Operation Choke Point

Operation Choke Point was a 2013 initiative of the United States Department of Justice[1] which investigated banks in the United States and the business they did with firearm dealers, payday lenders, and other companies believed to be at a high risk for fraud and money laundering.

This operation, disclosed in an August 2013 Wall Street Journal story,[2] was officially ended in August 2017,[3] and the FDIC settled multiple lawsuits by promising to Congress additional training for its examiners and to cease issuing "informal" and "unwritten suggestions" to banks.

Details

Some merchant categories that the Federal Deposit Insurance Corporation (FDIC) had listed until July 2014 as being associated with high-risk activity include (until the FDIC revised the original policy in July 2014):[4]

  • Ammunition Sales
  • Cable Box De-scramblers
  • Coin Dealers
  • Credit Card Schemes
  • Credit Repair Services
  • Dating Services
  • Debt Consolidation Scams
  • Drug Paraphernalia
  • Escort Services
  • Firearms Sales
  • Fireworks Sales
  • Get Rich Products
  • Government Grants
  • Home-Based Charities
  • Life-Time Guarantees
  • Life-Time Memberships
  • Lottery Sales
  • Mailing Lists/Personal Info
  • Money Transfer Networks
  • On-line Gambling
  • Pawn Shops
  • Payday Loans
  • Pharmaceutical Sales
  • Ponzi Schemes
  • Pornography[5]
  • Pyramid-Type Sales
  • Racist Materials
  • Surveillance Equipment
  • Telemarketing
  • Tobacco Sales
  • Travel Clubs

Results

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 January 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."[6]

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."[7]

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."[7][8]

On March 10, 2015, the U.S. 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."[9][10]

Reaction

"...Various other federal agencies..." also comply with this. Frank Keating of the American Bankers 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."[11]

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.[12]

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.[13][14]

Criticism

Critics of the operation accuse it of bypassing due process; the government is pressuring the financial industry to cut off the companies' access to banking services including access to capital, without first having shown that the targeted companies are violating the law.[15][16][17][18][19] Critics also say that "it's a thinly veiled ideological attack on industries the Obama administration doesn't like, such as gun sellers and coal producers."[20]

On May 29, 2014, the U.S. House of Representatives Committee on Oversight and Government Reform published a highly critical staff report that concluded:[21]

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 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.[22]

On March 24, 2015, a hearing was held before the Subcommittee on Oversight and Investigations of the House Financial Services Committee. Subcommittee chair Sean P. Duffy said at the outset, "I fear that activists at the DOJ and the FDIC are abusing their power and authority and are going after legal businesses and, in effect, they are weaponizing government to meet their ideological beliefs."[23]

In 2018, Tho Bishop of the Ludwig von Mises Institute published an article noting the strong objections of Native American leaders to Choke Point, due to claims that its effects could be economically devastating to tribal payday loan businesses. Bishop characterizes CFPB head Elizabeth Warren defense of Choke Point as heavy-handed and furthermore as "ideological imperialism" when applied to sovereign tribal territory.[24]

Federal investigations

The FDIC and the Department of Justice (DOJ) have launched investigations into the operation.[20]

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.[25] 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.[25] 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.[25]

Conclusion

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."[26]

The Washington Times says this letter "effectively ends Operation Choke Point."[26][27] 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."[28] Reports of continued termination of services to legitimate businesses, however, continue.[29]

On August 17, 2017, the U.S. Department of Justice, under the Trump Administration, announced that the Obama Administration's Operation Choke Point would officially end, stating that it was hurting legitimate businesses instead of preventing fraud as intended.[3]

FDIC retraining, new limitations on its personnel, and lawsuit settlement

On 15 November 2018, the FDIC promised to Congress "limitations on the ability of FDIC personnel to terminate account relationships." These would now be made only in writing, and if made, reported to the FDIC Board of Directors. "Informal", "unwritten suggestions" would no longer be allowed. "Additional training" was promised for FDIC examiners.[30] These promises were then used as a basis to settle lawsuits against the FDIC.[31][32][33]

