Choke Point News

In July, Chokepoint activity concentrated on the reclassification of high risk or illegal merchants, including payment processors, and a vote by Congress to terminate a DOJ program that protects seniors from fraud.

When reviewing these posts, please take time to think about the following:

1)      Have you put in place secondary payment processors, credit/debit card processors, or ewallet solutions to diversify your payment processing solutions?

2)      By removing seniors as a protected class legislation, you should still be concerned about UDAAP violations

Ask VP Compliance Services about its regulatory compliance audits.  We review your current policies and procedures for omissions and misinterpretations.

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7:00 AM EDT July 30th, 2014

Efforts to crack down on illegal or illegitimate merchants by zeroing in on their relationships with banks and third-party processors appears to have gone too far, and one bank regulatory agency is looking to remedy the situation, at least as far as it can do so on its own behalf.

The Federal Deposit Insurance Corp. this week in clarifying merchant categories where financial institutions should take caution in forming account relationships with third-party processors removed the specific examples it earlier provided in its guidance. Those categories included such merchant types as payday or short-term lenders, pornographers, debt consolidators and other “risky” merchant types.

In a July 28 letter to financial institutions, the FDIC noted that the list of examples of merchant categories has led to misunderstandings regarding the its supervisory approach to third-party processors, creating the misperception that the listed examples of merchant categories were prohibited or discouraged.

“In fact, it is FDIC’s policy that insured institutions that properly manage customer relationships are neither prohibited nor discouraged from providing services to any customer operating in compliance with applicable law,” the letter states. “Accordingly, the FDIC is clarifying its guidance to reinforce this approach, and as part of this clarification, the FDIC is removing the lists of examples of merchant categories from its official guidance and informational article.”

The issue of with whom financial institutions should work has taken a broad swath in Washington, as lawmakers and regulators look to crack down on areas where crooks can launder money and conduct business that might not provide consumers a fair shake.

Last month, following an Ohio Supreme Court decision that limited the state’s ability to regulate small-dollar loans, U.S. Sen. Sherrod Brown (D-Ohio) called on the Consumer Financial Protection Bureau (CFPB) to ramp up its enforcement on payday lenders, noting that the bureau’s robust authority to regulate banks and “bank-like” entities gives it a clear responsibility to bring additional scrutiny to the market.

“It is clear that the state-based system of regulating alternative financial products contains deficiencies that run counter to the CFPB’s mission,” she wrote in an open letter to bureau Director Richard Cordray. “Herefore, the CFPB must use its robust consumer-protection authority to write rules for small-dollar loans that will fill the gaps left by inadequate state laws.”

As reported in June, the CFPB actually has skipped over regulating payday lenders directly and has instead, in partnership with the FDIC and the Department of Justice through Operation Choke Point, essentially crushing them out of existence by making it difficult for them to use money.

Operation Choke Point is viewed by many as a means to offer backdoor regulation to companies that deal in industries deemed morally suspect, including short-term lenders, pornographers, ammunition sellers, escort services and online gambling sites. By it very name, its purpose is to choke off certain industries by cutting off their institutional oxygen – money.

The focus is not on the industries themselves directly, but instead on the banks that provide them services and make it possible for them to make payments.  Without the ability to work through the banking system to make or to process payments, the businesses cannot survive.

Though enforcement under Operation Chokehold so far in court seems to be limited to lenders and lending products, other industries have complained that they are seeing their access to banking services evaporate as financial services institutions determine they would rather close accounts than face the combined wrath of the Justice Department, FDIC and CFPB.

In understanding that dilemma, the FDIC has now backed off entirely on generalizing which merchant types banks should scrutinize, essentially leaving the other agencies to defend Operation Chokepoint, whose target list of suspect industries reportedly includes fireworks sales, tobacco clubs, telemarketers, makers of racist materials, drug paraphernalia manufacturers and Ponzi schemes.

July 21, 2014 The Trubune-Demacrat

Joe Sestak | Congress may remove safeguards protecting seniors from fraud


JOHNSTOWN — A scam artist stops by your 92-year-old neighbor’s home and repeatedly convinces her to give him $200 on each visit for a “can’t lose” investment. Hearing about it, the local police persuade the scammer to end his fraudulent behavior, but then the city council orders the police to stop their interference with “free market” decisions. True?

Yes. Congress is about to vote on terminating a successful Department of Justice (DOJ) task force known as Operation Choke Point that protects our seniors from comparable financial fraud conducted on a national scale by a number of banks complicit with fraudsters.

Elder abuse – financial, physical and emotional – has been called the crime of the 21st century, an epidemic that is expanding at an alarming rate in Pennsylvania. With the second-highest percentage of seniors among states, the elderly Pennsylvanian who recently had $85,000 drained from his bank accounts as he slipped into dementia is far from an isolated incident.

I saw it in my district as a congressman when Wachovia Bank allowed fraudulent telemarketers to knowingly use the bank’s accounts to steal millions of dollars from elderly victims throughout Pennsylvania; a number of them were my constituents.

A civil court ordered Wachovia to provide restitution to the victims, but such bank-abetted fraud steals $3 billion a year from seniors.

Most banks are on the alert for such fraud, but Operation Choke Point was finally set up last year to crack down on senior financial abuse because there are those who abet billions of dollars of harm to vulnerable seniors.

A classic military operation in terms of efficiency and effectiveness, it watches the “mother ship” – the banks that provide scammers access to the accounts of their seniors – rather than ineffectively pursuing the thousands of individual scam artists that can quickly “go to ground.”

By focusing on where the money is, the DOJ holds recalcitrant banks accountable that are knowingly aiding and abetting scammers in thousands of obviously fraudulent transactions from seniors’ accounts.

While banks are required to look out for and report what they consider suspicious transactions, a number had adopted a practice of turning their heads – or as one banking insider calls it, “Don’t ask, don’t tell” – since this illegal activity is also very profitable for banks.

Operation Choke Point now targets Internet, telemarketing, mail and other forms of mass-market fraudulent transactions to stop banks from turning a blind eye to dubious transactions from hoodwinked seniors. As a result, it has had a chilling effect upon scammers and their third-party processors by cutting off their access to a banking system that is being held accountable for abetting consumer fraud.

Successes have included Four Oaks Bank & Trust of North Carolina, which reached a settlement after being complicit with another bank in processing $2.4 billion in dishonest consumer transactions.

Closer to home, the First Bank of Delaware paid millions in fines and restitution after the DOJ filed civil charges that the bank had knowingly processed payments on behalf of scammers.

Easy? Not when American Bankers Association CEO Frank Keating sums up the “not our problem” attitude toward adhering to principled standards: “When you become a banker, no one issues you a badge, nor are you fitted for a judicial robe.”

And there’s the rub. Influential in the corridors of the Senate, powerful interest groups such as Frank Keating’s that represent financial institutions and third-party processors have convinced a group of senators, including one in Pennsylvania, to quietly sponsor legislation that would cut off all funding for Operation Choke Point.

There is a similar House measure.

The vote on the Senate amendment will soon occur when the Senate takes up the Commerce, Justice, Science and Related Agencies Appropriations Act.

It would be a shame if that amendment prevailed, for studies show one in four elderly Americans have been victims of financial fraud, a number that will assuredly increase as our senior population grows from 40 million today to more than 60 million by 2030, particularly if Congress ends one of the few programs that has worked to protect our parents and grandparents.

Maybe that is what we should keep in mind: these are our family members, and all of us will be in the “senior” category someday.

If members of Congress agree, they should let that – not special interest groups – influence their vote.

Joe Sestak is a former Navy admiral and U.S. congressman from the 7th Congressional District.

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