FDIC and DOJ Role in Operation Choke Point

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Operation Choke Point has been widely criticized because it bypasses due process and allows the government to illegally investigate businesses without proof of law-breaking in addition to forcing them to stop doing business with certain companies. Also, the effects of this initiative have had a negative impact on both legitimate businesses and honest American citizens alike.

This sample critical essay from Ultius examines how, without any legitimate or legal justification, the Department of Justice and FDIC have surpassed their boundaries and tried to force banks to do what they say for their own personal gain. 

Operation Choke Point: Department of Justice and the Federal Deposit Insurance Corporation overstepping their boundaries?

Operation Choke Point was an initiative by the United States Department of Justice, partnered with the Federal Deposit Insurance Corporation, and was executed in 2013. The goal was to monitor and investigate American banks and the business they do with specific kinds of companies, such as firearms producers and tobacco companies like Philip Morris (Bresnick). In addition, it was supposed to be aimed to prevent those with intentions to commit fraud from being able to access consumer bank accounts. However, there have been many reports of the initiative being used to intimidate banks into ceasing business with industries these industries that are considered ‘high-risk’ for fraud. 

What is Operation Choke Point?

Operation Choke Point was originally created by the United States Justice Department. Their aim was to ‘choke out’ companies that they considered to have a high risk of illegal activity, despite the fact that these businesses and their practices are often completely legal (“DOJ’s Operation Choke Point”). When it was announced that the government had the intention of cracking down on scams and fraud, federal prosecutor Michael Bresnick stated that:

“[S]adly, what we’ve seen is that too many banks allow payment processors to continue to maintain accounts within their institutions, despite the presence of glaring red flags indicative of fraud” (“Timeline: Operation Choke Point”).

Once the initiative was started, the Justice Department sent over fifty subpoenas to both processing firms and banks ranging from the National Bank of California, worth almost three and a half million dollars, to large banks like the PNC Financial Services Group, worth twenty-two billion dollars. It forced banks to deny service to a wide range of totally legal businesses.

The goal of Choke Point

The goal of implementing this initiative is to cut off payments and other banking services to certain businesses so that they cannot survive. Following their lead, other financial agencies, like the New York Financial Services, instructed one hundred and seventeen banks to employ safeguards to prevent online lenders without licenses from accessing the payment system (“Timeline: Operation Choke Point”). Included in the one hundred and seventeen were the United States’ four largest banking institutions, leaving the number of those directly affected by this initiative ever-increasing. Under Operation Choke Point, a number of legitimate businesses- such as rare coin dealers, firearms, and online gambling- are decided to create a reputational risk high enough to merit an investigation by the federal government. 

Overstepping boundaries

Operation Choke Point is a serious breach of legal boundaries and has been called unconstitutional. The Justice Department lacks any adequate legal right to intrude on the financial privacy of American businesses (“DOJ’s Operation Choke Point”). In order to justify Operation Choke Point, it is being executed through subpoenas being issued under Section 951 of the Financial Institutions Reform, Recovery, and Enforcement Act, which was implemented in 1989. However, the original intent of Section 951 was to allow the government to pursue civil action against companies that were committing fraud against banks, not private companies conducting perfectly legal business (“DOJ’s Operation Choke Point”). The government has morphed the intent of the bill to fit their current needs.

Short term lending targeted

Despite stating otherwise, the Justice Department’s main focus for Operation Choke Point was to specifically target short-term lending. Memoranda from previous meetings and communications have shown a sharper focus on short-tern lending, in addition to online lending. Furthermore, senior officials involved in the implementation of Operation Choke Point are on record to have expressed that the elimination of this kind of lending would be considered a momentous accomplishment for consumers (“DOJ’s Operation Choke Point”). There does not seem to be any legitimate explanation or justification for Operation Choke Point, yet the Department of Justice has moved forward with it anyway.

The role of the FDIC

The Department of Justice is not the only government organization that has been seriously over stepping boundaries with the implementation of Operation Choke Point. The Federal Deposit Insurance Corporation is also guilty of the same questionable behavior. The FDIC has justified their actions by equating legitimate businesses, like coin dealers, with debt consolidation scams, drug paraphernalia, and Ponzi schemes. The organization vindicated these outrageous classifications by citing themselves, stating that the categories have been ‘noted by the FDIC’ (“FDIC Involvement”). There is no clear indication of where exactly the FDIC gets the permission to carry out these kinds of actions. It is suspected that the FDIC composed this list with the intention of intimidating banks into denying business services to these kinds of companies.

Personal vendetta by FDIC?

According to documents produced to Congress, certain senior FDIC policymakers oppose payday lending on personal grounds and have previously tried to use the power of the FDIC to put a stop to it. Personal emails reveal that some of the FDIC’s senior bank examiners “literally cannot stand payday” and have expressed interested in demanding that banks cease all business relations with these companies (“FDIC Involvement”). In one particular case, an official in the Division of Depositor and Consumer Protection commanded that, in FDIC Chairman Martin Gruienberg’s letters to Congress, he always mention ‘pornography’ when speaking on payday lenders and other similar industries. The point of this was to send an image:

“regarding the unsavory nature of the businesses at issue” (“FDIC Involvement”).

As with the Department of Justice, there is a clear personal vendetta that is inspiring Operation Choke Point. 

