Pub. 3 2015 Issue 1

www.uba.org 8 T he FDIC recently took a significant step back from Operation Choke Point, encouraging banks to take a risk-based approach in assessing individual customer relationships and to not categor- ically decline to provide banking services, dealing a devastating blow to the operation the FDIC itself facilitated. Operation Choke Point was created by the Department of Justice (DOJ) in 2013 to “choke off ” banking services to businesses that the Obama Administration deemed “high risk” or “objectionable”, casting a shadow over the banking industry and scaring banks, businesses, and regulators alike. The DOJ intended for Opera- tion Choke Point to combat unlawful, mass-market consumer fraud by restrict- ing their access to banking systems, and initially intended to focus on the payday lending industry. Instead, this operation was used to choke off financial services to many otherwise legitimate small business- es that were considered “high-risk” due to a “reputational-risk” industry list released by the FDIC. Financial institutions used the list as a go-to guide telling them who Operation Choke Point is Getting Choked By Pamela Stockwell not to do business with, including payment processors, payday lenders, coin dealers, pharmaceutical firms, surveillance firms, telemarketers, home-based charities, gun retailers and ammunition merchants, and other businesses purported to be at higher risk for fraud. The FDIC’s list afforded no opportunities to appeal inclusions on the list. In December of 2014, a 20-page investiga- tive report released by the House Over- sight and Government Reform Committee detailed FDIC officials working with the DOJ to implement Operation Choke Point and target legal businesses. FDIC officials were also seen inserting their personal and moral opinions into banking decisions. In- vestigators found emails showing employ- ees trying to influence banks’ decisions on who to do business with by labeling certain industries “reputational risks,” ensuring banks “get the message” about the businesses the regulators do not like, and pressuring banks to cut credit or close those accounts. In the report, the House Government Reform and Oversight Committee stated that following the launch of Operation Choke Point in spring 2013, a wide variety of fully lawful and legitimate businesses received notices that their bank accounts were being abruptly terminated. The ter- minations were often attributed to “regula- tory trends” or “heightened scrutiny” and disclaimed any negative assessment of the accountholder’s financial risk. The House Government Reform and Oversight Committee publicly criticizes the absence of proper legal authority to support the operation, stating on its web- site that the DOJ has “radically and un- justifiably” expanded the intent of Section 951 of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 without any legal authority to implement Operation Choke Point. That law gave the DOJ tools to fight fraud against banks, but not against private companies operating legal businesses. Because of the lack of evidence of an increased risk in providing basic banking services such as deposit accounts, payroll processing, or check clearing services to any of these businesses compared to most other legitimate businesses, the FDIC has acknowledged wrongdoing and is now trying to stop this activity, clarifying that “reputational risk” alone is not enough reason to cut off banking relations.