Timothy D. Belevetz is a partner in Holland & Knight's Washington, D.C., office
The U.S. Department of Justice (DOJ) has quietly ended its four-year effort to prevent banks from providing credit and other services to certain businesses that had been deemed controversial. In an Aug. 16, 2017, letter to Rep. Bob Goodlatte (R-Va.), Chairman of the House Judiciary Committee, the DOJ stated that effective immediately it was ending the program, known as Operation Chokepoint. The DOJ did not widely announce the end of the program through a press release or other public statement.
Operation Chokepoint was designed to curb fraud by choking off wrongdoers' access to the national banking system, a requirement for the operation of nearly every business, legitimate or not. The initiative encouraged banks to deny services to certain categories of businesses seen as posing high risk to consumers and, accordingly, reputational risk to banks. Although the program was focused on abusive practices by illegal third-party payment processors, it also targeted merchants such as gun dealers, credit repair services, promoters of get-rich products, and escort services. It was launched in 2013 with the issuance of a set of bank subpoenas that attached Federal Deposit Insurance Corporation (FDIC) guidance identifying certain "elevated-risk" merchant categories. A financial institution that took on this type of customer faced the possibility of a civil enforcement action for providing services to a business that either the bank knew (or should have known) was engaged in illegal activity or generated reputational risk sufficient to jeopardize the safety and soundness of the institution.
The program was controversial from the outset. Critics claimed it harmed legitimate industries that happened to be disfavored under the Obama Administration. Detractors also complained that it shifted too much policing responsibilities from regulators to the banks themselves.
In its letter, the DOJ stated that it would "not discourage the provision of financial services to lawful industries, including businesses engaged in short-term lending and firearms-related activities." The DOJ sent a nearly identical letter to Sens. Thom Tillis (R-N.C.) and Mike Crapo (R-Idaho), who were among the legislators urging the DOJ to discontinue the program.
Takeaways and Considerations
Banks will still do well by implementing effective compliance programs to enable them to know the true identity of their customers, including third-party payment processors, and prevent those customers from using the banking system for illegal purposes. However, they should be able to breathe a little easier by not having to worry as much about the burden of responding to an Operation Chokepoint investigative subpoena or the cost of an enforcement action initiated pursuant to the program.
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