Operation Choke Point

Operation Choke Point is an initiative of the United States Department of Justice that was announced in 2013,^[1] which is investigating banks in the United States and the business they do with payment processors, payday lenders, and other companies believed to be at higher risk for fraud and money laundering.

This operation, first disclosed in August 2013 Wall Street Journal story ^[2] has been accused of bypassing due process.; the government is pressuring the financial industry to cut off the companies' access to banking services, without first having shown that the targeted companies are violating the law.^[3][4][5][6] As reported by the St. Louis Post-Dispatch, critics believe "it's a thinly veiled ideological attack on industries the Obama administration doesn't like, such as gun sellers and coal producers."^[7]

Details of the operation

Some merchant categories that the FDIC had listed until July 2014 as being associated with high-risk activity include, but are not limited to (until the FDIC revised the original policy in July 2014):^[8]

Results of the operation

In April 2014, Four Oaks Bank settled with the Department of Justice for engaging in the types of activities that Operation Choke Point is intended to stop. According to the complaint (dated Jan 8, 2014): "As of today, approximately 97 percent of TPPP-TX’s merchants for which Four Oaks Bank permits debits to consumers’ accounts are Internet payday lenders. A payday loan typically is a short-term, high interest loan that is not secured (made without collateral) and that has a repayment date coinciding with or close to the borrower’s next payday. Most payday loans are for $250 to $700. Annualized interest rates for Internet payday loans frequently range from 400 percent to 1,800 percent or more – far in excess of most states’ usury laws."^[10]

On April 17, 2014, Kevin Wack of the American Banker reported that Fifth Third Bank and Capital One had terminated their accounts with payday lenders amid alleged increased scrutiny by federal regulators. Wack notes that "in a recent submission to a congressional committee, the Financial Service Centers of America, a trade group that represents check cashers and payday lenders, listed several banks that it says have terminated their relationships with at least one of its member companies in recent months. Besides Capital One and Fifth Third, banks on the list include Bank of America, PNC Financial Services Group, Wells Fargo and U.S. Bancorp."^[11]

The Financial Service Centers of America (a trade group that represents payday lenders and other consumer businesses) recently commissioned a survey of its members about bank discontinuance. The survey, conducted by Deloitte Financial Advisory Services, found that "14 of the 61 banking relationships reported by survey participants have been terminated since November 2013."^[12][13]

On March 10, 2015, the US Department of Justice announced a civil and criminal settlement with CommerceWest Bank, located in Irvine, California for its role in facilitating a third party processor's millions of dollars worth of unauthorized debits from consumer bank accounts. From the Dept. of Justice press release: "These merchants included a fraudulent telemarketing company and a company that charged hundreds of thousands of victims for a payday loan referral fee they had never authorized....CommerceWest also received complaints and inquiries from other banks, which expressed their belief that V Internet’s transactions were fraudulent... Even in the face of these explicit warnings from other banks, CommerceWest did not terminate V Internet or file a Suspicious Activity Report, an alert banks are required to file with the government indicating the presence of suspicious illegal activity."^[14]

Reaction

"...Various other federal agencies..." also comply with this. Frank Keating of the American Banking Association complained that Choke Point "is asking banks to identify customers" who are "simply doing something government officials don't like. Banks then 'choke off' those customers' access to financial services, shutting down their accounts." ^[15]

In August 2014, U.S. Representative Blaine Luetkemeyer introduced a bill that would limit law enforcement's ability to restrict access to the banking system as a response against Operation Choke Point.^[16]

On April 8, 2014, the House Financial Services Committee held a hearing with the general counsels of the federal banking agencies regarding, among other things, Operation Choke Point. Committee members from both parties argued that Operation Choke Point is hurting lawful non-bank financial service providers by pressuring to eliminate access to the banking system and, in turn, the businesses unable to offer services to constituents. The FDIC’s Richard Osterman repeatedly asserted that Operation Choke Point is a Justice Department operation and the FDIC’s participation is limited to providing information and guidance upon request. Mr. Osterman also asserted that the FDIC is not attempting to prohibit banks from offering products or services to non-bank financial service providers operating within the law. Similarly, Amy Friend, of the Office of the Comptroller of the Currency (OCC), stated that the OCC wants to ensure that banks conduct "due diligence and implement appropriate controls," but that the OCC is not prohibiting banks from offering services to lawful businesses.^[17][18]

On May 29, 2014, the U.S. House of Representatives Committee on Oversight and Government Reform published a highly critical staff report that concluded:^[19]

"Forceful prosecution of those who defraud American consumers is both responsible and admirable. However, Department of Justice initiatives to combat mass-market consumer fraud must be legitimate exercises of the Department’s legal authorities, and must be executed in a manner that does not unfairly harm legitimate merchants and individuals.

Operation Choke Point fails both these requirements. The Department’s radical reinterpretation of what constitutes an actionable violation under § 951 of FIRREA fundamentally distorts Congress’ intent in enacting the law, and inappropriately demands that bankers act as the moral arbiters and policemen of the commercial world. In light of the Department’s obligation to act within the bounds of the law, and its avowed commitment not to “discourage or inhibit” the lawful conduct of honest merchants, it is necessary to disavow and dismantle Operation Choke Point."

On November 21, 2014, William Isaac, the former Chairman of the Federal Deposit Insurance Corporation (FDIC) from 1981 to 1985, wrote a scathing opinion piece in the Wall Street Journal entitled "Don’t Like an Industry? Send a Message to Its Bankers: With Operation Choke Point, the Justice Department’s targets have included vendors of firearms and fireworks" stating that he believed that the agency acted in bad faith.^[20]

Federal investigations

Federal Deposit Insurance Corporation (FDIC) and the Department of Justice (DOJ) have both launched investigations into the operation.^[7]

The FDIC’s inspector general, Fred Gibson, said he would review the conduct of agency personnel to find if the “actions and policies of the FDIC were consistent with applicable laws, regulations and policy,” as well as the regulator’s mission.^[21] Gibson said he would investigate allegations that FDIC General Counsel Richard Osterman provided false testimony to Congress earlier this year when discussing his organization's activities.^[21] Osterman was testifying to the House of Representatives member when he rejected assertions that the FDIC wanted to cut off legitimate businesses’ use of the financial system.^[21]

Admission of wrongdoing

On January 29, 2015, the FDIC issued a Financial Institution Letter that states "The Federal Deposit Insurance Corporation (FDIC) issued a Financial Institution Letter today encouraging supervised institutions to take a risk-based approach in assessing individual customer relationships, rather than declining to provide banking services to entire categories of customers without regard to the risks presented by an individual customer or the financial institution's ability to manage the risk.""^[22]

The Washington Times says this letter "effectively ends Operation Choke Point."^[23][22] As reported by Forbes, "a change in the political landscape, many businesses threatening legal action and a congressman with a background in banking [forced] the bureaucracy to admit to misconduct and to stop financial attacks on legal businesses that the Obama administration deems to be politically incorrect."^[24]Reports of continued termination of services to legitimate businesses, however, continue.

See also

• Bank Secrecy Act of 1970
• Abuse of power

References