Alarming Surge in Bank Account Closures Due To Suspicious Activity Reports

However, experts are sounding the alarm bells over these mass closures, explaining that banks need to find other ways to deal with supposed suspicious activity, rather than automatically shutting a customer’s bank account down.

These SARs reports have then, for the most part, led to banks closing customers’ bank accounts because of this suspicious activity.

This increase in filings has happened because banks are now relying heavily on anti-money laundering (AML) software. This software looks at account transactions and flags account movements that seem suspicious.

“One is a heavy reliance on AML software to monitor transactions overseen by decision-makers who don’t know individual customers. Another is outdated rules used to determine which transactions are suspicious. A third is a set of incentives that push banks to rush and not take the time to understand individual cases,” Crosman wrote.

This has resulted in many banks choosing to close a customer’s account if their transactions are flagged immediately, rather than seeking out the customer to verify information.

For some banks, this is to make the process more efficient. Instead of potentially having to deal with regulation issues, banks immediately deal with the problem by simply closing the account.

However, banks don’t do this and haven’t explored any options to allow customers more of an input into this situation.

These institutions think that they’ll only lose a small amount of customers because of this issue. However, as AML systems have increasingly flagged accounts, this has led to more SARs filings and more account closures in the last few years.

Banks may soon have to deal with even more customer outrage. Plus, these customers could complain to regulators about their incorrect bank closure — which would bring more issues to these banks.

Though this will take more time and effort on the bank’s part, customer input could greatly help them narrow down what’s actually suspicious — and what’s not.

However, if this certainty isn’t as high, then banks should use their human employees to reach out to customers to find out what’s actually going on.

Meanwhile, businesses that have their accounts closed could struggle to pay their employees. To keep these massive issues from happening, experts believe banks should treat their customers with respect by not automatically closing their banking accounts if their system flags their transactions.

This approach contrasts with the more stringent measures seen in the U.S., leading to higher customer satisfaction and fewer wrongful closures in those regions.

Innovations such as machine learning models that adapt to new fraud patterns can better distinguish between legitimate and suspicious activities, thereby minimizing the unintended consequences of account closures on innocent customers (via Dow Jones).

Even worse, these closures can sometimes lead the affected businesses to shut down permanently due to financial strain.

These cases often emphasize the need for banks to adhere strictly to procedural fairness and transparency to avoid litigation and reputational damage.

Advocacy groups are pushing for more robust protections to ensure these rights are universally upheld and easily accessible.

Critics argue for a balanced approach that considers both the effectiveness of fraud prevention and the fairness to affected customers (via American Banker).

Institutions like credit unions or digital-only banks often provide more personalized services and may have different criteria for assessing suspicious activities, which can reduce the risk of unwarranted account closures.

By better understanding what behaviors might trigger suspicious activity alerts, customers can manage their accounts more effectively and avoid potential closures.

These changes aim to reduce unnecessary account closures by implementing more nuanced criteria and requiring a human review process before making a final decision on account termination.

However, they acknowledge the need for improving how these closures are handled, including better communication with the affected customers to explain the reasons and procedures involved.

Proactive engagement, transparent policies, and timely notifications can help build trust and reduce customer frustration during the review process.

Banks will probably continue to increasingly rely on advanced AI to pinpoint genuine fraud, but will need to do so while integrating human insights to ensure fair and accurate assessments, fostering a more transparent and customer-friendly approach.