Since early 2013, the United States Department of Justice (“DOJ”) has been formally targeting banks that service a wide range of lawfully operating businesses that it and the Federal Deposit Insurance Corporation (“FDIC”) consider “high risk.” The probe, known as “Operation Choke Point,” was started as an outgrowth of the Financial Fraud Enforcement Taskforce and seeks banks’ assistance in choking off access to the financial services industry by shutting down the bank accounts of high risk businesses.
As described in the April 24, 2014 Wall Street Journal Op-ed article by American Bankers Association CEO Frank Keating:
Justice’s premise is simple: Fraudsters can’t operate without access to banking services, and so the agency is going after the infrastructure that questionable merchants use rather than the merchants themselves. Most of these merchants are legally licensed businesses on a government list of “risky profiles.”
Mr. Keating’s Op-ed can be read here.
Operation Choke Point initially focused on online payday lenders operating in states that prohibit payday lending activity. However, Operation Choke Point has expanded its focus to a wide variety of areas that the FDIC has categorized as being “associated with high-risk activity.” According to the FDIC, such “high-risk” merchant activity includes ammunition, tobacco, fireworks, firearms, pornography, life-time membership clubs, and coin dealers, just to name a few. A complete list of the FDIC’s “high-risk” merchant categories can be found in its Summer 2011 Supervisory Insight entitled, Managing Risks in Third-Party Payment Processor Relationships.
In an effort to increase scrutiny of these so called “high-risk” activities, federal authorities are focusing on where these merchants receive financial services, particularly banks and payment processors. As a result, banks and payment processors have been forced between two difficult options: either discontinue servicing commercial customers which the federal government deems to be engaging in questionable although legal behavior, or continue and risk being the subject of heightened regulatory scrutiny and penalties.
Not surprisingly, Operation Choke Point has drawn harsh criticism from Congress due to the potentially devastating impact it has on millions of Americans’ access to legitimate nontraditional banking systems such as payday lenders and check cashers. As detailed in an August 22, 2013 letter from Congress to Attorney General Eric Holder, “[m]ore than one in four American households conducts some or all of their financial transactions outside the mainstream banking system.” Further, as explained by the House Committee on Oversight and Government Reform in its January 8, 2014 letter to Attorney General Holder, “[w]hile online leading, like all financial services, can be susceptible to fraud, the overwhelming majority of lenders fully comply with all applicable statutes, regulations, and industry-recognized best practices.” Thus, because Operation Choke Point “would eliminate the basic processing services that legitimate lenders rely upon to serve millions of Americans[,] [a] much more targeted approach is required.”
The banking industry has also voiced concern about Operation Choke Point because of the increased strain it has caused for banks’ anti-money laundering (“AML”) compliance programs. On April 8, 2014, the Independent Community Bankers of America (“ICBA”) described Operation Choke Point as “impos[ing] ill-considered and costly mandates on payment systems” and “threaten[ing] to close access to the financial system to law-abiding businesses, because the mere prospect of an enforcement action is sufficient to cause financial institutions to restrict access to their payment systems to only established companies that present low risks.” Thus, the ICBA requested that “DOJ suspend Operation Choke Point immediately and focus its resources directly on businesses that may be violating the law, rather than targeting banks providing payment services.” ICBA’s complete statement can be read here.
Similar thoughts were echoed by Frank Keating in his Wall Street Journal Op-ed:
[L]aw-enforcement agencies and courts, not banks, are responsible for determining criminal violations. The 1970 Bank Secrecy Act spells out the proper partnership for banks and law-enforcement agencies. The law established record keeping and reporting requirements for banks so that law-enforcement agencies would have the evidence needed to prosecute criminals effectively. That is the division of labor and responsibility envisioned by Congress: drawing upon each other’s strengths to fight crime.
Although Operation Choke Point was only formally launched in 2013, the purposes behind it are nothing new. Similar efforts have been launched in the past with respect to money services businesses (“MSBs”) and a variety of other “high risk” industries. For example, both the Office of the Comptroller of the Currency and FDIC have previously recommended that banks engage in enhanced due diligence, including ceasing the provision of services entirely, to MSBs due to the money laundering risks associated with such businesses. While Operation Choke Point is unquestionably damaging for banks and their “high risk” commercial customers, it will also hurt those individuals who utilize nontraditional financial services for their everyday banking needs.