A House panel says the Obama administration is using the Justice Department to target and “choke out” businesses it finds objectionable, from gun dealers and payday lenders to drug paraphernalia sellers and porn merchants.

The administration is using an anti-credit card fraud effort dubbed Operation Choke Point to go after legitimate businesses it deems “high-risk,” says a staff report by the House Committee on Oversight and Government Reform.

Internal Justice Department documents show that Attorney General Eric Holder was informed that small businesses were being hurt by the operation as banks dropped them and exited entire lines of business deemed “high-risk” by the government, yet his department has continued to pursue the operation, the report says.

In one note, Justice officials crafting talking points on Operation Choke Point to brief Mr. Holder acknowledged: “We have also learned from industry sources that many banks are taking note of our activity and that of the regulators and doing what they should have done all along — due diligence to know their customers. Some are also exiting ‘high-risk’ lines of business.”

“Operation Choke Point is the Justice Department’s newest abuse of power,” Rep. Darrell Issa, California Republican and committee chairman, said Thursday. “If the administration believes some businesses should be out of business, they should prosecute them before a judge and jury. By forcibly conscripting banks to do their bidding, the Justice Department has avoided any review and any check on their power.”

The Washington Times has reported that several gun retailers have been dropped by their banks as a result of the operation — the most recent being Powderhorn Outfitters, a sporting goods shop in Hyannis, Massachusetts, which was dropped last week by TD Bank after a 36-year business relationship.

“TD Bank evaluates each prospective lending relationship to ensure that we are operating within our risk appetite and only taking risks we can understand and manage,” said bank spokeswoman Erin Potts.

Justice Department spokeswoman Emily Pierce defended the agency Thursday, saying it “only investigate[s] banks and third-party payment processors that violate federal law” and adding that internal “documents suggest nothing to the contrary.”

“When financial institutions choose to process transactions, even though they know the transactions are fraudulent or are willfully ignorant of that fact, they are breaking federal law, and we will not hesitate to hold them accountable,” Ms. Pierce said.

Still, Operation Choke Point has generated ire and action on Capitol Hill. Rep. Blaine Luetkemeyer, Missouri Republican, on Thursday offered an amendment to an appropriations bill for the Justice Department that would bar funds from being used by the anti-fraud effort. He was joined by Rep. Mick Mulvaney, South Carolina Republican.

Also on Thursday, the National Shooting Sports Foundation, a trade association for the firearms industry, issued a statement saying that many of its members have had their banking relationships terminated by lending institutions as a result of Operation Choke Point.

“We respect the right of financial institutions to make business decisions based on objective criteria. It is unacceptable, however, to discriminate against businesses simply because they are engaged in the lawful commerce of firearms, an activity protected by the Second Amendment,” the organization said.

The group has met with the House Committee on Financial Services and members of the Oversight and Government Reform committee to air their grievances about the anti-fraud dragnet.

The Federal Deposit Insurance Corp. in 2011 directed banks to scrutinize their merchant customers who use payment processors, such as PayPal, for credit card transactions. The FDIC listed gun dealers as “high-risk” along with coin dealers, tobacco sellers, porn stores and drug paraphernalia shops, among others.

According to the House panel’s report, the Justice Department has used Operation Choke Point to open wide-ranging investigations of banks and payment processors associated with the businesses on the FDIC list. As of last year, Justice had issued more than 50 subpoenas to banks and payment processors, the report said.

The risk of an investigation, coupled with the due diligence of taking on what the administration deems “high-risk” clients, has deterred many banks from providing services to these legitimate industries, said Richard Riese, a senior vice president at the American Bankers Association.

The House committee report notes an internal Justice Department memorandum about the goals of Operation Choke Point, in which a senior official proposed that the department identify 10 suspect banks within 150 days to jump-start the effort.

“This alone is likely to cause banks to scrutinize their account relationships and, if warranted, to terminate fraud-tainted processors and merchants,” Stuart F. Delery, acting assistant attorney general, said in a memo dated November 2012.

What’s more, the report questions the legality of Operation Choke Point.

The Justice Department justified its legal standing to carry out the operation under Section 951 of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA), the report states. But Justice officials candidly admitted that FIRREA wasn’t designed by Congress to combat consumer fraud, as revealed in the internal memos.

“Ultimately, the Department’s tortured legal analysis has turned FIRREA on its head,” the report states. “[It] was intended to help the Department defend banks from fraud; instead, the Department is using it to forcibly conscript banks to serve as the ‘policemen and judges’ of the commercial world.”

Contrary to the Justice Department’s public statements, Operation Choke Point was primarily focused on the payday lending industry — a business that senior officials at the Justice Department find morally repugnant, the report says.

“Internal memoranda and communications demonstrate that Operation Choke Point was focused on short-term lending and online lending in particular. Senior officials expressed their belief that its elimination would be a ‘significant accomplishment’ for consumers,” it states.

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