Friday, June 6, 2014
The program, launched in April 2013 and known as Operation Choke Point, resulted in over 50 subpoenas being issued to banks and payment processors in just nine months, according to a report released on May 29, 2014, by the House Committee on Oversight and Government Reform. The DOJ program has also prompted related crackdowns by state and federal financial services regulators, and in turn resulted in several banks and acquirers terminating relationships with businesses that regulators consider objectionable.
In an April 2014 letter to the DOJ and members of Congress, the Independent Community Bankers of America said Operation Choke Point is bad for business. "While preventing fraud is a top concern for community banks, it needs to be balanced with ensuring that businesses and consumers that operate in accordance with applicable laws can still access payment systems," wrote ICBA President and Chief Executive Officer Camden R. Fine.
Jonathan Ellman, Senior Vice President, Regulatory Compliance and Government Affairs at Vantiv LLC, made a similar observation during an interview at the Transact 14: Powered by ETA conference held in early April. "I don't necessarily agree the level of pressure is appropriate to the problem," he said.
Rep. Darrell Issa, R-Calif., chairman of the House Committee on Oversight and Government Reform, called the program an "abuse of power" by the DOJ. "If the administration believes some businesses should be out of business, they should prosecute them before a judge and jury," he said. "By forcibly conscripting banks to do their bidding, the Justice Department has avoided any review and any check on their power."
According to the house committee's report, "Operation Choke Point has forced banks to terminate relationships with a wide variety of entirely lawful and legitimate businesses." And the report offers evidence (in the form of internal memoranda) that the DOJ isn't concerned about the program's impact on what it terms legitimate merchants.
The committee's report did not name any of the affected banks and processors, but Dow Jones Business News reported that several banks have disclosed investigations related to Operation Choke Point. These include PNC Financial Services Group, Salt Lake Citybased Zions Bancorporation, and a small North Carolina bank, Four Oaks Fincorp Inc.
The case against Four Oaks Four Oaks reached a $1.2 million settlement with the DOJ in January 2014 over allegations that it processed in excess of $2 billion in payments for allegedly fraudulent merchants. The DOJ offered details of the Four Oaks case in a May 7, 2014, departmental blog post. The post said a Texas-based processor that processed payments for Four Oaks was initiating unauthorized debits to consumer accounts, but that the bank ignored those warnings in exchange for more than $850,000 in transaction fees.
"The Justice Department has made it a priority to hold the perpetrators of consumer fraud accountable," DOJ attorneys wrote in the blog post. "But fraudsters can't act alone. They need access to the banking system to get money from their victims. And when financial institutions choose to process transactions even though they know the transactions are fraudulent, or willfully ignore clear evidence of fraud, they are profiting from illegal activities as well as breaking federal law."
The DOJ program has prompted several initiatives in response. The Electronic Transactions Association released a comprehensive set of guidelines for ISOs and processors on how to underwrite, monitor and manage risks associated with customer relationships. And at least one vendor has introduced a merchant investigation and monitoring solution for high-risk merchants.
The product, which goes by the name KYC Governor, was developed by Bellevue, Wash.-based G2 Web Services to help banks and their acquiring partners prevent the boarding of merchants outside their risk parameters, which might trigger Operation Choke Point subpoenas.
"The goal of KYC Governor is to reduce the fear and uncertainty banks are feeling from Operation Choke Point, and the fines and subpoenas that have come along with it," said Ed Barton, President of G2 Web Services, in announcing the new offering. "Clients particularly appreciate the ability to proactively identify merchants in 20+ high-risk categories outlined by the FDIC, including payday lending and telemarketing, and to monitor them accordingly."
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