Operation Choke Point: Consumer Protection Bureau Can Act as Judge, Jury and Executioner to Targeted Businesses

The Obama administration has been waging an undeclared war on businesses it doesn’t like by stretching executive authority beyond its proper bounds.

Known as Operation Choke Point, this campaign is now entering a new phase. While at least one of the agencies involved so far has stepped back to an extent, another, far less accountable one appears to be joining the fray. Legal businesses have every reason to fear that Operation Choke Point will be worse than before.

Operation Choke Point is the Department of Justice’s initiative aimed at “choking off” the financial oxygen of businesses it deems susceptible to fraud. This involves increasing regulatory supervision of banks that provide financial services to supposed “high risk” businesses. The goal is to pressure banks into not doing business with these businesses, often with no other justification than a certain industry faces a “reputational risk” for fraud.

Operation Choke Point has targeted “fraudulent businesses” by making it difficult for banks to lend funds to certain borrowers. A new directive from the Consumer Financial Protection Bureau could do away with any appeal process to reopen lines of credit. 

Even if we take the DOJ at its word and agree that it is only targeting fraudsters, the lack of due process is glaring. A perfectly legal business could see its access to financial services cut off simply because of the regulators’ suspicion. This is exactly what has happened.

Gun shops, pawn shops, sporting goods stores, payday lenders, check cashing services, and even porn stars have had their bank accounts closed despite there being no hint of financial impropriety on their part. Because it is the bank that cuts off the business, there is no appeal to the regulator.

Yet there is every reason to doubt the DOJ’s word.

For a start, its own internal documents display clear hostility towards one particular industry as a whole—payday lenders. Moreover, DOJ’s main partner, up till now, has been the Federal Deposit Insurance Corporation. Following pressure from Rep. Blaine Luetkemeyer (R-Mo.), a former banking examiner, FDIC has issued guidance to its supervisory staff that restricts some of the methods used to advance Operation Choke Point.

To date, Operation Choke Point has worked largely through regulators by issuing veiled threats or verbal comments suggesting that a banking institution should stop doing business with a given client. As a result, there has been no paper trail directly linking the closure of bank accounts with Operation Choke Point.

This new memorandum purports to put a stop to that. It instructs FDIC staff to put in writing any recommendations for closure of bank accounts and any criticism of banks for their relationships with certain businesses.

Furthermore, “reputational risk” alone is no longer to be considered grounds for recommending the termination of a banking relationship. Previous FDIC guidance on “reputational risk” led to the infamous list of industries targeted by Operation Choke Point.

The Department of Justice headquarters building in Washington is photographed early in the morning. The Federal Bureau of Investigation is housed within the Justice Department. (Credit: AP)
The Department of Justice headquarters building in Washington is photographed early in the morning. (Credit: AP)
However, FDIC’s retreat should be regarded as only a strategic withdrawal. The investigating attorneys at the Department of Justice who began the operation will retain the power to issue subpoenas, which can cause havoc to any bank that receives one. As long as that threat remains, banks will continue to be wary of doing business with companies that might possibly attract one.

Moreover, Operation Choke Point may soon get a new player.

Until now, the mightiest agency in financial regulation, the Consumer Financial Protection Bureau, has played only a small part in Operation Choke Point. But that may be about to change.

About the same time as FDIC issued its new guidance, the bureau issued ominous new guidance of its own. A bureau memo obtained by The Daily Caller warns banks and affected parties against blowing the whistle on the bureau’s investigations.

This is significant because the bureau is, unlike the DOJ and FDIC, almost unaccountable. It was set up so that its head could only be removed under exceptional circumstances. It writes its own budget, and is exempt from most judicial review. So in whatever action it takes to “protect” consumers from industries it doesn’t like, it will be judge, jury, and executioner, and there is nothing the affected business can do about it. Even complaining can be grounds for sanction.

President Barack Obama has said he will veto any attempt by Congress to water down the the buearu’s powers. Congress should call his bluff.

A good start would be to pass Rep. Luetkemeyer’s Financial Institution Consumer Protection Act that was reintroduced last week. Not only are lawmakers within their rights to rein in out-of-control, unaccountable executive branch agencies, it is their duty to do so.