The job of government, some people say, is to protect life and property and maintain the rule of law, period. But even that much government may be too much for the opponents of a Justice Department initiative known as Operation Choke Point.
The idea behind Operation Choke Point is simple: stop banks and third-party payment processors from abetting fraud. Financial institutions have long been required to watch out for (and report) evidence of criminal activity. Yet they have long been tempted to look the other way, since criminals can also be highly profitable customers. (The $8.9 billion fine against BNP Paribas this week for transferring money to Sudan and other blacklisted countries is just the latest case in point.)
In recent years, scammers of many sorts have developed ways of systematically extracting money from people’s bank accounts. In doing so, they have benefited from the rise of online commerce and automatic debiting, and also, in too many cases, from the complicity of banks, which have sometimes lent a hand even when the warning signs were staring them in the face.
In April, federal prosecutors announced a settlement with Four Oaks Bank & Trust of North Carolina. Four Oaks and a Texas-based payments company had processed roughly $2.4 billion in transactions benefiting illegal payday lenders, money laundering of Internet gambling operations and, in one case, a thinly disguised online Ponzi scheme.
Four Oaks employees suspected something was amiss. One tipoff: charge reversal rates of 30 percent to 70 percent, compared to what regulators say is a normal rate of 1.5 percent. Despite complaints from attorneys general and other warning signals, however, the bank did nothing except go on taking its cut. “I’m not sure ‘don’t ask, don’t tell’ is going to be a reasonable defense,” one bank manager commented in a cautionary email that colleagues chose to ignore.
Mass-market consumer fraud, in all its forms, is a huge law enforcement problem, costing people tens of billions of dollars a year, by the FBI’s estimate. Older Americans, a prime target, are bilked out of $2.9 billion a year, according to a study by MetLife. A few weeks ago, a payment processor agreed to surrender its claim to $1.1 million in earnings from what the Federal Trade Commission said was the company’s knowing alliance with a bogus credit-card interest rate reduction service that had defrauded tens of thousands of consumers out of more than $10 million in all.
So who would object to a crackdown on this sort of scam? Who, that is, other than the scammers who are being cracked down on?
Well, the objectors turn out to be surprisingly numerous, and surprisingly righteous. Some of them, moreover, hold seats in Congress. Rep. Blaine Luetkemeyer, R-Mo., for one, just last week introducedlegislation to, in his words, “stop these backdoor efforts by government bureaucrats to blackmail and threaten businesses simply because they morally object to entire sectors of our economy.”
That is the theme of the anti-Choke Point crusaders, whose congressional spokespeople also include Sen. David Vitter, R-La., and Rep. Darrell Issa, R-Calif., chairman of the House Oversight and Government Reform Committee. Issa’s committee, in a recent report, claimed that Operation Choke Point had “forced banks to terminate relationships with a wide variety of entirely lawful and legitimate merchants.”
The committee could not, however, point to any real-life example of a bank being told to behave this way. The best evidence it could muster was a 2011 guidance memo in which the Federal Deposit Insurance Corporation (making no reference to Operation Choke Point) identified 30 lines of business, including get-rich products, drug paraphernalia and escort services, with a high potential for fraud. The point of the memo, though, was simply to highlight areas where banks and payment companies should be looking for signs of trouble – for, say, an unusually “high volume of consumer complaints” or “a large number of returns or charge backs.”
How, then, to explain the protest and indignation? One obvious factor is the political power of the financial industry. Many bankers work hard to avoid the legal and reputational problems that come from doing business with lawbreakers. Others, though, seem to angrily reject the notion that they have a responsibility to exercise due diligence; and, as often happens in Washington, the banking establishment has decided to stick up for its worst elements rather than its best. “When you become a banker, no one issues you a badge, nor are you fitted for a judicial robe,” American Bankers Association CEO Frank Keating argued in a recent Wall Street Journal op ed, summing up the “we can’t be bothered” attitude of some of his constituents and allies.
In addition to the banks and payment processers and their respective trade associations, the forces of opposition appear to include online gamblers and payday lenders. The payday lending industry has come under mounting criticism for a business model that depends on getting borrowers stuck in triple-digit-interest debt for months on end. Twenty-two states have banned or sharply limited such loans. Some lenders have responded by moving online or engaging in other subterfuges, and a crackdown on the processing of illegal payments clearly poses a threat to their ability to make loans that violate the law. (And even licensed payday lenders and money transmitters have sometimes been unable to get bank accounts; but that’s an old industry complaint – one that long predates the 2013 launch of Operation Choke Point.)
Undoubtedly, there is money to be made – campaign money – by legislators who decide to join the attack. And if some of them seem to have let their rhetoric get out of control, perhaps that can be attributed to a combination of reflexive government-bashing and the need to find moral cover for a position that would otherwise sound a lot like shilling for an especially smarmy collection of special interests.
Fortunately, this strange cause has not gained traction in the Senate, and the Justice Department appears to be standing behind the program. Two banks, Zions and PNC, have disclosed that they are currently under investigation for facilitating fraud. The Department has announced similar investigations into more than 10 additional (but as yet unnamed) banks and payment processing companies. Last week, Attorney General Eric Holder issued a statement vowing to “enforce the law against both the fraudsters who prey on consumers and the financial institutions who choose to allow these crimes to occur.”
As the Operation continues, and word gets out, most people will probably respond well to the phenomenon of Uncle Sam challenging (rather than enabling) the unlawful conduct of banks. Perhaps, in time, we will hear fewer lawmakers railing against what ought to be viewed as a normal and uncontroversial exercise of law enforcement.