WASHINGTON -- House Republicans are agitating to dramatically curb federal bank regulators' ability to combat money laundering, calling for changes in decades-old financial fraud standards in an effort to aid payday lenders.

Moving illegal cash through the financial system has long been barred by money laundering laws. But under a bill introduced by Rep. Blaine Luetkemeyer (R-Mo.), federal regulators would be forbidden from doing anything to "restrict or discourage" a bank from doing business with any company that has both a license to do business and a "reasoned legal opinion" from a lawyer claiming that the business doesn't break the law.

That's not a high hurdle to clear. Obtaining a business license and hiring a lawyer is a routine money laundering tactic for everyone from the mafia to terrorists to, more commonly, petty fraud scammers.

"It's completely whitewashing fraud," said Lauren Saunders, associate director of the National Consumer Law Center. "There are licensed companies that commit fraud all the time, and everybody's got lawyers who will try to justify what they're doing."

The GOP bill represents an escalation of the deregulatory fever that has gripped the party ever since President Barack Obama signed the 2010 Wall Street reform law. But the bill's proximate catalyst is a Department of Justice project combating consumer fraud called Operation Choke Point, which aims to cut off fraudsters from the banking system. The only public Choke Point action to date cracked down on North Carolina's Four Oaks Bank for processing payments on behalf of a host of undesirables: a Ponzi scheme that was busted by the Securities and Exchange Commission, online gambling agencies that settled with federal prosecutors and a horde of shady online payday lenders headquartered in places as far flung as Belize and Costa Rica.

Republicans aren't actually defending Four Oaks or its crooked clients at congressional hearings. Instead, the supporters of Luetkemeyer's End Operation Choke Point Act of 2014 warn of a rogue administration hijacking the free market by destroying entire industries it personally disfavors.

During a June hearing before the House Financial Services Committee, Rep. Patrick McHenry (R-N.C.) called Choke Point an "ideological crusade" waged by "abusive" regulators who had put together a "government hit list of industries."

"Could Planned Parenthood and the abortion issue be on that list?" demanded Rep. Sean Duffy (R-Wis.) at the same hearing. "I'm not saying it should. But who's to say that they couldn't fit into a bureaucratic scheme to shut down legitimate business. ... We have a federal government that's out of control."

"This was political from day one," warned Rep. Stephen Fincher (R-Tenn.).

There's really only one industry making hay over Choke Point: payday lenders, who also filed a lawsuit against the Federal Deposit Insurance Corporation, the Federal Reserve and the Office of the Comptroller of the Currency in June.

"Defendant agencies and DOJ knew early on that their coordinated, coercive campaign of backroom pressure tactics was succeeding in prompting banks 'to exit or severely curtail' business with all payday lenders," the lawsuit, filed in the U.S. District Court for the District of Columbia, alleges.

In May, Rep. Darrell Issa (R-Calif.), chairman of the House Oversight and Government Reform Committee, parroted payday lender gripes in a committee report. "Internal memoranda on Operation Choke Point clearly demonstrate that the Department's primary target is the short-term lending industry -- an indisputably lawful financial service," the report reads.



Payday lending is indisputably lawful, except when it's totally illegal. Fifteen states ban payday lending. Others require the industry to abide by regulatory requirements ranging from basic licensing standards to interest rate limits and restrictions on the number of loans a consumer can take out in a given year. Payday lenders, especially in the online space, frequently break these rules or simply rip off their low-income customers by illegally draining their bank accounts. DOJ's lawsuit against Four Oaks quoted one such aggrieved customer:

I borrowed $600 and expected to pay $800-900 total including fees for the loan. After 3-4 months I noticed $900 in withdrawals for the loan, which I thought was acceptable. I did not expect to see any more debits. Debits occurred every two weeks, not monthly, so I was paying back $350 per month. When the debits totaled $1150, I called the company to ask why they were still debiting money from my account. They informed me that the first $600 were fees for the loan and did not reduce the principle [sic]. The subsequent $187 payments were paying down the loan at $50 per month, this was after I had already been charged $900 or so. ... So I ended up paying $1800 for a $600 loan. ... They are complete crooks!!

Indeed, the payday lending industry is so riddled with deceit that one of its most recent lobbying blitzes on Capitol Hill urged the government to crack down on other payday fraudsters who were scooping up customers and ruining the industry's already challenged reputation.

