As noted by William Isaac (former FDIC Chair) in his BankThink piece “DOJ Memo Leaves No Doubt About Choke Point’s Motives” he House Financial Services and Judiciary committees held hearings this week ways to curtail Operation Choke Point – a plan which “starves” certain companies (as detailed in a prior Business Advocate pieces – A Stripper, An Ambassador, and Gun Dealer Walk Into A Bank ... And No One Can Open An Account and Operation Choke Point -- One Man's Government Investigation Is Another's Government Persecution – these companies that the government see through a jaundiced eye) by (in)directly denying essential banking services.
The former FDIC Chair views Operation Choke Point as “a particularly egregious example of an unconstitutional abuse of power that ought to alarm and frighten each of us, irrespective of our ideology, party affiliation, or view of the particular products or services being cut off.” Operation Choke Point uses long-established Bank Secrecy Act, Anti-Money Laundering, and Know Your Customer laws and policies to coerce banks to stop doing business with “non-preferred” people and businesses.
Per Mr. Isaac, the DOJ's motivations behind Operation Choke Point are contained in a Sept 2013 memo (which is can be found here as part of the materials made available by the House Committee on Oversight and Government Reform):
“The indisputable truth is that Operation Choke Point is not about BSA/AML in any respect. We do not have to speculate about the strategy and motives behind Operation Choke Point, as they are set forth quite clearly in a Sept. 9, 2013 memo written by Michael Blume, director of the consumer protection branch of the DOJ, to Stuart Delery, assistant attorney general in the DOJ’s civil division, providing a status report on Choke Point. Mr. Blume describes the strategies in these terms on page 14 of the report:
• We principally are pursuing civil, rather than criminal, investigations. Criminal investigations can take considerably longer to complete and generally require a more intensive investigation. Only if an investigation presents particularly egregious criminal conduct are we opening it as a criminal investigation.
• We are targeting banks more than payment processors, and payment processors more than merchants. Any one case, whether against a bank, a processor, or a merchant, takes substantial time and attention from our team. Bank cases will deter other banks, thereby stopping the processing of transactions for fraudulent merchants and the processors with which they work. This may mean filing civil complaints or criminal cases against banks based on transactions with fraudulent merchants and/or processors – but not filing actions against the underlying fraudulent merchants or processors. This practice is not optimal and may present litigation risks. But it may be necessary to prevent the initiative from grinding to a halt due to resources used pursuing the merchants and processors.
These words are chilling to anyone who has any regard for due process and the rule of law. Mr. Blume explains that the DOJ prefers using civil complaints rather than criminal complaints because the burden of proof is much lower and requires less investigation into the facts. And he explains that the DOJ is going after the banks who are not violating the law instead of the merchants who may be violating the law because the DOJ can do much more damage with much less effort by coercing the banks.
Mr. Blume addresses on page 10 of his report the damage being done to lawful businesses that are being denied essential banking services:
Although we recognize the possibility that banks may have therefore decided to stop doing business with legitimate lenders, we do not believe that such decisions should alter our investigative plans. Solving that problem – if it exists – should be left to the legitimate lenders themselves who can, through their own dealings with banks, present sufficient information to the banks to convince them that their business model and lending operations are wholly legitimate.
In the former Chair’s view, Congress should approve legislation neutering Operation Choke Point as it “is doing severe and irreparable harm to firms engaged in lawful businesses.”
In simple terms, Operation Choke Point wants to stop banks and third-party payment processors from abetting fraud. However, while this is a legitimate policy supporting the use of AML/BSA/KYC provisions to this end, many businesses are being ensnared in the Operation Choke Points net, often without notice and too often without true recourse.