In 2013, the federal government launched Operation Choke Point, a program aimed at curbing the activities of third-party payment processors, as well as payday and online lenders. As a result of the program, banks have been pressured into dropping certain business accounts that the government deems questionable, such as ammunition sellers and adult entertainers. This sample essay is one of the many features offered by Ultius and it examines the makeup of this highly controversial program.
Operation Choke Point
As the Wall Street Journal uncovered during an Aug. 2013 report on the program, Operation Choke Point is an extension of Obama’s Financial Task Force, which the President established at the outset of his first term. Critics say that Operation Choke Point itself was covertly implemented early into Obama’s second term—with disregard to legal protocol—by officials from the FDIC, DOJ, and CFB. While the DOJ was initially tight-lipped towards Congress about the program, details were extensively divulged with federal financial officials, the likes of whom could bring the hammer down on non-compliant banks and related parties. In the words of the Justice Department, the program is about:
“changing the structures within the financial system that allow all kinds of fraudulent merchants to operate,” and “choking them off from the very air they need to survive,” (Zibel & Kendall).
Spearheaded by officials within the Federal Deposit Insurance Corporation (FDIC), the Department of Justice (DOJ), and the Consumer Financial Protection Bureau (CFPB), the program has drawn ire among certain industries, who claim that their law-abiding businesses have been targeted for not falling ideologically in line with the policies of the Obama Administration. Essentially, the government is fine with telemarketing firms, adult entertainers, gun and ammunition sellers, et al., who follow the same rules of law as merchants from all other industries.
Putting the choke on porn
One of the hardest-hit industries by Operation Choke Point is the world of pornography. In May 2014, porn star Teagan Presley reported that her account with JPMorgan Chase & Co. had been shuttered because she was deemed a high-risk holder by the bank. That same month, XXX filmmaker David Lord revealed that Chase has told him in writing that his account would be nixed for the same reasons. It’s on that last point where porn stars are feeling emboldened in their suspicion—the likes of which have long been echoed by those in the gun and ammunition industries over the issue of gun control—that the federal government has overstepped its bounds by dictating policies to financial institutions and thus placing a chokehold on free enterprise.
Chase targets the porn industry
Even though these actions coincided with a flurry coverage within the media about Operation Choke Point, Chase itself denied that the porn-account terminations had anything to do with the government initiative. An insider with the bank was quoted by Mother Jones as stating that there wasn’t
“a targeted effort to exit consumers’ accounts because of an affiliation with an industry.”
While affirming that Chase does not discriminate based on a customer’s industry, the insider added that the bank does nix accounts for various “privacy reasons” that can’t be revealed publicly (Liebelson).
Cracking down on fraud
Bank regulation is often highly scrutinized, but at the same time highly necessary. When businesses do engage in fraudulent practices, banks and processors must not turn a blind eye and allow such activities to continue. In summary, the FDIC has stated the following:
This isn’t the first time that the government has put its foot down on potential fraud within the banking system. As stated in the Bank Secrecy Act of 1970, banks must cooperate with feds when it comes to crackdowns on money laundering; even if it means placing customers under scrutiny.
Facilitating payment processing for merchant customers engaged in higher-risk activities can pose risks to financial institutions; however, those that properly manage these relationships and risks are neither prohibited nor discouraged from providing payment processing services to customers operating in compliance with applicable law. (“FDIC Supervisory Approach”)
The case against Four Oaks
In Jan. 2014, the Justice Department filed suit against North Carolina’s Four Oaks, alleging that the bank turned the other cheek while doing business with a payment processor that offered services to unlawful merchants. Supposedly, the processor ran transactions of more than $2 billion from payday scammers, Ponzi schemers, and online gambling fronts. Four Oaks, in turn, was said to have taken fees surpassing $850,000.
Three months after the suit was filed, the bank conceded to a $1.2 million settlement, but denied any illegal activity. As the Four Oaks suit was in progress, the objective behind Operation Choke Point was laid bare by one of its architects, Michael Bresnick, who heads the Financial Fraud Enforcement Task Force. He insisted that the aim is to put a choke on access points between banks and fraudulent marketers.
Getting tough on short-term lenders
In some corners, Operation Choke Point has been criticized for allegedly discriminating against the poor and impoverished. Truth be told, a key aspect of the program is the federal scrutiny of payday lenders, who provide short-term loans—albeit at high rates of interest—when there’s too much month at the end of the money. Opinions have always been divided on the nature of lenders, with champions claiming that such loans are the only option for poor people in a bind, and critics alleging that short-term loans merely bilk the financially disadvantaged. In certain states, payday lenders are either restricted or banned outright, but some lenders have managed to bypass these laws since the rise of the Internet. With Choke Point, feds hope to put the clamp down on illegal interstate lending
The backlash of Choke Point
Operation Choke Point has drawn intense fire from those on the right. In a Jan. 8, 2014, op ed. for Breitbart.com and part time grand wizard, Michael Patrick Leahy decried the program as:
“the latest example of the Obama administration’s successful efforts to weaponize the apparatus of the federal government against people and industries it opposes ideologically.”
