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House Report: "Choke Point" Targets Legal Businesses for Asphyxiation

Friday, May 30, 2014

On May 29, House Oversight and Government Reform Committee Chairman Darrell Issa  (R-Calif.)  released a staff report, The Department of Justice's "Operation Choke Point": Illegally Choking Off Legitimate Businesses? The report concludes that the true goal of the operation is to "choke out" certain industries, including legal businesses like sellers of firearms and ammunition, which the current administration considers politically objectionable.

The report follows the Department of Justice's (DOJ's) launch last year of Operation Choke Point, a wide-ranging investigation into banks and payment processors (the middlemen between banks and merchants in financial transactions). DOJ claimed the operation was aimed at combating mass-market consumer fraud by shutting down access to the banking and payment systems that are necessary for fraudulent businesses to operate. The justification was an alleged higher "risk profile" for consumer fraud or potentially illegal activities associated with some merchants or activities identified by the Federal Deposit Insurance Corporation (FDIC).

These "high risk" merchants are typically characterized by high rates of unauthorized transactions, consumer complaints, or evidence of state or federal regulatory or criminal actions against the business customer. However, with no explanation or justification, the FDIC's list of high-risk merchants and activities also lumped in ammunition and firearm sales (among other legal industries) with potentially exploitative or outright illegal enterprises. No one can reasonably suggest that firearms and ammunition sellers pose the same risks of fraud to banks and consumers as Ponzi schemes, cable-box descramblers, "get rich" products, online gambling, pyramid–type sales, debt consolidation scams, and similar schemes.

As NRA recently reported, evidence has been mounting that banks and financial institutions have been responding to the threat or potential for government investigative action and penalties by refusing to do business with legitimate law-abiding companies in the firearm industry. These decisions, moreover, are apparently being made without regard to the specific company's credit, criminal or financial history. Rather, they're predicated on the implicit threat that a bank's business relationship with a listed "high risk" merchant could be enough to trigger a federal subpoena and resulting investigation and lawsuit.     

Earlier this year, Chairman Issa and Subcommittee Chairman Jim Jordan requested that the Justice Department produce documents and communications related to Choke Point. Their resulting review of the 853 pages of internal documents provided in response concludes that "Operation Choke Point is an inappropriate exercise of the Department's legal authorities, and is being executed in a manner that unfairly harms legitimate merchants and individuals."

Other key findings of the report released this week include the following:

  • DOJ acted without the requisite legal basis. In furtherance of Operation Choke Point, the Department of Justice "radically and inappropriately expanded its own authority." Operation Choke Point's investigatory basis purportedly rests on subpoenas issued under Section 951 of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989, or FIRREA. Yet this authority was intended to give the Department the tools to pursue civil penalties against entities that commit fraud affecting banks, not to investigate consumer fraud, much less private companies doing legal business.
  • Despite assertions that the government's intended goal was limited to fraudulent activity, the report finds that DOJ targeted legitimate businesses. The desired effect was clearly to have legal merchants and legitimate businesses "choked off from the financial system." Operation Choke Point, according to the report, effectively transformed the FDIC "high risk" list "into an implicit threat of a federal investigation," a reaction the DOJ anticipated. The Justice Department was aware of the impact on legitimate businesses – that banks were dumping entire sectors of business deemed "high risk" by the government -- and "dismissed them."  The proffered reasoning was that banks and "legitimate" businesses would sort it out, an expectation the report likened to claiming, "if one is not a witch, then they will sink rather than float."
       
  • Rather than have offenders prosecuted on the basis of real and sufficient evidence in a court of law, DOJ misused its authority to "forcibly conscript banks to serve as the 'policemen and judges' of the commercial world."

  • The report specifically cites the consequences of labeling firearms and ammunition sales as "high risk," resulting in law-abiding firearm merchants having existing bank accounts frozen or terminated. "The experience of firearms and ammunition merchants – an industry far removed from consumer finance fraud – calls into question the sincerity of the Department's statements" regarding the scope and goals of  Operation Choke Point.

The report and its appendices are available online.

The report: http://oversight.house.gov/wp-content/uploads/2014/05/Staff-Report-Operation-Choke-Point1.pdf

 First appendix of documents: http://oversight.house.gov/wp-content/uploads/2014/05/Appendix-1-of-2.pdf

Second appendix of documents: http://oversight.house.gov/wp-content/uploads/2014/05/Appendix-2-of-2.pdf 

Congressional action is already underway to reign in what is merely the latest is a growing list of DOJ's abusive practices. We will continue to report as developments unfold.

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