Debanking is when banks and financial institutions decide to close customer accounts when they think those customers can pose a risk to the institution. This could be a regulatory, legal, or financial risk. It is also known as de-risking. Over the past 5 years in Canada, over 800 bank accounts have been cancelled by financial institutions, according to the FCAC (Financial Consumer Agency of Canada). In most cases, the people in question are not provided any reasons why the bank is closing their accounts.
Reasons for debanking
Across the many instances of debanking, there were some things in common. People may face debanking due to any of these or a combination of these factors. In almost all cases, the bank or financial institution is unlikely to tell you why they’re closing your account. Here are some of the common reasons:
Compliance with regulations
Banks and financial institutions have complex and detailed rules and regulations to follow. The regulations state that banks are responsible for identifying and addressing financial misconduct. If they suspect that an account is being used for illegal practices or find suspicious patterns, they will try to find more information and make a decision whether to close the account or not. Some patterns and practices they may try to quickly shut down are:
- Money laundering
- Moving large sums rapidly
- Suspicious e-transfers
- Unusual deposits and withdrawals
- Using personal accounts for business
Risk management
Banks are also responsible for managing their own risk exposure. Financial institutions are generally risk-averse in terms of exposure and would not want to continue maintaining high-risk relationships. This is especially relevant if they perceive a customer as riskier than their threshold of comfort. If the financial institution perceives an individual or business as high risk, they may close the account. This also includes the customer’s behaviour in bank branches, violation of account terms & conditions, or customer behaviour and willingness to respond to questions about account usage and activity.
Operating costs
Compliance with AML (anti-money laundering) and CTF (counter-terrorist financing) regulations is expensive. If an account is considered high-risk or requires excessive monitoring, the bank may choose to close the account instead of dealing with constant compliance costs. If an account costs more to maintain than it generates in terms of fees or interest, or has high overdraft use, it may not be worth it to the bank to provide it. It is not known how many accounts that have been debanked have been affected for this reason.
Lack of provision
If the bank does not have specific policies and procedures in place to support the kind of activity or transactions you’re using the account for. For example, an account being used for small business banking or foreign investment regulations, for which the bank may not have the necessary provisions. Regulations are getting more stringent over time, and banks may find some business lines, uses, or segments too difficult to serve. This could be because they are expensive to serve and maintain within regulations, or if the financial institution simply does not have the provision to do so.
Debanking as a weapon
There have not been too many instances of debanking being used as a weapon, at least in Canada. During the 2022 Freedom Convoy protests, the Canadian government froze the bank accounts of protest sympathizers. The Prime Minister needed to invoke the Emergencies Act to do so, allowing banks to freeze accounts without a court order. The government also broadened it to include crypto and crowdfunding platforms under Canadian rules.
There have also been reports of banks being more stringent with bitcoin companies or money service companies. Even if they have all their paperwork and verifications in place. Sometimes, it just comes down to the bank’s existing risk exposure, their risk tolerance, and how much risk they’ve already exposed themselves to. It could also be simply because they don’t want to support or finance these activities. Either way, they are within their rights to close any accounts, and they don’t need to provide a reason.
There have also been reports of banks closing accounts and reducing funding for companies in certain industries. For example, oil and gas. Environmental advocacy groups have pushed back on banks that continue to support fossil fuel companies. This has led to financial institutions being more wary about how much support they are providing to companies in these industries.
How does debanking happen?
Banks are not required to disclose reasons for debanking. This is good if the debanking is for valid reasons, and they don’t want the high-risk individual to know the patterns they have found. On the other hand, if an innocent, law-abiding person is debanked, they also have no reason and hence no recourse. This means that there is a high risk of collateral damage when banks carry out debanking without comprehensive verification.
When someone is debanked, their accounts are often shut down without warning. In some cases, the bank may just provide a bank draft for the funds in your account. They could also provide a grace period of one to three months to transfer your larger products to another bank, for example, a mortgage. It depends on a case-by-case basis, so there is no real guideline for how to manage it.
If your account has been shut down and you have no other accounts with other banks or financial institutions, you may be left scrambling to pay your bills. If you’re already dealing with debt, this can really throw you off balance or hit your credit score further.
Does it actually help?
According to the Ombudsman for Banking Services and Investments, the number of clients debanked by financial institutions has increased over time. From just 19 such complaints in 2019, it quickly rose to 113 in 2023. The Ombudsman and the Financial Consumer Agency of Canada (FCAC) have limited powers in this area, so innocent people who have been debanked don’t have much recourse.
FinTRAC is also working hard to crack down on financial crime. The number of suspicious transaction reports they received from financial institutions increased 63.5% over just the last few years, from 386,102 reports in 2019-2020 to a massive 631,137 reports in 2023-2024. There is mounting pressure on banks, intelligence agencies, and financial watchdogs alike.
The hope with debanking would be, then, to catch criminal activity. However, the number of money laundering charges that were federally prosecuted has been in decline. The Public Prosecution Service of Canada reports an over 50% reduction in charges in less than 10 years. They fell from 85 in 2012-2013 to just 41 in 2019-2020.
What to do if you are debanked
- You can request a written explanation from the bank. That being said, they are not legally obliged to provide one. Be prepared for them not to provide it to you.
- Explore other banking options, as you will need to go through the process again and open new accounts. It may be a safe option to open accounts with other banks as a backup. Especially if you have multiple products with just one bank. Having another account can help you manage your expenses and paycheques even if your primary account is shut down without warning.
- You can file a complaint with the Ombudsman for Banking Services and Investments (OBSI). They can look into the complaint, but they cannot make banks reverse their decision. They will not be able to provide you with a reason either. However, the complaint does go on record.
- Reach out to the FCAC for guidance. They cannot make the banks reinstate your account either. However, they can provide guidance that may be helpful to keep in mind.
Key takeaways
Debanking is when banks shut down customer accounts based on their own risk analyses. This is also called de-risking and could be to address regulatory, legal or financial risk. Over 800 Canadian bank accounts have been cancelled in the last 5 years.
Banks can shut down accounts due to regulatory compliance issues, risk management, operating costs, or a lack of provisions in their banking structure. Banks are not required to disclose reasons for debanking either. The affected person is provided with no reason and often has no recourse or scope of discussion with the bank. This can make it harder to stay on top of your bills, especially if you’re already dealing with debt. If this is the case for you and your debt has become unmanageable, reach out to us. Our trained credit counsellors can provide advice that works for you.
