Operation Choke Point Under Attack

Operation Choke Point, a Department of Justice (“DOJ”) initiative designed as an anti-fraud measure has been under attack, with a congressional committee report  released May 29 and a newly filed lawsuit coming from the Community Financial Services Association of America. The DOJ has operated the program by notifying banks of accounts that they believe pose a “high risk” of supporting fraudulent activity or which pose a “reputational risk” to the bank and encouraging the banks to close such accounts. However, both the congressional committee report and the lawsuit claim that the DOJ, acting in combination with banking regulators, are attempting to deprive certain politically unpopular, but legitimate businesses of banking services (depriving them of their ability to survive, hence creating a “choke point”). The Community Financial Services Association is a trade organization representing payday lenders, but the congressional committee report also cited fireworks dealers, gun dealers and performers within the adult entertainment industry as being targets of the DOJ’s program. Even though they are faced with the prospect of losing clients, many banks are not in a position to argue and are operating with little latitude as many of them have entered into agreements suspending settlement obligations provided they are not involved in any prosecutions for a set time horizon. Some banks, recognizing which industries are being targeted have chosen to exit those lines of business entirely rather than deal with potential investigations and the increased expense of time and money that may be required to handle individual account closure requests from regulators and/or the increased documentation and monitoring of accounts within those industries to prove the bank had performed proper due diligence. Commentators, plaintiffs, and the House Financial Services Committee have all expressed concern over the nebulous “reputational risk” standard, arguing that it could easily be applied to numerous industries (some of which have been covered in Operation Choke Point and some which have not) and also that it could be applied discriminatorily against companies within the same industry. Perhaps more concerning than the discriminatory application concerns are the concerns generated as a result of the government acting largely as an unchecked moral policeman of legally-operated industries and businesses. Additional court cases are expected and further congressional investigation will hopefully lend more light, both as to the extent of the Justice Department’s authority in this area and as to the full list of the program’s targets.