United States: Operation Choke Point Update

House Financial Services Committee Question's FDIC's Involvement in Operation Choke Point after DOJ Announces Two More "Choke Point" Settlements Against Banks, Including One with Criminal Charges under the Bank Secrecy Act

Over the past year and a half, Congress has been at odds with the Obama Administration's Operation Choke Point (OCP) (described below). The latest action occurred on March 24, 2015, as Federal Deposit Insurance Corporation (FDIC) Chairman Martin J. Gruenberg testified on OCP before the House Financial Services Committee's Subcommittee on Oversight and Investigations, chaired by Rep. Sean Duffy (R-WI). At the hearing, Chairman Gruenberg outlined the history and basis of the FDIC's participation in OCP. He noted that in January 2015, the FDIC issued a memorandum to its supervision staff explaining that "institutions need only perform the due diligence, underwriting and monitoring necessary to mitigate any risks that may be inherent in the relationship." He further stated that "the FDIC will not criticize, discourage or prohibit banks that have appropriate controls in place from doing business with customers who are operating consistent with federal and state law."

In response, Subcommittee Chairman Duffy indicated that the FDIC has not gone far enough to correct errors stemming from OCP, calling actions that affect legal businesses "an abuse of power." He criticized Chairman Gruenberg for not disciplining FDIC employees who allegedly forced banks to stop serving payday lenders and other businesses. Chairman Duffy highlighted internal emails critical of the payday lending industry from several FDIC regional directors and stated that "[t]hese people have no place in government, and if you allow them to stay you have no place in government."

DOJ Continues OCP Enforcement

The hearing comes only a week after Department of Justice (DOJ) announced that it reached two more consent decrees in connection with OCP. In civil complaints against CommerceWest Bank and Plaza Bank, DOJ alleged consumer fraud schemes perpetrated by third-party payment processors (TPPPs) that were customers of the defendant banks.

DOJ alleged that V Internet LLC, a TPPP customer of Commerce Bank, allowed unauthorized customer account withdrawals on behalf of a telemarketing company and a payday lender that charged unauthorized $30 payday loan referral fees. Against Plaza Bank, DOJ alleged that a TPPP in which two of the bank's founders and senior executives had a financial interest allowed merchants to make unauthorized withdrawals. The complaints accuse the two banks of ignoring warning signs and knowingly permitting fraudulent merchants, through a TPPP, to illegally withdraw millions of dollars from consumer accounts.

In the two consent decrees (available here and here), the DOJ found that the banks violated both the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA) and the civil antifraud injunction statute. CommerceWest Bank was also charged with a felony violation under the Bank Secrecy Act for failure to file Suspicious Activity Reports. CommerceWest Bank and the DOJ entered into a $4.9 million criminal and civil settlement, consisting of a $1 million civil penalty, $1 million forfeiture, and a $2.9 million forfeiture as part of its deferred prosecution agreement. Plaza Bank was ordered to pay a $1 million civil penalty, as well as a $225,000 forfeiture. In addition to standard injunctive relief, both consent orders set permanent injunctions controlling the banks' relationship with TPPPs. Specific injunctions include prohibitions on:

  • Providing banking accounts or services to TPPPs that are not licensed as money transmitters under state law and registered with the Financial Crimes Enforcement Network (FinCEN);
  • Delegating the due diligence and monitoring of merchants to a TPPP;
  • Providing Automated Clearing House (ACH) services, access, or processing to any merchant engaged in telemarketing or "Internet-based Business" without a due diligence review of the merchant;
  • Providing bank accounts or banking services to any TPPP that processes payments for any merchant that has surpassed the "Return Rate Threshold;"
  • Operating as an "Originating Depository Financial Institution" with regard to remotely created checks or payment orders, without prior authorization; and
  • Continuing to process payments or provide banking services to any entity that the Bank has reason to believe is engaged in any unlawful or otherwise deceptive practices harming consumers.

Overview of OCP

OCP is the coordinated federal multiagency enforcement initiative targeting banks serving merchants that have raised regulatory or "reputational" concerns. OCP seeks to "choke-off" certain merchants' ability to process credit card and ACH transactions by holding banks and payment processors liable for acts committed by the merchants they service. OCP began as part of an effort to investigate the role of financial institutions and payment processors in consumer fraud schemes. The initiative involves the DOJ, the FDIC, the Federal Trade Commission (FTC), and the Consumer Financial Protection Bureau (CFPB), as well as other agencies and states' Attorneys General, comprising the Consumer Protection Working Group of the Financial Fraud Enforcement Taskforce. The agencies' coordinated activity targeting payment processing in a variety of allegedly "high risk" activities was disclosed in 2013.

