Despite campaigning to end “intrusive regulations,” President-elect Donald Trump now threatens to commandeer businesses to enact social policy.
Back in April, Trump revealed a plan to “pay for the wall” on the U.S.-Mexico border. But as The Washington Post noted, the proposal relies more on pressuring payment systems than on allocating funds. Specifically, Trump has promised to “impound” remittances — money immigrants send home — when senders can’t prove lawful presence in the United States. According to Trump's proposal, U.S. remittances to Mexico — worth approximately $24 billion last year, according to the World Bank — are so crucial that such a clampdown would force the Mexican government to finance his wall.
Now, it’s uncertain if Trump intends to deliver on his threat. He has retracted his prediction that Mexico will pay up front. But he might still attack remittances as an anti-immigration strategy in-and-of-itself.
Indeed, the supposed architect of the remittances plan, Kris Kobach, now sits on the transition team. If by “impound,” Trump means he’ll somehow actually seize remittances, he'll have to overcome stiff legal obstacles. But regulatory pressure, taxation and fines provide somewhat easier avenues, all of which end poorly for the industry.
Both firms and their customers should take this danger seriously, even if the details of the design are currently unclear. Financial institutions stand to lose significant revenue. According to World Bank data collected as of July, the average consumer cost of a $200 U.S.-to-Mexico remittance was $12.71, and $22.47 for a $500 remittance.
To enact the April plan, Trump would likely need to amend the U.S. Patriot Act and corresponding regulations. Section 326 of the statute requires the Treasury to establish minimum standards for verifying customer identification. Banks and money services businesses like Western Union must collect sender ID for transactions above $3,000. They must also cross-check terrorist lists and report suspicious activity. But as of now, they need not screen users for immigration status.
Trump’s team presumably would want to modify the applicable and current regulations so that no “alien” may transfer money outside the U.S. without first proving lawful presence. On paper, such regulation would apply to anyone sending money beyond U.S. borders (thus potentially avoiding constitutional challenges). But Section 326 doesn’t appear to provide sound footing for a broad mandate. Money transfer networks would rightfully sue.
Yet Trump may not have to choose such a difficult approach, especially since pressure alone sometimes causes financial services companies to act in ways they otherwise wouldn't. Immigrant rights advocates have long argued that for mere fear of crackdown, financial institutions already go well beyond minimum standards for ID verification, effectively excluding many immigrants from mainstream services. Banks have also increasingly terminated the commercial accounts that remittance transmitters needed to conduct business. Bush administration regulators fought this consequence, but firms tend to “de-risk” — exiting entire lines of business to avoid amplified scrutiny.
Even broader regulatory pressure has successfully squeezed business and customers out of the financial system. Indeed, in an American Banker interview in April, Francis Creighton, executive vice president of government affairs for the Financial Services Roundtable, compared Trump’s remittance policy to the Obama administration’s Operation Choke Point, the Department of Justice’s investigation of financial institutions processing payments for potentially fraudulent companies. The DOJ initiative was linked with a highly controversial Federal Deposit Insurance Corp. list of categories of “high-risk” merchants, including money transfer networks, payday lenders, gun dealers and sex workers. (The FDIC published the list in 2011, but withdrew it in 2014.)
Critics claim these combined actions drove financial institutions to terminate relationships with listed industries. Trump may propose intervention on a colossal scale, but there's a history of enforcement and supervision pushing certain people out of the system. If Trump makes a case that immigrants are homeland security and money laundering threats, he could successfully deploy tactics that conservatives and libertarians have previously denounced.
Trump could also call for legislation to impose new taxes or fines on remittances. For years, hardliners have proposed heavy remittance taxes (as high as 50%) to broadly deter immigration. Others have proposed fines primarily for surveillance purposes. For example, there’s a Senate bill (modeled after Oklahoma law) that would require money transfer networks to screen customers for lawful immigration status. Under Sen. David Vitter’s bill, customers who can't prove lawful presence must pay fines to the Consumer Financial Protection Bureau, and thus create a federal record. A Government Accountability Office study found this type of legislation would likely succeed in deterring formal remittances.
Yet just how much restriction on sending remittances would impact immigration is uncertain. Immigrants with different types of legal status might respond differently to scaled prices and surveillance. Some might return home — or never come to the U.S. at all.
Some fintech companies have expressed confidence they might avoid draconian rules. Although they indeed have a positive role to play in the future of remittances, hiding from Trump’s proposed controls seems quite unlikely, even with virtual currencies. Moreover, as of now, immigrants rarely use mobile technology in cross-border transactions.
Regardless of how the variables shake out, Trump’s remittances plan doesn’t bode well for immigrants, regulators or the industry. It would cause humanitarian crises in countries receiving the $135 billion annually flowing from people who live, work and fiscally contribute to the U.S. economy. Moreover, it would constitute an unprecedented poisoning of the payments ecosystem.
The foundation of payments provision is trust. Permitting the federal government to erode that trust is not only harmful to individuals – it is a danger to the business model.