Banks increasingly closing defence firms’ accounts, trade body warns
The defence trade body is seeking to reassure the industry after more than a dozen firms had their bank accounts closed, with the Ministry of Defence warning excessive ESG criteria in banking and investment are “dangerous” for national security.
ADS Group, working with banking association UK Finance, is set to issue new guidance to its more than 1,300 members on accessing financial services following a spike in complaints over so-called “debanking”.
Morning Wire understands at least 15 defence firms have formally raised concerns over their bank accounts being closed by a range of lenders, with many more reluctant to come forward due to fears of retribution and future applications being tarnished.
A joint report from the trade bodies, supported by the business department, said “debanking” mainly affected small and medium-sized companies, which make up more than 90 per cent of ADS’ members.
These firms do business with a number of different countries, including Ukraine, and the vast majority have export licences from the government.
However, the report warned that being granted a licence did not necessarily mean firms would pass banks’ checks, which have to comply with strict regulation.
The banking sector’s main concerns relate to anti-money laundering rules and where a company exports to, with non-compliance risking major fines.
“There is also an issue about a lack of visibility of defence sector supply chains, which can create challenges for lenders in demonstrating that the finance meets their credit risk appetite,” one banking source told Morning Wire
Banks generally cannot tell defence firms why their accounts are being closed to avoid “tipping off” criminals.
Enterprise minister Kevin Hollinrake said in a foreword to the report that “accessing basic banking services is fraught with difficulty” for too many businesses.
“In short, even where all parties involved are acting transparently and ethically, there may be factors that prevent a bank account from being opened, or lead an existing account to be closed,” he added.
Earl Attlee, a Conservative member of the House of Lords, has criticised the government for not doing enough to crack down on the issue.
“There’s a fear among defence contractors about telling the MoD they’re experiencing banking problems because the MoD might misunderstand and pull the contract because it thinks the firm is going bust,” he told Morning Wire
The MoD is looking into banks’ ESG and compliance practices, with ministers concerned account closures could cost jobs in the defence sector and threaten its supply of equipment to the Armed Forces.
“Attempts to rip away funding from UK firms who support our prosperity and help to keep our nation safe are not only dangerous for our security, but also self-defeating for so-called moral investors,” said defence secretary Grant Shapps.
He added: “We have a moral imperative to invest in defence – without it we can’t protect our nation or help our friends and allies, including Ukraine, defend their freedom.
“Despite that, we’ve seen how ESG criteria can go too far and punish defence. Any investor who tries to defund the UK’s defence industry needs a serious wake up call, and we are backing the defence industry all the way.”
Larger defence firms have also struggled with getting access to finance and banking services. Morning Wire understands that investment exclusions for defence stocks now outnumber exclusions for tobacco stocks.
Total customer complaints about “debanking” have surged this year, with the Financial Conduct Authority saying the most common reasons given by lenders for closing accounts is inactivity or financial crime concerns.
“By reducing the perceived burden of regulatory adherence at the get-go, we hope to deliver a stronger, more collaborative and inclusive risk environment,” said Kevin Craven, chief executive of ADS, and David Postings, CEO of UK Finance, in a joint statement.
“Collaboration between the ADS Group and UK Finance, demonstrated in part by this joint guide, aims to ensure defence and security businesses have the tools and knowledge they need to innovate, scale and grow.”