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Comp Blog

Q&A: What is Operation Choke Point?

By: Danielle Wright

CommentFriday - June 27, 2014

img723Q: What is “Operation Choke Point” and are credit unions impacted by this initiative?

A: In 2013, the U.S. Department of Justice launched an investigation of several banks and payment processors known as “Operation Choke Point,” using its investigative authority under Section 951 of FIRREA. Financial institutions and payment processors are considered the “choke-points” in the fraud committed by certain “high risk” businesses that victimize consumers and launder illegal proceeds. Therefore, the goal of the initiative is to deny (choke off) these businesses’ access to the banking system and payment networks.  

What types of businesses are we talking about?  According to the May 29, 2014 House Committee on Oversight and Government Reforms’ staff report on Operation Choke Point, some of the targeted merchant categories associated with high-risk activity include: ammunition sales, coin dealers, credit repair services, dating services, debt consolidation services, home-based charities, escort services, fireworks sales,  lifetime memberships, mailing lists, money transfer networks, online gambling, payday loans, telemarketing, travel clubs, etc. As you can see from the list, many of these businesses may be operating quite lawfully. Nevertheless, many banks are turning these businesses away to stay out of the crosshairs of DOJ and their regulators. That’s why when you Google “Operation Choke Point,” you’ll find that lawsuits have been filed by payday lenders and other businesses that believe they’re being unfairly targeted by DOJ.  

As you read in CUNA’s News Now earlier this month, Rep. Blaine Luetkemeyer (R-Mo.) and a bipartisan group of five members of Congress offered an amendment to the Commerce, Justice and Science Appropriations Bill that would deny funds to operate the program.  And we heard yesterday that Rep. Luetkemeyer introduced HR 4986, the End Operation Choke Point Act of 2014. So stay tuned for additional developments on the legislative front.  

As for industry reaction, CUNA joined a coalition of financial services trades (ICBA, CBA, NAFCU and others) and submitted on April 8, 2014 a joint statement for the record with the House Financial Services Committee expressing concerns regarding the consequences of the DOJ initiative:

“Operation Choke Point threatens to close access to the financial system to law-abiding businesses, because the mere prospect of an enforcement action is sufficient to cause financial institutions to restrict access to their payment systems to only established companies that present low risks.  While preventing fraud is a top concern, it needs to be balanced with ensuring that businesses and consumers that operate in accordance with applicable laws can still access payment systems.” 

So, what does this have to do with credit unions?  

From everything I’ve read so far, NCUA has not weighed in on the DOJ initiative and credit unions have not been the target of any of DOJ’s subpoenas. However, if banks are being discouraged from serving these businesses, it won’t be long before they start approaching credit unions for service.  In that event, NCUA would likely echo what FDIC has told banks providing services to merchants engaged in higher-risk activities

“Financial institutions are expected to…perform proper risk assessments, conduct due diligence sufficient to ascertain that the merchants are operating in accordance with applicable law, and maintain appropriate systems to monitor these relationships over time…financial institutions need to assure themselves that they are not facilitating fraudulent or other illegal activity.” 

Remembering the insurmountable CDD standards FinCEN laid out in February for opening accounts marijuana businesses, banks have obviously been concerned with the FDIC stance. 

CUNA has been asked what “guidance” we might offer on opening an account for a business that FDIC “associates with high-risk activity.” Bottom line at this point:  This is a Bank Secrecy Act due diligence issue. But, we have to warn a credit union that opens (or maintains) an account for a business identified by the FDIC or DOJ as engaging in “high-risk activity” to eventually expect inquiries from its regulator (NCUA or the state).  

As you know, right now NCUA has only been publicly expressing its concern about credit unions opening accounts for money services businesses (MSBs) that banks have turned away. With Operation Choke Point getting more attention, it’s likely that NCUA will eventually express concerns about credit unions opening accounts for a whole range of businesses that banks are turning away.

Please keep in mind that we’re still waiting for a customer due diligence (CDD) proposal to drop from FinCEN (Click here for the 2012 Advance Notice of Proposed Rulemaking). Some spill-over from Operation Choke Point is not out of the question. As we learn more, we’ll definitely let you know!  


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