Throughout 2014, Congress expressed concerns about the broader impact of OCP on legitimate payment processors and the role of the regulatory agencies through various committee hearings, investigations and reports, letters to regulators, and report language accompanying fiscal year appropriations for certain regulatory agencies. In particular:

  • In January 2014, House Oversight and Government Reform Committee Chairman Darrell Issa (R-CA) expressed concerns about OCP and "serious mismanagement and abuse" of legal authority in a letter to U.S. Attorney General Holder.
  • In May 2014, Chairman Issa's staff concluded in a staff report that OCP "is an inappropriate exercise of the [DOJ's] legal authorities, and [has] been executed in a manner that unfairly harms legitimate merchants and individuals."
  • In June 2014, Chairman Issa wrote to FDIC Chairman Martin Gruenberg requesting information on the FDIC's designation of "high risk" businesses.
  • In June 2014, Chairman Issa wrote to FTC Chairwoman Ramirez asking for information on the FTC's involvement in OCP.
  • In July 2014, Congress held hearings on OCP.
  • On Aug. 4, 2014, Representatives Bobby Rush (D-IL) and Steve Cohen (D-TN) wrote to FTC Chairwoman Ramirez "to encourage the Commission to work cooperatively with the electronic payments industry to advance the common goal of protecting consumers from fraud." They urged the Commission to "recognize [the] value [of the Electronic Transactions Association Guidelines on Merchant and ISO Underwriting and Risk Monitoring] in protecting consumers from fraudulent merchants and processors."
  • On Sept. 22, 2014, Senators Saxby Chambliss (R-GA) and John Hardy Isakson (R-GA) wrote to the FTC Commissioners "to encourage the Commission to work cooperatively with the payments industry to advance the common goal of protecting consumers from unlawful merchants." They also indicated that "[the Electronic Transactions Association Guidelines on Merchant and ISO Underwriting and Risk Monitoring] offer a promising approach to denying unlawful merchants access to payment systems."
  • In December 2014, Chairman Issa issued a report on FDIC's role in OCP.

The FDIC responded to the congressional interest in OCP in July 2014 by retracting its list of "high-risk" merchant industries. In January 2015, the FDIC issued a Financial Institution Letter (FIL-5-2015) stating that banks must take a more case-by-case approach to underwriting and banking services. Specifically, the letter "encourages institutions to take a risk-based approach in assessing individual customer relationships rather than declining to provide banking services to entire categories of customers without regard to the risks presented by an individual customer or the bank's ability to manage the risk."

113th Congress - Legislative Proposals

In the 113th Congress, several bills were introduced to stop OCP. On May 5, 2014, Rep. Frank Wolf (R-VA) introduced an appropriations bill, H.R. 4660, Commerce, Justice, Science, and Related Agencies Appropriations Act, 2015, that would have provided that "[n]one of the funds made available in this Act may be used to carry out Operation Choke Point." This language, however, was not included in the final Public Law.

On June 16, 2014, Rep. Luetkemeyer (R-MO) introduced H.R. 4986, the End Operation Choke Point Act of 2014, seeking to amend the Federal Deposit Insurance Act and the Federal Credit Union Act to prohibit the federal banking agencies from prohibiting, restricting, or discouraging banks and credit unions from serving merchants that are licensed, registered, or are otherwise lawful businesses.

On November 20, 2014, Rep. Luetkemeyer introduced H.R. 5758, the Financial Institution Customer Protection Act of 2014, which would have required federal banking regulators to provide material reasons beyond reputational risk for ordering a bank to terminate a banking relationship.

114th Congress - Current Legislative Proposals

There have been several proposals to address OCP in the current Congress. On February 5, 2015, Rep. Luetkemeyer re-introduced the Financial Institution Customer Protection Act bill as H.R. 766, the Financial Institution Customer Protection Act of 2015. Senator Marco Rubio (R-FL) introduced a bill on February 12, 2015, S. 477, the Firearms Manufacturers and Dealers Protection Act of 2015. This bill would deny appropriations to the FDIC, DOJ, or "any other federal agency to carry out Operation Choke Point or any other program designed to discourage the provision or continuation of credit or the processing of payments by financial institutions for dealers and manufacturers of firearms and ammunition." Representative David Schweikert (R-AZ) introduced a companion bill, H.R. 1413, the Firearms Manufacturers and Dealers Protection Act of 2015, in the House on March 17, 2015.

On March 19, 2015, the Senate Budget Committee (SBC) adopted an amendment proposed by Sen. Crapo (R-ID) that aims to prohibit the DOJ from continuing OCP. In his remarks on the amendment, Sen. Crapo argued that OCP affects legitimate business's access to credit, stating that "rather than targeting bad actors for illegal activity, this effort, known as Operation Choke Point, is causing banks to deny or terminate credit lines due to fear of DOJ subpoenas or unjustified regulatory action by federal banking regulators." The amendment was approved in a 13-9 vote of the SBC and is likely to be adopted by the full Senate as part of the 2016 budget resolution. While the amendment is part of a non-binding budget resolution, it is the latest example of Congress' continued and growing concern about OCP and it will influence decisions made later this year by appropriators who hold the Department of Justice's purse strings.

We will continue to monitor these developments.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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