In an administration that has pioneered the use of regulatory power to bully businesses into doing “voluntarily” what the bureaucrats can’t require by law, a secretive federal program that has become public in the last few months stands out as an especially disturbing abuse of power.
The program's name, “Operation Choke Point,” is a pretty strong indication of trouble--an eerie way for bureaucrats to describe their conduct toward private citizens.
It’s a reference to the banking system as the “choke point” of businesses, a critical piece of the economic infrastructure which government can co-opt to strangle legal activities it doesn't favor. In fact, I first learned about the program through my work as an advisor to the U.S. Consumer Coalition, which is fighting attacks like these on legal American businesses.
The revelation is alarming in part because it suggests federal officials have realized that they can leverage their strong regulatory authority over one industry, financial services, to exert broad control over many others.
The “choke point” initiative, a joint project of the Department of Justice, the FDIC, the Consumer Financial Protection Bureau and other agencies, started by targeting payday lenders. Officials approached banks and third-party payment processors, advising them that they could be held accountable if regulators concluded that any of their customers (the payday lenders) engaged in illegal behavior. The feds suggested ominously that banks ran a “reputational risk” if they serviced such clients.
The banks got the message. Nice bank you've got there. Shame if something happened to it.
As the Independent Community Bankers of America, an industry association, said in a letter to the Justice Department regarding Operation Choke Point, the program “gives community banks the untenable choices of either severing valuable and legal customer relationships or risking DoJ enforcement actions.” It could “close access to the financial system to law-abiding businesses,” the letter continued, “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.”
Heeding the feds' thuggish warning, the banks have been dropping the payday lenders as customers en masse. In a recent story on this phenomenon, the Washington Post quoted a letter from a banker to a payday lender with whom the bank was ending its relationship. “Based on your performance, there’s no way we shouldn’t be a credit provider,” the banker wrote. “Our only issue is, and it has always been, the space in which you operate. It is the scrutiny that you, and now that we, are under.”
Could it be any clearer?
The lenders aren’t the only legal businesses the regulators are using their authority in financial services to "choke." A document the FDIC released in 2011 warns third-party payment processors that the agency is concerned about their business with “disreputable merchants” in 30 industries. In addition to “pay day loans,” the document warns about “ammunition sales,” “firearms sales,” “coin dealers,” “online gambling,” “tobacco sales,” “racist materials,” “pornography,” and “telemarketing,” among others.
Bureaucrats, it seems, are indeed deputizing bankers and payment processors to cut off these industries from the financial services they need to survive. The Washington Times reported last week that banks and payment processors have been terminating the accounts of law-abiding gun dealers across the country.
Much like the letter to the payday lender in the Post, the Times quotes a bank assuring a gun dealer that its decision to drop him as a client “in no way reflects any derogatory reasons for such action on your behalf. But rather one of industry. Unfortunately your company’s line of business is not commensurate with the industries we work with.”
There are reports of similar account terminations in many other industries the FDIC has labeled "high-risk."
These developments should concern every American. For the government to hold banks responsible for monitoring the business of all their customers is unprecedented. To do so with the explicit aim of chilling the perfectly legal economic activities of private citizens is such a jaw-dropping abuse of power that it would have been unbelievable from any previous administration.
If the Department of Justice has evidence that particular businesses have broken the law, it should prosecute them. Lacking that, it certainly has no right to attack entire industries through the banking system. This story is as outrageous as they come. The federal bureaucracy has gone completely off the rails.
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