Effects of Operation Choke Point

The major problem that Operation Choke Point creates is the precedent that it sets. The United States government runs on a delicate system of checks and balances. Each branch and department and committee is carefully monitored and kept in check by the others within the government body. Some fear that that:

"if Congress won’t assert its constitutional authority by blocking such behavior, it will never retrieve the power and authority the Constitution gave it” (Leahy).

Unelected officials are imposing their own rules and restrictions on legitimate businesses without any justifiable proof or evidence of fraud. If one branch of government is allowed to abuse its power and proceed without any monitoring or balance, it creates leeway for others to do the same. When government committees and departments are able to do whatever they want, it leaves room for inappropriate behavior and an abuse of power. 

Other industries affected by Operation Choke Point

Operation Choke Point is also having negative effects on other businesses on the government’s ‘high-risk’ list, not just the payday lenders. By denying companies vital banking services that keep their businesses flowing and moving, the government has effectively delivered a hit to completely genuine businesses. It has been reported that, as a direct consequence of Operation Choke Point, firearms shops are reporting that they have also been denied banking services for no legitimate reason (Zywicki). In addition, there have been some reports made by porn stars that their bank accounts have suddenly been terminated due to ‘moral’ discrepancies related to the ‘reputational risk’ of conducting business with these individuals (Zywiski). This has largely been decried as a means of censoring the porn industry. Out of fear, banks have cut off banking services to, not just businesses that deal in particular ‘high-risk’ activity, but now individuals who happen to work in specific industries. If companies and individuals are conducting perfectly legal business and not committing any crimes or injustices, it is inappropriate for them to be punished or cut off from banking services without any reasonable evidence.

Response

Operation Choke Point was not exceedingly popular in Congress. On August 22, 2014, a letter from thirty-one members of Congress was sent to FDIC Chairman Martin Gruenberg and Attorney General Eric Holder pointing out the obscurity of the initiative; congressmen were not informed that it had officially become a federal initiative and that it had been dubbed, ‘Operation Choke Point’ (Leahy). In the letter, the congressmen stated that they were:

“especially troubled by reports that the DOJ and FDIC are intimidating some community banks and third part payment processors with threats of heightened regulatory scrutiny unless they cease doing business with online leaders. As a result, many bank and payment processors are terminating relationships with many of their long-term customers who provide underserved consumers with short-term credit options” (Leahy).

They believed that President Obama and the government did not have the proper authority to carry out Operation Choke Point and that the Department of Justice and FDIC were vastly overstepping their boundaries. 

Republican efforts to discredit the program

To prove that Operation Choke Point denies banking services to legitimate businesses, Republicans have called in executives from major financial institutions, in addition to judicial and economic regulatory agency representatives, to testify before Congress. These witnesses testified that more than eighty United States banks have abruptly ended business with payday lenders out of fear of retaliation from government officials (Calder). There were also representatives testifying that the same was beginning to happen to firearms and ammunition businesses. During the testimonies, former Chairman of the FDIC William Isaac stated that:

“Operation Choke Point is one of the most dangerous programs I have experienced in by forty-five years of service as a bank regulator, bank attorney and consultant, and bank board member. Operating without legal authority and guided by a political agenda, unelected officials at the Department of Justice are discouraging banks from providing basic banking services to legitimate businesses simply because they don’t like them. Bankers are being cowed into submission by an oppressive regulatory regime” (Calder).

Witnesses also referred to the government list of ‘high-risk’ businesses as a hit list to target an ideological crusade.

Conclusion

In short, Operation Choke Point is an abuse of authority on the part of the Department of Justice and the Federal Deposit Insurance Corporation. Despite insisting that their concern stretches across a wide variety of businesses and industries, the initiative focuses particularly on payday lending. Operation Choke Point has forced banks to terminate business relationships with legal and legitimate companies without any justification. These illegal actions have affected a number of innocent, law-abiding businesses and even individuals. If allowed to continue, the list of those victimized by Operation Choke Point will only continue to grow. This kind of behavior by the government is completely unacceptable, unjustifiable, and should be halted immediately before they send the message that the rules do not apply to them.

Works Cited

“Timeline: Operation Choke Point”. The American Banker. SourceMedia. Web. 3 Mar. 2015. 

113th Cong., HR Rept. “The Department of Justice’s “Operation Choke Point”: Illegally Choking Off Legitimate Businesses?” Government Printing Office. Washington, DC., 29 May 2014. Web. 2 Mar. 2015. 

113th Cong., HR Rept. “Federal Deposit Insurance Corporation’s Involvement in “Operation Choke Point””. Government Printing Office. Washington, DC., 8 Dec. 2014. Web. 3 Mar. 2015.

Bresnick, Michael J. “Financial Fraud Enforcement Task Force”. The United States Department of Justice. The United States Department of Justice, 20 Mar. 2013. Web. 3 Mar. 2015. 

Calder, Keith. “Operation Choke Point Exposed in a Week of Hearings”. American Commitment. American Commitment. Web. 3 Mar. 2015. 

Leahy, Michael Patrick. “Obama’s ‘Operation Choke Point’ Seeks to Destroy Sectors of Private Lending Industry”. Breitbart. Breitbart, 8 Jan. 2014. Web. 2 Mar. 2015. 

Zywicki, Todd. “Operation Choke Point”. The Washington Post. The Washington Post, 24 May 2014. Web. 2 Mar. 2015.