Should Banks Facilitate Financial Fraud?

By Charles H. Green

A new brawl may be brewing in Congress around the question of whether banks should facilitate financial fraud. Say what? Granted, my bias is fully transparent through this phraseology, but some members of Congress are charging that the Obama administration is unreasonably discouraging banks from providing money services for certain business sectors with poor reputations.

The known business interests range from pornography publishers to payday lenders.

There’s plenty of ideology involved ranging from freedom of expression to right to enter a What to docontract. How much intervention is appropriate to protect people from making bad decisions can be countered with the argument that “bad decision” is a relative term that should be owned by the person realizing the consequences.

Do small business lenders have a dog in this hunt? An ugly family secret in our trade is that we routinely encounter and lend to business owners whose financial reports cannot mask that they are not paying tax on their actual profits.

Many business owners freely admit to lenders that their expenses are padded with non-business expenses. Others regularly pilfer cash, skipping corporate and personal tax reporting, but the results shows up in personal assets and lifestyle.

Calling out these sins does not reward the whistleblower but ignoring obvious tax fraud makes you (and therefore your bank) an enabler of illegal activity. Worse, as a taxpayer, you silently approve these offenders who are increasing your tax burden.

SBA has been employing a more muscular approach to a post de facto loan default analysis over past couple years, so if you can recognize tax fraud with a naked eye, it’s safe to say the OIG could put a real number to it?

Would they punish your bank for either missing the obvious tax fraud or worse for obviously ignoring it? No one knows, but it’s a good time for small business lenders to  be asking themselves, should I facilitate fraud?

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