Since it started last year, Operation Choke Point has led to more than 50 subpoenas on banks and third-party payment processors. The list has never been made public, but it is known to include major banks such as Pittsburgh-based PNC Bank.
According to internal government documents released with the recent House Committee report, the Justice Department has opened criminal investigations into four payment processors and one bank, and opened civil investigations of more than 10 banks and processors.
In the government’s first settlement to date, Four Oaks Bank in North Carolina was ordered to pay $1.2 million in penalties. It also will be subject to heightened due-diligence requirements for any work it does with third-party payment processors and the merchants that the processors do business with.
A red flag for possible fraud is a high rate of transactions that bounce back to the company doing business online. Most of these returns happen because a customer doesn’t have enough money in the account, experts say. Banks, which pocket fees for every transaction, are required to monitor return rates and look into high ones.
Justice has said it’s seen return rates for some companies above 30 percent and even 85 percent, well in excess of the 1.5 percent industry average.
Banks also are being targeted by a flurry of private lawsuits filed on behalf of consumers who accuse the banks of facilitating the collection of unlawful debts.
North American Banking Co., a small bank in Roseville with about $340 million in assets, is named in three suits.
“This has gone way overboard,” CEO Michael Bilski said in an interview. “It’s a terrible use of the Justice Department’s powers to do things. It’s not the way the country was built. It’s forcing legitimate businesses with legitimate licenses to shut down operations because they don’t have access to a system.”
North American Banking has not been subpoenaed by the Justice Department, Bilski said. Yet he said he felt clear pressure to cut off two legitimate money service businesses in Minnesota last year. Bilski would not say exactly where the pressure came from, and would not identify the two companies, but said they were not payday lenders and had valid Minnesota licenses.
Minneapolis-based U.S. Bancorp, too, has been a target of private litigation. A New Jersey woman, Angel L. Gordon, sued U.S. Bank in federal court in Minnesota last year, saying the bank enabled online payday lender National Opportunities Unlimited Inc., which charged interest rates much higher than New Jersey’s legal limits. She wound up spending $1,814 over 10 weeks to repay an $800 payday loan from the company, according to the complaint.
The judge dismissed the case on April 21 after the bank argued that the dispute should go to arbitration since the loan agreement Gordon signed with the payday lender contained an arbitration clause.
U.S. Bank declined to comment for this article.
Bank regulators have stressed that Operation Choke Point is a Justice Department operation. In April, a Federal Deposit Insurance Corp. official testified at a congressional hearing that its examiners are not pushing banks to cut off certain customers.
In an interview, an FDIC spokesman said he thinks the Justice Department operation is frequently confused with FDIC’s separate efforts to remind banks that they must have controls in place to monitor their relationships with merchants considered to be associated with high-risk activity. The list includes payday lenders and money transfer networks to merchants in ammunition, firearms, drug paraphernalia, pornography, home-based charities and surveillance equipment, among others.
Fred Laing, president of the Upper Midwest Automated Clearing House Association in Brooklyn Park, which supports electronic banking, said he has only seen payday lenders being cut off and that banks and credit unions are “dropping them like flies.”
But in addition, bank regulators are pushing risk controls, Laing said, and there’s been an overreaction “that in a sense forces financial institutions to get out of businesses that they’re just not comfortable with.”
“There’s pressure on anything considered high-risk,” said Laing.