Operation Choke Point

The general outline is the DOJ and bank regulators are putting the screws
to banks and other third-party payment processors to refuse banking
services to companies and industries that are deemed to pose a “reputation
risk” to the bank

The ability to destroy legal industries through secret actions to deprive
them of banking services has obvious political consequences

Operation Choke Point

By Todd Zywicki  | The Washington Post  |  May 24, 2014

The Justice Department’s “Operation Choke Point” initiative has been
shrouded in secrecy, but now it is starting to come to light. I first heard
about the program in January through this article and since then it has
been difficult to discover details about it. It is so named because through
strangling the providers of financial services to the targeted industries, the
government can “choke off” the oxygen (money) needed for these
industries to survive. Without an ability to process payments, the
businesses – especially online vendors — cannot survive.

The general outline is the DOJ and bank regulators are putting the screws
to banks and other third-party payment processors to refuse banking
services to companies and industries that are deemed to pose a “reputation
risk” to the bank. Most controversially, the list of dubious industries is
populated by enterprises that are entirely, or at least generally, legal. Tom
Blumer’s extremely informative post summarizing what is known to date
about Operation Choke Point reproduces the list, which includes things
such as ammunition sales, escort services, get-quick-rich schemes, on-line
gambling, “racist materials” and payday loans. Quite obviously, some of
these things are not like the other; moreover, just because there are some
bad apples within a legal industry doesn’t justify effectively destroying a
legal industry through secret executive fiat.


Especially ironic, of course, is that while the DOJ and bank regulators are
choking off financial services to legal industries, they are also encouraging
banks to provide banking services to illegal marijuana sales.

The ability to destroy legal industries through secret actions to deprive
them of banking services has obvious political consequences. For example,
it was reported last week that firearms shops are alleging that Operation
Choke Point is being used to pressure banks into refusing to providing
financial services. There are also reports that porn stars (and here) have
had their bank accounts terminated for “moral” reasons related to the
“reputation risk” of banking individuals in the porn industry. IRS officials

Search must already be salivating about ways to apply Operation Choke Point to
tea party groups.

In principle, of course, the logic of Operation Choke Point could be
extended to groups not currently targeted. Notably absent from the FDIC’s
hit list, for example, are abortion clinics, radical environmental groups, or,
well, marijuana shops, for that matter. Something similar was done to cut
off credit-card payments to support the operation of WikiLeaks.

The larger legal and regulatory issue here is the expansive use of the vague
and subjective standard of “reputation risk” to target these industries. In a
letter to Janet Yellen, the chair of the Federal Reserve, last week, House
Financial Services Committee Chairman Jeb Hensarling expressed concern
over the growing use of “reputation risk” as a vehicle for attacking legal
businesses. Is there any discernible principle as to why, for example, a
payday lender or firearms dealer poses a “reputation risk” and an abortion
provider does not?

So far, one of the porn stars has sued to try to determine why his loan
application was denied. Given that Operation Choke Point seems to be
doing exactly what was its alleged intent — to choke the life out of the
businesses in the covered industries — I expect more lawsuits to come that
will shed some light on this initiative.