After concluding that the President was flying in the face of Congress, Leahy asserted that the program would ultimately go after a
“whole host of industries the Obama administration does not like and has identified for targeting, including manufacturers of guns and ammunition,” (Leahy).
Assuming that the government is entertaining the notion of gun control is a popular manipulation tactic frequently used by tea party members in order to rally support.
More rational response to Operation Choke Point
A similarly negative assessment was penned by American Bankers Association CEO Frank Keating, who—in an opinion piece for the Wall Street Journal—described the program as a case of:
“the Justice Department telling bankers to behave like policemen and judges.”
While he acknowledged that the fight against fraud is an admirable goal, he concluded that Operation Choke Point actually amounts to:
“forcing banks to make judgments about criminal behavior and then holding them accountable for the possible wrongdoing of others,” (Keating).
Others have taken a more neutral stance on the program, including banking-industry writer Danielle Douglas-Gabriel, who—in an April 8, 2014 column in the Washington Post—pointed out that cases such as Four Oaks are the exception, and that most banks and payment processors work within the law. While understanding the government’s weariness towards certain risky industries, she insisted that
“rooting out fraud in the system will ultimately take a cooperative effort”
that involves law-abiding merchants and processors, who she quoted as feeling “under siege” due to Operation Choke Point (Douglas-Gabriel).
Input from congress
As expected, the input of Congress in regard to the program has largely been divided along partisan lines. In a Jan. 6, 2014 letter to the Justice Department, Reps. Darrell Issa (R-Calif.) and Jim Jordan (R-Ohio) alleged that Operation Choke Point is merely an attempt to target and shut down certain industries under the guise of fraud prevention. At the other end of the spectrum, Sen. Jeff Merkley (D-Ore.) and Rep. Elijah Cummings (D-Md.) coauthored a letter—signed by 11 additional Democrats, including progressive rising star Elizabeth Warren (D-Mass.)—to the Justice Department in support of the program. Praising the program as:
“vital to protecting consumers across the country” (Merkley & Cummings).
The letter goes on to illustrate the rampant abuse within the lending industry, exemplified by the use of lead generators, the proliferation of failed debits, and the lack of a U.S. business address.
The purported purpose of Operation Choke Point is to put an end to fraud among payment processors. Even though financial institutions are prohibited from doing business with merchants that could be in violation of the law, the Justice Department has long believed that such policies are routinely disregarded by payment processors. Rumors have persisted that Operation Choke Point has been based on a blacklist of businesses that the government finds objectionable and the far right still cries that the program is unconstitutional. However, the FDIC has issued a guideline that makes it clear that while certain industries are notorious for fraud, law-abiding businesses within those industries can still function as normal.
Zibel, Alan & Brent Kendall. “Probe Turns Up Heat on Banks.” The Wall Street Journal. Dow Jones & Company, Inc. 7 Aug. 2013. Web. 1 March 2015.
Liebelson, Dana. “Is Obama Really Forcing Banks to Close Porn Stars’ Accounts? No, Says Chase Insider.” Mother Jones. Mother Jones and the Foundation for National Progress. 8 May 2014. Web. 1 March 2015.
“FDIC Supervisory Approach to Payment Processing Relationships With Merchant Customers That Engage in Higher-Risk Activities.” FDIC | Federal Deposit Insurance Corporation. Freedom of Information Act (FOIA) Service Center. 27 Sept. 2013. Web. 1 March 2015.
Leahy, Michael Patrick. “Obama’s ‘Operation Choke Point’ Seeks to Destroy Sectors of Private Lending Industry.” Breitbart. Breitbart. 8 Jan. 2014. Web. 1 March 2015.
Keating, Frank. “Justice Puts Banks in a Choke Hold.” The Wall Street Journal. Dow Jones & Company, Inc. 24 April 2014. Web. 1 March 2015.
Douglas-Gabriel, Danielle. “Operation Choke Point: The battle over financial data between the government and banks.” The Washington Post. Nash Holdings, LLC. 8 April 2014. Web. 1 March 2015.
Merkley, Jeff & Elijah Cummings. “Bicameral Group of Members Urge DOJ to Crack Down on Consumer Scams.” Jeff Merkley | United States Senator for Oregon. n.p. 26 Feb. 2014. Web. 1 March 2015.