Federal antifraud initiative goes too far, banks say

A secretive Justice Department investigation spilled into the open as criticism intensifies.

The goal of the Justice Department’s Operation Choke Point was logical enough: Instead of the Whac-A-Mole approach to shutting down companies scamming consumers online, go after the financial institutions and third-party payment processors who give crooks access to the electronic network for financial transactions.

Consumer advocates have applauded the shift in enforcement strategy. But one year into the Justice Department’s secretive investigation, the backlash is intensifying.

Banks claim the mission is overly broad and that the department should be going after the scammers, such as payday lenders, and not those processing payments. The money service industry, which includes shops that do check cashing and wire transfers, argues that banks are indiscriminately cutting off their members regardless of any wrongdoing. There are scattered reports of gun and ammunition dealers having their access cut off, amid general concern that Choke Point has increased pressure on banks and payment processors to choke off a range of retailers deemed “high risk,” even if they’re not doing anything illegal.

A newly formed U.S. Consumer Coalition, backed by unnamed individuals and companies, has launched a multimillion-dollar campaign to fight Operation Choke Point.

“We’re getting two to 15 e-mails a day from people who have lost their bank accounts due to Operation Choke Point, including government employees,” said Brian Wise, a senior adviser at the coalition.

Wise said the group has received more than a dozen reports from gun dealers about being cut off.

Lawmakers also are ratcheting up their opposition. On May 29 the House Committee on Oversight and Government Reform released a scathing report recommending that Operation Choke Point be dismantled. Rep. Blaine Luetkemeyer, R-Mo., is drafting legislation to curb it.

In an interview, a Justice Department spokeswoman said that Choke Point is not targeting any specific industry, not even payday lenders.

“We only investigate banks and third-party payment processors suspected of violating federal law,” Justice spokeswoman Emily Pierce said via e-mail. “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.”

Campaign’s supporters

The campaign continues to enjoy broad support. A group of 13 Democratic lawmakers in February wrote to Attorney General Eric Holder, saying Americans “depend on the vigilance of banks and payment processors.”

Consumer advocates, too, remain steadfast. Lauren Saunders, managing attorney of the National Consumer Law Center, called the attacks on Choke Point political.

“The lobbyists have done an amazing PR job of making it look like this is some out-of-control operation, when there is absolutely no evidence to support it,” said Saunders.

Chris Dewall isn’t sure why he was cut off. Dewall, who launched Red Wing Ammunition Co. in Red Wing, Minn., last year after returning from the North Dakota oil fields, said his payment processor, First Data Corp., cut him off from Internet sales in March. According to Dewall, First Data’s risk management department told him that what he does is too high-risk and “in the same category as porn.”

It gave him 24 hours to make refunds to all his customers. First Data did not mention Operation Choke Point, he said, and he does not know if his closure is linked to it.

“So I brought the website down and started refunding orders,” Dewall said, noting that his customers were angry. “It was pretty bad.” He said he hasn’t been able to get access to the electronic network anywhere, and now does business only at gun shows.

A First Data spokeswoman said it doesn’t comment on individual customers.

“First Data processes transactions for merchants selling firearms and ammunition, so long as they meet our longstanding credit/risk management policy requirements,” she said. “These policies were implemented before the DOJ’s Operation Choke Point and are unrelated.”

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