"Some brick-and-mortar guys came into the office about a year ago," recalled one House Democratic aide. "They said, 'We provide creative financial services solutions for low-income Americans, but these other guys online, they're just scum.'"

"What we have a problem with is illegal unregulated lenders of any kind," said Jamie Fulmer, spokesman for Advance America, the nation's largest payday lending corporation. "If somebody is not operating within the parameters of the law, then one, they should be held accountable, and two, that shouldn't be confused with legitimate business."

The growth of online payday lending has made it increasingly difficult for state regulators to crack down on fraud within the industry. When a company has a storefront offering illegal services, it's relatively straightforward for regulators to walk in and figure out what's going on. But online lenders' digital operations are harder to investigate. Once an online lender obtains access to a customer's bank account, money can rapidly be moved out of the state or even the country.

"I think every state and federal agency that has anything to do with consumer protection is dealing with this proliferation of unlicensed online payday lenders all over the country and all over the world," said Michael Larsen, chief of the Idaho Department of Finance's Consumer Finance Bureau.

"It's hard to track these guys down, because they have all these shell companies and sometimes some of them are offshore," said Deborah Bortner, who oversees the non-depository division of the Washington state Department of Financial Institutions.

Both Idaho and Washington passed laws stating that borrowers don't have to pay back loans from unlicensed payday lenders. But in many ways, federal agencies are better positioned to crack down on online fraud. Electronically transferring money across state lines to execute a fraudulent transaction is illegal under well-established federal law. And since 1970, the Bank Secrecy Act has required banks to keep tabs on their clients, an obligation that was updated under President George H.W. Bush in 1989 and President George W. Bush in 2001.

Luetkemeyer's bill wouldn't just hamstring federal regulatory agencies. It would also force DOJ to obtain a court order to examine bank transaction records instead of simply issuing a subpoena. Though prosecutors would still have authority to go after money laundering, in practice bank regulators are often the primary line of defense, recommending cases to DOJ after gathering extensive evidence of their own.

The whole payday loan industry has spent months ginning up multiple hearings on Capitol Hill, Issa's report, a lawsuit and now Luetkemeyer's bill, which has 12 additional co-sponsors. Despite the heated rhetoric, neither Issa's report nor the payday lender lawsuit documents a single example of "backroom pressure" to choke off a legal business. The lawsuit also fails to identify any lender that has actually been driven out of business. If Operation Choke Point is trying to destroy entire industries, it's doing a pretty terrible job.

Choke Point and related regulatory scrutiny may, however, be increasing costs for payday lenders. Their lawsuit contends that several lenders have incurred higher transaction fees after being forced to change banks.

Their complaints have also been amplified by small banks that don't want the increased scrutiny of their books. The Independent Community Bankers Association has been lobbying for Luetkemeyer's bill, and the American Bankers Association testified in favor of the bill as a benefit to the community banks.

The banks protest that DOJ's money laundering focus is holding them accountable for somebody else's misdeeds. But money laundering law has required banks to keep tabs on their clients since the 1970s and prohibits them from processing transactions in the service of fraud. Banks aren't liable for every single bogus transaction, but if they ignore a pattern of illegal activity, they can get in trouble with both DOJ and federal banking agencies. Wachovia (now Wells Fargo) was busted during the financial crisis, once for facilitating petty scammers and once for helping funnel billions of dollars in Mexican drug cartel money. HSBC got hit for laundering drug money in 2013.

DOJ's complaint against Four Oaks states that the bank received "more than $850,000 in gross fees" from processing "more than 9.8 million" transactions with third-party payment processors, who work with payday lenders and others. That comes out to about 8.7 cents per transaction. For a small bank, that extra income goes a long way, but it's not very much money for companies that measure quarterly revenue in the billions of dollars.

At larger banks, having to pay people to monitor the legality of some customers isn't worth the transaction fees. Fifth Third Bank, for instance, told payday lenders that it would no longer deal with them and the associated risks, according to the payday lender lawsuit.

Such decisions are annoying for those payday lenders that are abiding by the law and have to shop around for other banks to handle their accounts. But it's not evidence of "backroom pressure" from a federal bureaucratic cabal. It's basic law enforcement.