Operation Choke Point finally suffocated by Justice Department

Operation Choke Point is dead, but not forgotten.

Critics of the government campaign, launched in 2013 through Federal Deposit Insurance Corporation guidance, say it used strong-arm tactics to force banks to end legal, but politically unsavory, business relationships.

Among the many companies placed on the government’s “naughty list” of elevated risk were fireworks and firearms companies, strip clubs, home-based charities, amusement game owners, porn stars, travel clubs, online gambling, marijuana dispensaries, and payday and small-dollar lenders. There was no demand to sever these banking relationships, but the overt hint was there, one backed up with more direct and formal letters to institutions.

Although the FDIC backed away from the initiative in 2015, the true death knell for the much-maligned guidance came in an Aug. 16 letter from the Department of Justice’s Office of Legislative Affairs.

“We share your view that law abiding businesses should not be targeted simply for operating in an industry that a particular administration might disfavor. Enforcement decisions should always be made based on the facts and applicable law,” wrote Stephen Boyd, assistant attorney general, in a letter responding to Congressional concerns. “All of the Department’s bank investigations conducted as part of Operation Choke Point are now over. The initiative is no longer in effect, and it will not be undertaken again.”

The Justice Department, he wrote, is committed to bringing enforcement actions only where warranted by facts and the applicable law, without regard to political preferences.

“We reiterate that the Department will not discourage the provision of financial services to lawful industries, including businesses engaged in short-term lending and firearms related activities,” the letter adds.

The response follows concerns detailed in a letter to Attorney General Jeff Sessions from House Judiciary Committee Chairman Bob Goodlatte (R-Va.), House Financial Services Committee Chairman Jeb Hensarling (R-Texas), Rep. Tom Marino (R-Pa.), Rep. Blaine Luetkemeyer (R-Mo.), and Rep. Darrell Issa (R-Calif.). Federal Reserve Board Chair Janet Yellen, and Acting Comptroller Keith Noreika were also copied.

“Financial institutions should be given explicit assurance that they may serve these unfairly targeted industries just like any other legitimate businesses. Institutions should also be encouraged to restore longstanding relationships with lawful, targeted industries,” the letter says.

“Once again, the Trump Administration is changing the rules to make life easier for financial predators and scammers, this time ending a successful effort to crack down on money laundering and other illegal activities by predatory lenders and others.”
Karl Frisch, Executive Director, Allied Progress

Obama Administration attorneys first proposed Operation Choke Point in November 2012.  From February 2013 through August 2013, the Justice Department issued 60 administrative subpoenas to banks doing business with certain types of entities. Affixed to some of these subpoenas, was a list from the FDIC and the Comptroller of the Currency captioned “High Risk Merchants/Activities.”

With regard to payday lenders a 2013 internal Justice Department memo read: “Although we recognize the possibility that banks may have therefore decided to stop doing business with legitimate lenders, we do not believe that such decisions should alter our investigative plans.”

“Solving that problem, if it exists, should be left to legitimate lenders themselves who can, through their own dealings with banks, present sufficient information to the banks to convince them that their business model and lending operations are wholly legitimate,” it added

“In the Obama Justice Department’s view, targeted industries were guilty until proven innocent, and that was fine in its view, because the presumption of guilt was rebuttable,” the representatives’ letter says. “This theory, which underlay Operation Choke Point, turned traditional law enforcement procedure on its head … [It] started by presuming a whole industry guilty until individual merchants prove their innocence.”

On June 22, 2017, the Judiciary Committee convened a roundtable discussion with victims of Operation Choke Point to discuss their experiences and the need for remedial action in the Trump administration.  Many had similar stories of longstanding banking relationships suddenly terminated without any evidence of heightened risk or wrongdoing.

One of the participants—a veteran and a former law enforcement professional—described how his bank came to him and said that, the government “came in like a bunch of thugs” and pressured them to stop serving his small firearms business. Without access to banking services, his business faltered.

Another participant, a firearms manufacturer who had been in business over 40 years, described that he held accounts at over twenty financial institutions and within a short period of time all were terminated. Participants from other industries told of losing access to banking services as recently as April 2017.

