With a name, like “Operation Choke Point” you can tell that the government is quite interested in literally choking off business to some lenders. But just who is in the crosshairs of the regulations and penalties that come part and parcel with Operation Choke Point? Is the government interested in shutting down small online lenders, local cash advance locations or even the big banks that do business with smaller lenders? That is the type of question that we all need to ask. For the government’s part, however, they are already offering their version of who this measure is intended for in the form of reports given directly to an investigative panel.

Seal of the United States Department of Justice

Seal of the United States Department of Justice (Photo credit: Wikipedia)

The gist of the statements given by Department of Justice officials and bank regulators seems to be that they are not trying to impose penalties on legitimate lenders, but they are interested in putting some serious pressure on what they deem to be fraudulent businesses. This statement, however, seems to run contrary to what many banks and their business partners have been hearing. Some members of the committee told stories about legitimate businesses, ranging from firearms dealers to payday lenders, who have had their bank accounts terminated because their banks were a bit scared off by the ongoing scrutiny the government is placing on these types of industries.

The ICBA (Independent Community Bankers of America) said that some of its members were, “alarmed by the sweeping scope and aggressive tactics of Operation Choke Point.” In the past 24 months alone, over 50 banks and payment processing companies have been served subpoenas as a direct result of Operation Choke Point.

What is Operation Choke Point?

To put all of these dealings in perspective, it is helpful to understand just what Operation Choke Point really is. This initiative was launched as a method for the government to fight consumer fraud. The purpose(s) are stated as:

To deny banking access to known fraudulent businesses.

To hold banks and payment processing companies accountable if one of their clients is engaged in fraud and still actively doing business.

The highest profile success of Operation Choke Point so far has been that of a consent order and settlement reached with the Four Oaks Bank in North Carolina. The bank has to pay $1.2 million to the government, following charges of allowing third party payment processing companies to provide payments for fraudulent merchants, even after being notified from consumer’s banks regarding unauthorized debits from their bank accounts.

Stuart Delery, the assistant attorney general of the DOJ’s civil division, said, “Our policy is to investigate specific conduct, based on evidence that consumers are being defrauded — not to target whole industries or businesses acting lawfully, and to follow the facts wherever they lead us, in accordance with the law, regardless of the type of business involved.”

Banking industry regulators have, however, increased their focus on banks’ business ties to certain industries. For example, the FDIC recently released a list of 30 industries that they consider to be high risk for fraudulent business activity. These industries ranged from telemarketers to credit repair organizations. One Republican official, Representative Patrick McHenry went so far as to call this list a “government hit list.”

As is usually the case with these types of government initiatives, it will take some time for everything to play out for all of us to plainly see. In the meantime, though, it does not appear that those officials behind Operation Choke Point are going to be easing up any time soon, which means that many business owners – and banks – may soon find themselves facing some very severe – possibly business-killing – restrictions and fines…