How Valid Are the Critiques?
Laws aimed at preventing banks from discriminating against customers because of their legal but controversial industry and other politically contentious criteria, otherwise known as “fair access laws,” are having a moment in the sun and on the firing line. These laws, including those passed in Florida and Tennessee, are part of the response to the recent wave of politicized banking that saw banks, government officials, and activists try to leverage access to banking services as a tool of de facto regulation. In response to the response, both the Treasury Department’s Under Secretary for Terrorism and Financial Intelligence and the Comptroller of the Currency have recently made statements criticizing fair access laws for various reasons.
This post will just focus on Under Secretary Brian Nelson’s letter, with Acting Comptroller Hsu’s statement addressed in a later post. The Under Secretary’s letter, which is attached below, was written in response to a letter from Representatives Josh Gottheimer, Blaine Luetkemeyer, and Brad Sherman expressing concern that the state fair access laws might threaten the anti-money laundering system.
As a threshold matter it should be acknowledged that the AML/KYC system is opaque by design, with almost no concrete data available to the public. As such, it is possible that the Treasury Department’s concerns are drawing on legitimate information that can’t be shared. However, it is also possible that this opacity is being used as a shield to avoid being questioned. This is why more oversight and transparency is so important in this area.
The Concerns About Fair Access
In his letter Under Secretary Nelson expresses concerns that certain provisions in the fair access laws may interfere with federal efforts to prevent bad actors from using the financial system, with the Florida law taken as an exemplar.
Specifically, the Under Secretary focuses on two general elements of the laws:
· Restrictions on a bank’s ability to consider certain factors when deciding whether to provide services, including restricting consideration of non-quantifiable factors and things like a customer’s affiliations and business sector.
· Notification requirements to customers if a bank refuses service.
According to the Under Secretary the first element is potentially problematic because it may conflict with the legal obligations of banks to manage risk, especially but not exclusively regarding anti-money laundering and sanctions issues.
The letter notes that while the laws restrict a bank’s use of non-quantifiable factors, such factors can be important for banks to meet their obligations under the Bank Secrecy Act (BSA) and other federal laws.
The letter also criticizes the restrictions the state laws place on a bank using a customer’s “affiliations” or “business sector” as criteria to refuse services. While the letter lacks any actual examples of problems it uses the hypothetical example of a state law prohibiting a bank from considering a customer’s affiliation with a known terrorist group or whether a firm is engaged in producing goods necessary to Russia’s war effort (what those are the letter doesn’t say) or fentanyl precursors as a possible threat to the integrity of the banking system.
As to the second element, the letter says that because the laws include provisions requiring banks to provide customers with an explanation of why they were denied services this could risk revealing that the bank submitted a suspicious activity report (SAR) on the client, which would run counter to the legal requirement that SARs not be revealed. The letter notes that even if the report didn’t mention a SAR explicitly, a redacted report could implicitly reveal the existence of a SAR.
Are These Concerns Realistic?
While the letter paints a dire picture, there are reasons for skepticism.
First, it is important to keep in mind that federal law, and federal regulations legitimately derived from federal law, trump state law. As such, if a bank is forced to choose between complying with Federal or State law it will pick federal law. In fact, banks and the Treasury department could sue to enjoin enforcement of the state law if such enforcement would run counter to federal law.
To be sure, having laws in conflict could introduce uncertainty initially, and this would be a real concern to the extent it happens, but it would not be by any means unprecedented given the history of disputes around the impact of other state laws on national banks. Nor would it be a permanent state as courts would resolve the ambiguity.
However, are we certain that there will be a conflict between state and federal law? It is far less clear that this is true than the letter’s alarmist tone would indicate. Remember, these new laws don’t exist in a vacuum, rather, they exist within the broader body of state and federal law, which informs how the laws’ provisions should be interpreted, implicitly or explicitly.
For example, the Florida statute explicitly incorporates Florida’s anti-money laundering law, which largely mirrors federal law, including its definition of suspicious activity, and considers timely submission of reports to federal regulators to generally be compliance with the law. The Florida AML law also exempts all records and reports filed pursuant to a SAR from disclosure. Under the Florida fair access law banks can deny services to customers on AML/KYC grounds. Further, the Florida fair access law also explicitly conditions providing a report to a customer on such report not being otherwise prohibited by law, such as the prohibition on alerting a customer to the presence of a SAR.
Likewise, the Tennessee law, as amended, does provide that a customer denied service is entitled to a statement from the bank as to why, unless such notification is prohibited by federal law. There is no conflict between the laws, if federal law prohibits such a report, it will not be given.
Tennessee’s law, as amended, also explicitly permits banks to refuse to provide services to customers engaged in fraud, criminal conduct, incitement to criminal conduct, or obscenity or otherwise non-constitutionally protected speech. Tennessee law also explicitly permits banks to notify government authorities if they have evidence of a violation of law or regulation and requires them to provide information when required by law.
Second, the letter’s fears about banks being unable to consider factors relevant to compliance or safety relies on a very narrow view of the term “quantifiable.” As Michael Ross, an attorney with the Alliance Defending Freedom, correctly pointed out to me, a better reading is likely what the OCC adopted as part of its 2021 fair access rule. In the rule the OCC distinguished quantifiable risks as risks that were unique to the customer from indirect, speculative, or generalized risks.
It isn’t that a bank can’t consider the risk posed by a firm that makes trade goods useful to Russia (and presumably others) or fentanyl precursors. Rather, it must assess the legitimate risks posed to the bank by that specific customer, considering that customer’s risk profile. As such, a bank should be able to continue to deny service if a customer legitimately exceeds the bank’s risk threshold, but the bank must be able to “show its work.”
This isn’t to say that there is no possibility of conflict between the state fair access laws and federal law, but that the scope of conflict is likely much smaller than the letter’s alarmist tone would indicate. The laws likely can generally be read together harmoniously. Perhaps some minor revision of the state laws would be wise, and Treasury should feel free to provide advice to help states do that. But if there is conflict the state law would need to yield, so the legitimate interests protected by federal law aren’t likely to be under significant threat.
What about Federal Policy outside of the Law?
Of course, there is also a potential gray zone. While federal laws, and federal regulations promulgated pursuant to federal laws trump state laws, what about federal guidance, or cases where the federal regulator asserts authority that isn’t provided by statute?
For example, what if a federal regulator believes it can penalize a bank for failing to consider amorphous concepts like reputation risk, without a quantifiable basis? It is unclear how far regulators can go in asserting reputation risk, with courts divided on what sort of risk must be posed to the bank.
In this case would regulator preference preempt state law? It would likely depend on whether the regulator’s preference was in fact grounded in its statutory authority. As such, this is a question that could be resolved by litigation, providing needed clarity and transparency to an often uncertain and opaque area of regulation.
Such clarity would be a feature, not a bug, of the state fair access efforts. Bank regulators have an unfortunate history of using questionable assertions of authority to push banks to drop legal but controversial customers. While the legitimate interests of federal law should be protected, excessive or abusive misuse of authority should not. To the extent these state laws prompt clarity on exactly where the line is, it would benefit not only the industry and bank customers, but also the country as a whole.
The interaction between state fair access law and federal law is certainly important. Perhaps the appropriate committees should consider hearings to obtain more information. This would help better inform the debate and allow assumptions on all sides to be tested. If nothing else, Under Secretary Nelson has a standing invitation to come on FinRegRant and discuss!
