Has your bank account been canceled for no good reason? If you’re in a business the government doesn’t like, soon it could be. Firearm sellers, pawn shops, payday lenders, and even porn stars around the nation have recently found their bank accounts canceled despite years of good relationships with their banks.
When pressed, the banks say that it is because of heightened regulatory supervision of “high risk” industries. This has been traced back to a shadowy Obama administration program launched in 2013 called “Operation Choke Point.” Some recent developments have led some to believe that Choke Point is over, or at least in retreat. That’s hardly the case. In fact, things might get worse for people in affected industries.
Operation Choke Point is a Department of Justice-led initiative aimed at “choking off” the financial oxygen of potential financial fraudsters who use Third Party Payment Processors (TPPPs) to process payments. It does this based on a 2011 guidance document from the Federal Deposit Insurance Corporation (FDIC) on how banks should manage their relationships with TPPPs that deal with industries that might present “reputational risk” to the bank. Until recently, that guidance contained a list of about 30 “high risk” industries, including ammunition, drug paraphernalia, pornography, home-based charities, and many others.
As a result, when the agencies involved in Choke Point began issuing subpoenas—with a particular focus on payday lenders—banks started cutting off banking services to those industries on the list. Affected businesspeople were left dumbfounded, until stories began appearing in the press about other industries receiving similar treatment. Dots were connected, Operation Choke Point came to light, and outrage followed. Hearings were held, and documents were uncovered that illustrated how Choke Point had evolved.
Now, the FDIC has withdrawn the list from its guidance, saying, “The lists of examples of merchant categories have led to misunderstandings regarding the FDIC’s supervisory approach to institutions’ relationships with TPPPs, resulting in the misperception that the listed examples of merchant categories were prohibited or discouraged.” At first, this might look like a significant victory. It is anything but.
Operation Choke Point continues, though in a slightly different guise. The underlying guidance about “reputational risk” remains unchanged. All the government has done is remove examples of what might constitute such risk from its websites. As a result, banks now have to judge for themselves what constitutes the sort of reputational risk that could trigger a federal subpoena.
Meanwhile, Justice Department attorneys are using their own judgment about reputational risk to serve as a basis for whom to investigate. If today’s focus is on payday lenders, who is to say, for example, that pornography will not be the next industry to come under the spotlight – during this administration or in a future Republican administration? What about a coal company, when so many are now convinced that coal pollutes the planet and the nation should move toward “renewable” energy?
While the guidance remains in place and DOJ attorneys continue to use the threat of subpoena to get banks to investigate potential fraud for them, banks will remain reluctant to do business with potentially “high-risk” industries, especially when they have no idea how their regulators determine what constitutes “high-risk” in the first place. Some high-profile cases might get their bank accounts reopened, but for the rest of the affected industries, little is likely to change.
Operation Choke Point goes on. All that has happened is that the FDIC has been embarrassed by the results of its guidance. It has removed the most egregious aspect of its guidance, but as long as the guidance remains the ultimate cause of its embarrassment will continue.
Meanwhile, the Department of Justice is sticking to its argument that it is targeting fraud. It is not. If it were targeting fraud, it would investigate fraudsters and bring criminal charges against them. That is how the system is supposed to work, but Operation Choke Point functions more like a fishing expedition. The DOJ’s contention that it can use such broad-brush powers without innocent parties getting hurt beggars belief – particularly when there is plenty of evidence of that happening.
Attorney General Eric Holder should bring his rogue attorneys under control and announce an end to Operation Choke Point immediately. That is the only way to free innocent businesses from under the shadow of this egregious executive overreach.