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Operation Choke Point: Closing Legal Businesses

by melodie bowler / /

On July 17th, the House Judiciary Subcommittee on Regulatory Reform, Commercial and Antitrust Law held a hearing on Operation Choke Point (OCP), a program within the Department of Justice (DOJ). The first witness, Assistant Attorney General Stuart Delery of the DOJ Civil Division, stated OCP’s objective is to identify and prevent fraudulent merchants and payment processors from accessing financial services. An obscure program until recently, OCP is gaining recognition for the questionable manner of its investigations. Thus far, the DOJ has sent fifty subpoenas to financial institutions, largely local banks and credit unions, requesting information on their customers. Only one of the cases has closed, the remaining are ongoing.

When questioned by Rep. Darrell Issa (R-CA), Delery agreed that the subpoenas he sent are not meant to change routine banking operations. Since the inception of OCP, however, businesses in particular industries have reported being denied loans or having their long-standing bank accounts closed. The Federal Deposit Insurance Corporation (FDIC) published a list of “high risk” industries (including businesses as diverse as firearms sales, home-based charities, coin dealers, and dating services), but Delery denied any connection between that list and DOJ objectives. Upon further scrutiny of the issued subpoenas, which Delery signed, Rep. Issa found a truncated version of the FDIC’s list attached to each one. Somehow, Delery still denied a connection between OCP-DOJ objectives and the FDIC list.

Whether intending to or not, by including the list in the subpoenas and effectively endorsing FDIC “recommendations,” the DOJ has caused banks to rethink their clientele in order to maintain compliancy with the federal government. Subcommittee Chairman Spencer Bachus (R-AL) mentioned a letter circulated to lawmakers last fall, in which one bank claimed it was threatened with an audit if it agreed to service an online lender. Another said the FDIC refused to close an audit unless the bank stopped certain payment processing. Despite these accounts, Delery continued to insist the DOJ is innocent. He stated that his department is making efforts to explain to financial institutions that they are not discouraging legal business, but encouraging due diligence.

As Rep. Issa illuminated in the hearing, the FDIC list was created based on “ideological decisions of what is high risk rather than economic.” For businesses whose accounts were closed, the basis had nothing to do with a change in their risk profiles and was instead predicated on a change in bureaucratic opinion. It is far less costly for banks to drop unfavorably-viewed clients now, than to respond to subpoenas later. In the subpoenas that were already issued, the DOJ requested the banks’ documents from each merchant’s account for every month in which they had a return rate of 3 percent or more, despite Delery’s admission that fraud is indicated by return rates of 30 percent or more. Delery could not attest to the cost of compliance with such a request. Another witness, David Thompson, representing short-term lenders, said the cost can be in the hundreds of thousands. For small banks and credit unions, the new expense of servicing these legal yet “high risk” businesses makes them no longer profitable, resulting in closed accounts.

Fitting with the hearing’s title, “Guilty Until Proven Innocent,” the panel uncovered that the DOJ is targeting banks for serving legal industries, rather than investigating specific cases of fraud within individual businesses. House Judiciary Committee Chairman Bob Goodlatte (R-VA) described the problem in his opening statement, clarifying that Operation Choke Point does stop some fraud, but there are too many casualties.

For more information, Michael Ligouri’s blog covers the House Financial Services Committee’s hearing on July 15th, and Brandon Arnold’s blog overviews the operation as a whole.