In June 2006, the New York Times, over strident pleas not to from the Bush 43 administration, published details of how counterterrorism officials were "tracing transactions of people suspected of having ties to Al Qaeda by reviewing records from the nerve center of the global banking industry." According to the administration, the program had "helped in the capture of the most wanted Qaeda figure in Southeast Asia." Other outlets like the Wall Street Journal and the Los Angeles Times, which were apparently on the brink of breaking what the Times reported first, also chipped in with their own supplements. The stories received prominent network TV coverage, and reinforced the image of the Bush administration as secretive and far less than transparent.
So the details of how the government was monitoring the operation of the world's financial system to obtain clues to help catch terrorists apparently deserved full exposure. If that's fine, why has the press been barely interested in a far more troubling development, namely Eric Holder's U.S. Department of Justice using pressure on the financial system to conduct "a massive government overreach into private businesses that are operating within the law," which has been going on for at least a year? Welcome to "Operation Choke Point."
An American Banker photo montage lays out the timeline (bolds are mine throughout this post):
On March 20, 2013, federal prosecutor Michael Bresnick gave a little-noticed speech to the Exchequer Club in Washington in which he said that that (the) Justice Department planned to crack down on banks that allowed online scammers to access the payments system. "Sadly, what we've seen is that too many banks allow payment processors to continue to maintain accounts within their institutions, despite the presence of glaring red flags indicative of fraud," said Bresnick, who was then the executive director of the Financial Fraud Enforcement Task Force. Bresnick has since gone into private law practice.
As Operation Choke Point got under way, the Justice Department sent more than 50 subpoenas to banks and payment processing firms, according to a presentation made by federal prosecutors in September. The banks that received subpoenas have not been identified, but a few have disclosed their involvement. They range from large banks, such as the $220 billion-asset PNC Financial Services Group (PNC), to small ones, like the $343 million-asset National Bank of California.
In August, New York Financial Services Superintendent Benjamin Lawsky instructed 117 banks, including the nation's four largest, to develop safeguards aimed at preventing unlicensed online lenders from accessing the payments system. Lawsky also filed suit against online lenders that he said were violating New York's interest-rate cap. "We're really trying to take a shock-and-awe strategy," Lawsky said. "We want to make payday lending into New York, over the Internet, as unappetizing as possible."
Meanwhile, the Federal Deposit Insurance Corp. also stepped its reviews of banks' relationships with online lenders and other businesses that might pose heightened risk for banks.
... during the fall, the Justice Department was pressuring banks that had received subpoenas to settle with the government. The strategy was to reach a settlement with one of the banks that could then be used as a template in talks with other banks, according to sources. At the same time, the Justice Department argued that its tactics were having their intended impact. "The system is working," a Justice official said in September, "and as a result, banks are cutting off processors, processors are cutting off scammers, and scammers are starting to get desperate for a way to access consumers' bank accounts."
... In January 2014, the Justice filed its first proposed settlement as part of Operation Choke Point. The tentative deal called for the $809 million-asset Four Oaks Bank in North Carolina to pay a $1.2 million fine, and to accept tight restrictions on its ability to do business with Internet consumer lenders. A 39-page complaint filed in federal court alleged that Four Oaks willfully ignored violations of the law in order to preserve a lucrative line of business. Four Oaks, headed by chief executive officer Ayden Lee, Jr., did not admit to any wrongdoing.
... In recent months, Operation Choke Point has increasingly become a political football. Rep. Darrell Issa, R-Calif., who chairs the House Oversight Committee, wrote to Attorney General Eric Holder in January, requesting a slew of documents and suggesting that the probe was a veiled effort to eliminate even legal online lending. Around the same time, an anonymous online campaign, "Stop the Choke," sought to persuade conservative lawmakers to attack Justice's investigation. Then in February, Rep. Elijah Cummings of Maryland, the top Democrat on the House Oversight Committee, and 12 other congressional Democrats wrote to Holder urging the Justice Department not to cave in the face of Republican opposition.
DOJ is essentially employing a variant of the tactics former New York Attorney General Eliot Spitzer used against mutual fund companies last decade: threatening to smear them in the business community and otherwise make their lives miserable unless they settle.
Even despite the tactics, some readers may be reacting to all of this as a good idea. After all, payday lenders don't have the cleanest of hands, and some — but far from all — may be operating illegally. There are two problems with this position.
The first is that DOJ doesn't have the constitutional authority to go after businesses whose illegality has not been established by threatening their bank and financial services providers with legal sanctions and regulatory harassment if they don't participate in the persecution. There are these things called laws which must be passed to declare certain financial practices and contracts illegal. That hasn't happened. Short of that, there at least need to be court rulings having the same effect. There is apparently no evidence that DOJ has involved the courts at all.
The second is that although the bankers' montage concentrated on payday lenders, many more business endeavors besides payday lending are involved. At least some of them, as odious as nanny-state officials and other might believe they are, operate legally.
According to a January post at the web site Cryptocoins News, the net DOJ is casting is very wide (the FDIC link is in the original and is valid, confirming that the web site's writers weren't just making things up):
The DOJ is targeting 30 high-risk industries, as labeled by the Federal Deposit Insurance Corporation (FDIC) in 2011, in a report titled “Managing Risks in Third-Party Payment Processor Relationships.”
The FDIC’s list of 30 high-risk merchant categories that are currently being pursued by the DOJ.
Ammunition Sales
Cable Box De-scramblers
Coin Dealers
Credit Card Schemes
Credit Repair Services
Dating Services
Debt Consolidation Scams
Drug Paraphernalia
Escort Services
Firearms Sales
Fireworks Sales
Get Rich Products
Government Grants
Home-Based Charities
Life-Time Guarantees
Life-Time Memberships
Lottery Sales
Mailing Lists/Personal Info
Money Transfer Networks
On-line Gambling
PayDay Loans
Pharmaceutical Sales
Ponzi Schemes
Pornography
Pyramid-Type Sales
Racist Materials
Surveillance Equipment
Telemarketing
Tobacco Sales
Travel Clubs
At Techdirt yesterday, Timothy Geigner, after noting that many porn stars have had their accounts arbitrarily closed because of "high risk," made a number of extremely salient points:
Let's not mince words: a program that was built upon the goals of stopping financial fraud has devolved into a massive government overreach into private businesses that are operating within the law. ... The intention of the government, it would seem, is to make the banks unwilling to deal with the government harassment and simply cut anyone in those industries off from the financial institutions. Nobody is happy about this.
I'm not so sure about that, Tim. Someone in the Justice Department obviously is — as apparently are Democrats like Cummings.
Continuing with Geigner's gut check:
The federal government is lording over legal industries operating within their respective states' laws and single-handedly directing banking institutions to cut their legs out from beneath them. ... It represents a violation of a free and legal marketplace by a government that has as much moral authority as can fit in a thimble.
... This should be terrifying to business owners in every industry. Sure, this time they're going after some companies that you may not like, be they porn, or payday lenders, or people making racist materials, tobacco, or fireworks. But if those industries are operating within the law, they have the right to exist. The law is the only measure by which the DOJ should be invoking banking policy. ... This underhanded attack on free enterprise is simply un-American.
And it's authoritarian.
And, unlike SWIFT, other than limited coverage at some business-related web sites, the press has virtually ignored the ongoing ugliness of Operation Choke Point for over a year. Recent coverage at the Hill, a Washington Post blog, and the Wall Street Journal are all nice. But this is the type of operation which I believe the vast majority of Americans would find appalling — and I daresay that's why the establishment press's key gatekeepers are ignoring it.
Cross-posted at BizzyBlog.com.