That testimony seems to fly in the face of January 2015 guidance from the FDIC encouraging banks to judge customer relationships on a case-by-case basis rather than “declining to provide banking services to entire categories of customers.”

While the FDIC rescinded its “High-Risk Merchant” list, however, it never rescinded its general guidance about reputation risks posed by bank customers or retracted its assertion that the industries it had listed are particularly high-risk.

Goodlatte, Hensarling, Marino, Issa, and Luetkemeyer praised the Justice Department’s “formal and unqualified retreat” from Operation Choke Point in a joint statement.

“We applaud the Trump Justice Department for decisively ending Operation Choke Point … By ending [it], the Justice Department has restored [its] responsibility to pursue lawbreakers, not legitimate businesses,” they wrote.

An Aug. 21 letter from Acting Comptroller of the Currency Keith Noreika provided additional assurances. 

“The OCC is not now, nor has it ever been, part of Operation Choke Point,” he wrote. That has been, and will continue to be, the policy of the agency. The agency rejects the targeting of any business operating within state and federal law, as well as any intimidation of regulated financial institutions into banking or denying banking services to particular businesses.”

“Decisions on who to bank are business decisions and matters of banker judgment,” he added. “We expect banks to assess the risks posed by individual customers on a case-by-case basis and to implement appropriate controls to manage their relationships. The agency expects the banks it supervises to maintain banking relationships with any lawful businesses or customers they choose, so long as they effectively manage any risks related to the resulting transactions and comply with applicable laws and regulations.”

Recently, the OCC issued a supervision tip to examiners that reiterates a policy of not directing banks to open, close or maintain individual accounts, or engage in the termination of entire categories of customer accounts, without regard to the risks presented by individual customers.

The ATM Industry Association was among the trade groups that lobbied for “a complete and permanent end” to Operation Choke Point.

“Operation Choke Point certainly began with laudable intentions, but quickly became a runaway train crashing into hundreds of legitimate businesses,” it said in a statement. “Although regulators indicate that this practice has been ended with regard to ATM operators, the regulatory system has a long ‘memory.’ It would appear that not all field bank examiners have suspended this practice. And larger banks in particular, are still quite sensitive to the additional compliance burdens recently placed on them relative to ATM and other cash-intensive businesses.”

Not everyone, of course, is pleased by the retreat from Operation Choke Point.

“Once again, the Trump Administration is changing the rules to make life easier for financial predators and scammers, this time ending a successful effort to crack down on money laundering and other illegal activities by predatory lenders and others,” says Karl Frisch, executive director of Allied Progress. “The program’s demise was a high-profile goal of the predatory payday lending industry and its allies in Congress.”

“This is a massive giveaway to predatory payday lenders and other shady financial scam-artists. Operation Choke Point has been incredibly effective at cracking down on the flow of money to fraudulent merchants that violate the law and target vulnerable consumers,” he added. “Ending this program will make it easier for financial predators and other unscrupulous industries to get the resources they need to carry out their deceptive and frequently unlawful business practices.”

What’s next? A lawsuit against federal agencies over the rule, brought against a consortium of payday lenders, is still winding its way through the courts.

There is also concern that not all agencies will heed the Justice Department’s plug pulling. Notably, the Consumer Financial Protection Bureau could decide to keep the spirit of the guidance alive, critics say.

“The Department of Justice letter does not mean that Operation Choke Point is over or that its effects are no longer being felt,” says Pete Patterson, a partner at law firm Cooper & Kirk. He spoke at a recent forum sponsored by the Federalist Society.

Patterson decried the government’s use of “sub-regulatory guidance” that, in this case, caused “extensive collateral damage to legitimate businesses.”

He urged Congress to step in and clarify what reputational risk means.

“The financial regulators could certainly come out like the Department of Justice has and repudiate Operation Choke Point,” Patterson says. “They could engage in notice and comment rulemaking that sets down some markers of what reputation risk means and what it can be used to do. Obviously, the regulators also have some leeway in interpreting their own rules and even reversing those rules, but it would not be as durable as Congressional legislation would be.”