



Columbo

Minority Report





Not that kind of operation. Photograph: ZUMA/Rex Features Photograph: ZUMA / Rex Features

There is just one problem: just like stop-and-frisk, critics say the Operation Choke Point indirectly discriminates against the poor and against minorities.



Specifically, Operation Choke Point is sending regulators after a lot of businesses that also have legitimate uses, like payday lenders. Criminals like to use the lenders as a front for less legal transactions. But those businesses have another constituency: low-income Americans, who often don't have bank accounts and, with their bounced checks and low balances, wouldn't be welcome at your average Bank of America branch.

And while some regulators and lawmakers view the negative effect on payday lending as an added benefit in helping crack down in predatory lending, some lawmakers view it as an attack on the few financial options open to the working class.



What is Operation Choke Point?

Operation Choke Point is an effort born out of the Financial Fraud Enforcement Task Force, a group created in 2009 as a kind of League of Extraordinary Gentleman of law enforcement, including the Department of Justice, the Federal Trade Commission, and Federal Deposit Insurance Corporation. Those names should tell you what the cast of characters are in a drama like this: the DOJ handles the criminal aspects, the FTC regulates business and the FDIC regulates banks.





California congressman Darrell Issa and Maryland representative Elijah Cummings. Photograph: J Scott Applewhite/AP Photograph: J Scott Applewhite/AP

The theory behind Operation Choke Point is that by cutting off the access that scammers and fraudsters have to banks, there would be less fraud. To determine who the potential fraudsters are, the regulators came up with a blacklist of potential bad guys: credit card schemes, gambling, escort services, Ponzi schemes and payday loans.

There's another characteristic that regulators used to determine potential fraudsters: the amount of payments that businesses had to return to consumers – often because they were not authorized. Government regulators define a "return" as any transaction that had been returned to the consumer’s bank account. It is not strictly limited to unauthorized transactions, which are usually evidence of fraud.



Regulators want to set the “transaction return rate of 3% or more in any one month period,” a modest amount that some, including Congressman Darrell Issa, argue won't be revealing enough. "The 3% standard is far too low to serve as a reasonable indication of potential fraud," says Issa.



Not surprisingly, considering the fees at stake, the financial industry agrees with Issa. NACHA, the electronic payments association that represents the industry, has suggested setting the rate indicating fraud at a much loftier 15%.

Part of the reason is that returns happen for a plurality of reasons. Marsha Jones, executive director of Third Party Payments Processors Association, notes that returns can also be made due to closed account, bad account number, insufficient or uncollected funds.

“To say that returns and chargebacks are the same thing, as Department of Justice has tried to do, is a real problem,” says Jones.



Chargebacks are returns made due to unathourized debits - more indicative, some say, of fraud. Most returns, however, occur for high-risk or sub-prime consumers, Jones explains.

Payday lenders and the poor



There's another nuance here. While those lenders have a reputation for predatory rates and exploitation of low-income Americans, they're also often the only "banking" system that exists in working-class neighborhoods. Neither banks nor regulators have shown any inclination to change that.

Issa is an unlikely defender of the payday lenders, particularly those who lend across state lines by using the internet.



Online lenders specialize in offering consumers small, short-term loans online. According to the most recent data available from the Federal Deposit Insurance Corporation, 28.3% of households in the US are deemed unbanked or underbanked. For these consumers who have been shut out of the traditional banking system, short-term online loans are often their only realistic way to make end meet. While online lending can be susceptible to fraud, the overwhelming majority of lenders fully comply with all applicable statutes, regulations, and industry recognized best practices.”

Operation Choke Point and Darrell Issa

In his letter to the Department of Justice, Issa, who is the chairman of the House committee on oversight and government reform, argued that the DOJ is exercising prior restraint; that it's preventing businesses from functioning even when they haven't been proven by law to be doing anything wrong, “rather than investigations into known fraud.” He also argued that the DOJ was sweeping too far into the financial affairs of low-income Americans in trying to limit unauthorized withdrawals: “while the Justice Department is correct that 'without bank access there are no unauthorized withdrawals,’ without bank access there are also no authorized withdrawals.”

Not that kind of gangster squad. Photograph: Jamie Trueblood/AP Photograph: Jamie Trueblood/AP

Not all lawmakers, however, share Issa’s view of the situation. On 26 February, 13 Democrat lawmakers wrote to the Department of Justice in order to “urge [it] to continue its vigorous oversight”. Among the lawmakers who signed off on the letter were those who have positioned themselves as advocates of side of working-class Americans: Senators Elizabeth Warren, Dick Durbin and Jeff Merkley. In their letter, they noted that in order to protect Americans from becoming victims of fraudulent schemes, “the law obligates banks and payment processors to be on the lookout for ‘red flags’ that may indicate a payment is improper or illegal.”

The definition of those red flags, based on high return rates and the definition of high-risk merchants as put forth by the regulators who dislike payday lenders, is the point of contention between the supporters and the critics of the Operation Choke Point.

Where things stand now

To determine if the Operation Choke Point was unfairly targeting businesses such as payday lenders, Issa requested that the Department of Justice turn over all documents and communications related to the operation since January 2011. The deadline imposed by Issa was 22 January, 2014. While the Department of Justice has yet to respond, it has, however, sent a letter to Congressmen Blaine Luetkemeyer and Kevin Yoder on 28 January. The letter was to follow up on their briefing by assistant attorney general Stuart Delery, who has signed off on the 50 subpoenas issued to the banks, and to reassure them that the Department of Justice has “no interest in pursuing or discouraging lawful conduct”.

(For more on how some banks turn a blind eye to red flags, see this story.)