Regulators Repudiate Operation Choke Point at Lawmakers’ Request

Financial Services Law

Sounding the likely death knell for Operation Choke Point, federal regulators formally repudiated the program after receiving a letter from Republican legislators inviting them to do so.

What happened

The controversial initiative launched by the Department of Justice (DOJ) under President Barack Obama, known as “Operation Choke Point,” was intended to limit firearms dealers and certain short-term and payday lenders from access to consumers by cutting off their relationships with entities like merchants, check cashers and nonbank financial services providers.

The program has been the subject of litigation and a government investigation.

Democrats generally oppose any curtailment. But, seeking to put an end to the program once and for all, five Republican lawmakers—Reps. Jeb Hensarling (R-Texas), Bob Goodlatte (R-Va.), Tom Marino (R-Pa.), Darrell Issa (R-Calif.) and Blaine Luetkemeyer (R-Mo.)—called on the DOJ, the Office of the Comptroller of the Currency (OCC) and the Federal Reserve Board of Governors to take affirmative steps to distance themselves from the program.

“Operation Choke Point was an Obama Administration initiative that destroyed legitimate business to which that Administration was ideologically opposed (e.g., firearms dealers) by intimidating financial institutions into denying banking services to those businesses,” the legislators wrote. “The damage from this initiative lingers, and we request that you take immediate corrective action.”

The Federal Deposit Insurance Corp. has taken a positive step, announcing guidance to encourage banks to judge customer relationships on a case-by-case basis in lieu of declining to provide banking services to entire categories of customers. But even this effort is incomplete, the lawmakers said, because the FDIC never rescinded its general guidance about reputation risks posed by certain bank customers or retracted its assertion that specific industries are particularly high-risk.

“We are concerned and informed that banks have continued to refuse to serve law-abiding members of lawful industries on account of their purported poor reputations,” the letter stated. “Accordingly, we request that your respective Departments and agencies issue clear and public formal policy statements repudiating Operation Choke Point and the abuses by financial regulators of the ‘reputation risk’ guidance they developed and promulgated under Operation Choke Point’s auspices.”

The regulators responded with an unequivocal end to the program or, as the DOJ described it in its letter to the lawmakers, “a misguided initiative conducted during the previous administration.”

“We share your view that law abiding businesses should not be targeted simply for operating in an industry that a particular administration might disfavor,” Assistant U.S. Attorney General Stephen F. Boyd wrote. “All of the Department’s bank investigations conducted as part of Operation Chokepoint [sic] are now over, the initiative is no longer in effect, and it will not be undertaken again. Some of the responses to the subpoenas led to the discovery of other criminal activity involving certain individuals and non-bank entities. To the extent the Department continues to pursue those ancillary investigations, none relates to or seeks to deter lawful conduct.”

Boyd also noted that the DOJ “will not discourage the provision of financial services to lawful industries, including business engaged in short-term lending and firearms-related activities,” adding that the agency “share[s] your view that law abiding businesses should not be targeted simply for operating in an industry that a particular administration might disfavor. Enforcement decisions should always be made based on the facts and the applicable law.”

Not to be outdone, Acting Comptroller of the Currency Keith A. Noreika also wrote back to the lawmakers, emphasizing that the OCC “is not now, nor has it ever been part of Operation Chokepoint [sic].”

“The agency rejects the targeting of any business operating within state and federal law as well as any intimidation of regulated financial institutions into banking or denying banking services to particular businesses,” Noreika wrote. “We expect banks to assess the risks posed by individual customers on a case-by-case basis and to implement appropriate controls to manage their relationships. The agency expects the banks it supervises to maintain banking relationships with any lawful businesses or customers they choose, so long as they effectively manage any risks related to the resulting transactions and comply with applicable laws and regulations.”

To read the DOJ’s letter, click here.

To read the OCC’s letter, click here.

Why it matters

While controversial, Operation Choke Point has been remarkably effective. GOP control over the executive branch is the game-changer here, and the responses from the DOJ and the OCC should serve to assuage the concerns of lawmakers and put a formal end to the effort. The program still lives on in litigation, however, as a Washington, D.C., federal court in July refused to dismiss an action brought by payday lenders against federal banking regulators over the initiative, allowing the case to proceed into discovery.



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