Operation Choke Point may not go down in history as one of the Justice Department’s better ideas, but it will certainly be remembered as one of it’s ore aptly named ones. The initiative, a joint effort between the Department of Justice and various bank regulatory agencies (Treasury, the CFPB, the SEC) aims to literally choke-off money to certain types of businesses by making it difficult for them to retain and receive banking services.
These businesses—which are primarily reported on as pay day lenders and online gambling sites, but also include areas such as pornography, ammunition sales and fireworks merchants—are not illegal and the government does not maintain that they are. The government does maintain, however, that some are more likely to behave in a illegal ways such that handling their transactions might become a legal liability for the banks.
Through Operation Choke Point, the federal government is essentially persistently and forcefully reminding banks of the borderline nature of some business arenas, putting lateral pressure on banks to simply avoid these people as clients rather than risk provoking the regulatory wrath of the United States federal government.
The oversight and investigations subcommittee of the House Financial Services Committee had some questions about operation Choke Point earlier this week, or at least some thoughts to share about the direction and nature of the anti-fraud initiative.
Government officials testifying before the committee noted that Operation Choke Point is first and foremost a mechanism by which the government is trying to protect consumers from fraud. Noting payday lending as an example—officials testified that payday lenders who are breaking the law will illegal collection practices are putting their banks into legitimate peril, and that banks need to be aware of this as there are consequences for being actually or willfully ignorant."
"If the bank is operating lawfully and the third-party payment processor is acting lawfully there, you have nothing to be concerned about,” FDIC General Council Richard Osterman said in prepared testimony.
And yet concern over Choke Point is widespread.
"Operation Choke Point is fundamentally unfair to the banks and to the legal businesses that find their banking services cut off. Once banking services are cut off to these state-licensed and regulated businesses, there is no chance for the business to appeal the decision. The company is simply in a business that, while legal, has been determined “undesirable” and therefore “high risk” by the federal bureaucracy. This Orwellian result is frightening,” wrote former chairman of the FDIC William Issac on The Hill blog.
Issac’s sentiment is apparently shared widely among house republicans who summarily drilled the Federal representatives who sat before them Tuesday on the legality, efficacy and wisdom of a Federal program that to them seemed designed to simultaneously extort and coerce bankers while also crippling American small businesses—a regulatory hat trick.
"Our concern is we have a federal government that is out of control and we have bureaucrats that think they can get a swift idea and impose the heavy hand of government on legitimate business that have had no adjudication of fraud,” said Representative Sean Duffy, a Republican from Wisconsin. “You come in here and say fraudulent, fraudulent, fraudulent and you haven’t proved it all."
In May The House Oversight and Government Reform Committee, led by California Republican Darrell Issa issued a report in May that essentially accused the operation of being a backdoor method of persecuting businesses that the current administration merely does not like.
Congressional Rep Blane Blaine Luetkemeye has introduced legislation which he says will “stop these backdoor efforts by government bureaucrats to blackmail and threaten businesses simply because they morally object to entire sectors of our economy."
Democrats tend to see the bill more favorably, and encouraged officials to continue to crack down on payday lenders. No supporter of the initiative PYMNTS contacted had any comment as to how preventing actors in the pornography industry from using their bank accounts was going to help stop payday lenders from adopting abusive practices.