Monday , June 5, 2023

Operation Choke Point Lives on in Actions by Other Federal Agencies, ETA Chief Warns

While the U.S. Department of Justice’s Operation Choke Point initiative ended last year, over-zealous efforts by other federal agencies threaten law-abiding payments companies in the same way Choke Point did, the chief executive of the Electronic Transactions Association warned Congress on Thursday.

Testifying before the House Financial Services Subcommittee on Financial Institutions and Consumer Credit, the ETA’s Jason Oxman also supported a limited-purpose national bank charter for financial-technology companies and national rather than state requirements for cybersecurity. In addition, he announced an update to the ETA’s guidelines on risk monitoring for merchants and independent sales organizations.

Oxman: “There is nothing to stop [other entities] from bringing a case that looks very much like those that arose under Operation Choke Point.”
The ETA is a Washington, D.C-based trade association for payments processors and technology developers.

Operation Choke Point was a controversial Obama administration initiative to shut down fraudulent merchants by bringing civil suits against their payments providers. After the inauguration of the Trump administration, the Justice Department told Congress last August it was shutting down the initiative. But Oxman said much of the initiative’s basic strategy remains in place at other agencies.

“There is nothing to stop the Department of Justice—or, for that matter, the Consumer Financial Protection Bureau (CFPB), the Federal Trade Commission (FTC), or a state attorney general—from bringing a case that looks very much like those that arose under Operation Choke Point,” he warned in his testimony Thursday morning before a panel investigating so-called de-risking, or the practice by banks and other entities to avoid possible legal liability by shutting off client access to services.

By way of example, he cited a “zero-tolerance policy” at the FTC for payments processors that knew or should have known a client is violating the Telemarketing Sales Rule. The CFPB has been “equally aggressive” in pursuing processors, he alleged, citing recent cases against Intercept Corp. and Global Payments Inc. Both cases, he noted, were dismissed last year by federal judges.

The ETA “is concerned that these Operation Choke Point-type enforcement actions will continue to put pressure on its members to shun entire lines of business out of a fear that the members could be called upon to financially insure the total volume of a merchant’s sales transactions,” Oxman told the subcommittee. “A more sensible policy recognizes the strong interest the payments industry has in preventing fraud and other illegal activities, and allows industry to focus on enhancing its underwriting and risk-management tools to safeguard the payments system from unscrupulous merchants.”

In other remarks, Oxman lent support to initiatives he said are aimed at fostering “growth and inclusiveness” in the payments industry. An example is a proposal at the Office of the Comptroller of the Currency to create a limited-purpose bank charter for financial technology companies. “Such a charter will provide numerous public-policy benefits, including a regular and consistent regulatory framework for chartered fintech companies and increased competition to develop cost-efficient, inclusive products and services,” he said.

Oxman also supported federal rules governing cybersecurity and data-breach response, citing inconsistency and confusion caused by sometimes conflicting state requirements.

Overall, he said, the industry has been effective on its own in combatting fraud. Losses in 2016 from credit card fraud amounted to $9 billion, or 0.15% of some $6 trillion in credit, debit, and prepaid card volume, he said. Figures for debit and prepaid losses were not immediately available.

“ETA members have developed effective due-diligence programs to prevent fraudulent actors from accessing payment systems and to terminate access for network participants that engage in fraud. These programs have helped to keep the rate of fraud on payment systems at remarkably low levels,” Oxman said in his remarks.

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