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FDIC Backpedals on Operation Choke Point as Victims Fight Back

Friday, August 1, 2014

This week, the Federal Deposit Insurance Corporation (FDIC) released a new Financial Institution Letter purportedly aimed at “clarifying its supervisory approach to institutions establishing account relationships with third-party payment processors (TPPPs).” As we have reported, FDIC is among a number of federal agencies involved in Operation Choke Point, an enforcement program that claims to target financial fraud, but that many say is being used to choke off banking services to legitimate, although politically-disfavored, businesses. 

Another FDIC Financial Institution Letter from 2011 included a list of so-called “high risk” merchant categories for which banks servicing TPPPs were instructed to be on alert. The risky activities, according to FDIC, included firearm and ammunition sales.  The regulators, of course, could not plausibly portray firearm or ammunition sales as inherently fraudulent in the same manner as other activities on the list (such as Ponzi schemes).  Nevertheless, they claimed the activities posed “reputational risk” to the banks because some people consider them personally or politically objectionable.

According to a report by the House Oversight and Government Reform Committee, the Department of Justice (DOJ) then launched Operation Choke Point to increase regulatory scrutiny of banks doing business with merchants on the list. The banks, fearing compliance costs and bad publicity that could arise from DOJ investigations, in turn began denying or severing business relationships with customers in the listed industries. As a result, a number of firearm-related businesses lost or were denied access to credit, without regard to their individual creditworthiness or financial performance.

FDIC’s latest moves seek to walk back its portrayal of the listed merchant categories as inherently risky to banks. Indeed, FDIC has revised the online version of its guidance materials to remove the list. Monday’s Financial Institution Letter also states:

[T]he lists of examples of merchant categories have led to misunderstandings regarding the FDIC’s supervisory approach to institutions’ relationships with TPPPs, resulting in the misperception that the listed examples of merchant categories were prohibited or discouraged. The FDIC encourages insured depository institutions to serve their communities and recognizes the importance of services they provide. In fact, it is the FDIC’s policy that insured institutions that properly manage customer relationships are neither prohibited nor discouraged from providing services to customers operating in compliance with applicable federal and state law. Accordingly, as part of clarifying our guidance, the FDIC is removing the lists of examples of merchant categories from outstanding guidance and the article.

FDIC, in other words, is trying to portray the matter as a miscommunication and is suggesting that banks were overreacting to its “guidance” by severing relationships with customers that were in the listed categories. Needless to say, FDIC is not accepting responsibility for creating what many say became the target list for Operation Choke Point, much less acknowledging the businesses were deliberately being forced out of the market for banking services. Indeed, FDIC’s statement seems to blame the list on the TPPPs themselves: “The original documents contained lists of examples of telemarketing or Internet merchant categories that had been associated by the payments industry with higher-risk activity” (emphasis added).

On the other hand, FDIC’s rescission of the list and its acknowledgement that, at the very least, the list conveyed the wrong message are welcome developments. 

Whether that settles the matter of Operation Choke Point, however, is far from clear.

Brian Wise, who helped create the U.S. Consumer Coalition to shed light on the abuses of Operation Choke Point, remained skeptical in comments to the Washington Times:

While we support the FDIC’s decision to remove the list of ‘high-risk merchants’ from the FDIC website, damage has already been done to countless businesses across the country who have already lost their bank accounts. … Whether the list is published on the FDIC’s website or not, we expect banks will still be fearful of doing business with these lawful industries.

Others are pursuing legal remedies to deal with the excesses of Operation Choke Point, including an appropriations rider, litigation, and pending legislation. Congress is also continuing its investigation into the matter, most recently with hearings conducted by the House Judiciary Committee and the House Financial Services Committee.

Clearly, the pressure is on the Obama administration with regard to Operation Choke Point, and while the president might hope the FDIC’s latest action would make that scrutiny disappear, any such hope would probably constitute wishful thinking at this point.

Indeed, The Blaze is now reporting on allegations that tactics like those used in Operation Choke Point may have been employed against specific political groups, including Pueblo Freedom and Rights, the grassroots organization that led last year’s historic recall of anti-gun Colorado Senator Angela Giron.

Given all this, and who knows what details of Operation Choke Point that may yet emerge, the FDIC’s recent attempts to cover its tracks may be a case of too little, too late.

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