Bill Would Put a Chokehold on the Justice Department’s Operation Choke Point

The U.S. Department of Justice’s controversial Operation Choke Point, an effort to cut off high-risk merchants’ access to electronic payments by challenging the banks and processors that serve them, continues to draw fire. The latest missile comes in the form of a bill from U.S. Rep. Blaine Luetkemeyer, R-Mo., who says his proposal would “restore the balance between financial institutions and regulators and protect private industry from the organized bureaucratic intimidation and regulation under way by the Obama Administration.”

Luetkemeyer’s bill, H.R. 4986, would create a so-called safe harbor for financial institutions to serve merchants that are licensed, registered as a money-services business, or have obtained what Luetkemeyer said in a news release is a “reasoned legal opinion demonstrating the legality of the merchant’s business.” The safe harbor does not require a financial institution to do business with any merchant and does not place the burden of determining the legality of the business with the financial institution, according to Luetkemeyer.

The bill also would rein in “the abusive misuse of DoJ subpoena authority” by changing procedures under which the department can seek a subpoena under the Financial Institutions Reform, Recovery, and Enforcement Act of 1989, he said.

A DoJ spokesperson says by email that the department has not taken a position on H.R. 4986.

Operation Choke Point has become controversial because of the government’s tactic of trying to deny allegedly fraudulent merchants the payment-processing services they need to collect money from consumers. Opponents say the effort unfairly targets payments firms and the banks they work with that provide services to high-risk but legal businesses, including ammunition, fireworks, and pharmaceuticals merchants.

The DoJ has at least 50 investigative inquiries under way into payments companies, according to the Electronic Transactions Association, the Washington, D.C.-based merchant-acquiring industry trade group. A trade association in the payday-lending industry, a major DoJ target, filed a federal lawsuit last month in an attempt to halt Operation Choke Point.

Luetkemeyer said he has “led the national charge against Operation Choke Point since learning that the Federal Deposit Insurance Corp. loaned [bank] examiners to the DoJ in a hostile attempt to take down non-depository lenders they believe have no moral right to exist.”

He added: “In an effort to drive legally operating, licensed, and regulated companies out of business, federal banking regulators in cahoots with the Department of Justice … are placing so much regulatory pressure on financial institutions that certain businesses not viewed favorably by the Attorney General and the Administration are eventually choked-off from the financial services they need to survive. That notion goes against the very nature of our free-market system. It is time to stop these back-door attempts by government bureaucrats to blackmail and threaten businesses simply because they morally object to entire sectors of our economy.”

H.R. 4986 quickly drew praise from some quarters, including the Independent Community Bankers of America, a small-bank trade group that has been critical of Operation Choke Point. “Too often Operation Choke Point is unduly pressuring banks to drop long-standing customers due to a political agenda and not the rule of law,” ICBA president and chief executive Camden R. Fine said in a statement. “Quiet pressure of this sort from an all-powerful government cannot be tolerated in a free society.”

A spokesperson for the ETA tells Digital Transactions News that “we do support this bill. While ETA supports the [Federal Trade Commission] pursuing processors and merchants who are directly engaged in unlawful activity, ETA is concerned that Operation Choke Point may impose liability on processors who merely processed transactions.”

The spokesperson notes that ETA “created a more targeted approach to combat consumer fraud” by developing underwriting and risk-management guidelines for financial institutions, independent sales organizations, agents, and payment processors.

It’s unclear how Luetkemeyer’s bill, which as of Tuesday had no co-sponsors, will fare. The bill is pending in the House Financial Services Committee, and no hearings have yet been scheduled. Meanwhile, an appropriations bill that includes a measure to cut off funding for Operation Choke Point passed the Republican-controlled House but has stalled in the Democrat-controlled Senate, according to press reports. And Attorney General Eric Holder recently posted a video on the DoJ’s Web site strongly defending Operation Choke Point.