See also

References
  1. "Financial Fraud Enforcement Task Force Executive Director Michael J. Bresnickat the Exchequer Club of Washington, D.C. - OPA - Department of Justice". Justice.gov. United States Department of Justice. Retrieved November 22, 2014.
  2. Zibel, Alan; Kendall, Brent (August 8, 2013). "Probe Turns Up Heat on Banks". The Wall Street Journal. Retrieved November 22, 2014.
  3. "Justice Department to end Obama-era 'Operation Choke Point'". POLITICO. Retrieved August 19, 2017.
  4. Issa, Darrell (May 29, 2014). "The Department of Justice's "Operation Choke Point": Illegally Choking Off Legitimate Businesses?" (PDF). Committee on Oversight and Government Reform. U.S. House of Representatives. p. 8. Archived from the original (PDF) on December 6, 2014. Retrieved November 26, 2014.
  5. O'Hara, Mary Emily (April 27, 2014). "Is the DOJ Forcing Banks to Terminate the Accounts of Porn Stars?". Vice News.
  6. "California Reinvestment Coalition: WHY WE NEED OPERATION CHOKE POINT TO STOP ILLEGAL ONLINE PAYDAY LENDERS". California Reinvestment Coalition. Retrieved November 22, 2014.
  7. Wack, Kevin (April 16, 2014). "Fifth Third, Capital One Cut Off Payday Lenders". American Banker. Retrieved November 22, 2014.
  8. Ellis, Blake (January 21, 2014). "Big banks to stop offering payday-like loans". CNNMoney. Retrieved November 22, 2014.
  9. "Department of Justice Civil and Criminal Complaint Against Commerce West Bank". California Reinvestment Coalition.
  10. "Department of Justice press release announcing settlement with CommerceWest Bank". March 12, 2015.
  11. Keating, Frank (April 24, 2014). "Justice Puts Banks in a Choke Hold". The Wall Street Journal.
  12. Carter, Zach (August 27, 2014). "House Republicans Are Trying To Make Money Laundering A Lot Easier". The Huffington Post. Archived from the original on August 27, 2014. Retrieved August 27, 2014.
  13. "House Committee on Financial Services Concerned with Decreased Consumer Choice". CFPB Monitor. April 21, 2014. Retrieved January 25, 2016.
  14. "Hearing entitled "Who's in Your Wallet: Examining How Washington Red Tape Impairs Economic Freedom"". House Committee on Financial Services. April 18, 2014. Retrieved April 25, 2014.
  15. Riddell, Kelly (May 18, 2014). "'High risk' label from feds puts gun sellers in banks' crosshairs, hurts business". The Washington Times. Retrieved May 22, 2014.
  16. Silver-Greenberg, Jessica (January 26, 2014). "Justice Department Inquiry Takes Aim at Banks' Business With Payday Lenders". The New York Times. Retrieved May 3, 2014.
  17. Douglas, Danielle (April 16, 2014). "Operation Choke Point: The battle over financial data between the government and banks". The Washington Post. Retrieved May 3, 2014.
  18. "Managing Risks in Third-Party Payment Processor Relationships", Fdic.gov, Federal Deposit Insurance Corporation, retrieved May 11, 2014
  19. "Community Financial Services Association of America: Unsealed Government Documents Prove Federal Coverup in Operation Chokepoint". October 12, 2018.
  20. Raasch, Chuck (November 14, 2014). "Luetkemeyer says feds to investigate 'Operation Choke Point'". St. Louis Post-Dispatch. Retrieved November 22, 2014.
  21. Issa, Darrell (May 29, 2014). "The Department of Justice's "Operation Choke Point": Illegally Choking Off Legitimate Businesses?" (PDF). Committee on Oversight and Government Reform. U.S. House of Representatives. p. 11. Archived from the original (PDF) on December 6, 2014. Retrieved November 26, 2014.
  22. Isaac, William (November 21, 2014). "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". The Wall Street Journal. Retrieved November 23, 2014. The Justice Department touts its Operation Choke Point as a good-faith effort to crack down on illegal businesses, weed out fraud and protect consumers. None of these claims is true.
  23. The Federal Deposit Insurance Corporation’s Role in Operation Choke Point: Hearing before the Subcommittee on Oversight and Investigations of the Committee on Financial Services, U.S. House of Representatives, One Hundred Fourteenth Congress, First Session, March 24, 2015
  24. Tho Bishop (2018) Elizabeth Warren's Other Cherokee Scandal: Her Fight Against Tribal Sovereignty Mises.org
  25. Zibel, Alan (November 14, 2014). "U.S. to Probe Abuse-of-Power Claims in Financial Fraud Crackdown". The Wall Street Journal. Retrieved November 22, 2014.
  26. Zywicki, Todd (January 29, 2015). "FDIC retreats on Operation Choke Point?". The Washington Post. Retrieved January 31, 2015.
  27. Riddel, Kelly (January 28, 2015). "FDIC attempts to end Operation Choke Point with letter, action". The Washington Times.
  28. Miniter, Frank (January 30, 2015). "FDIC Admits To Strangling Legal Gun Stores Banking Relationships". Forbes. Retrieved January 31, 2015.
  29. Nix, Katie (February 25, 2016). "FirstMerit Bank closes gun auctioneers accounts". Chronicle-Telegram. Retrieved February 25, 2016.
  30. https://www.consumerfinancemonitor.com/wp-content/uploads/sites/14/2018/12/fdic_response_to_rep._luetkemeyer.pdf
  31. https://www.fdic.gov/news/news/press/2019/pr19040.html
  32. https://www.law360.com/articles/1162156/fdic-payday-lenders-reach-deal-in-choke-point-suit
  33. https://www.prnewswire.com/news-releases/federal-deposit-insurance-corporation-agrees-to-settlement-in-operation-choke-point-lawsuit-300855421.html
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