Daniel Colbert has published Operation Choke Point: Using an Old Tool in a New Way in the American Criminal Law Review. The piece discusses a program of the U.S. Department of Justice aimed, among other things, at stopping fraud by on-line payday lenders. Here's the piece:
By Daniel Colbert, ACLR Featured Blogger
Prosecuting financial scams is incredibly difficult. By the time prosecutors identify fraudsters and gather enough evidence to bring a case, the fraudsters pack up shop and disappear, only to pop up again somewhere else. This leaves agencies like the Department of Justice wasting resources playing a perpetual game of whack-a-mole while consumers are constantly exposed to scams. Seeking a solution to this problem, the Justice Department created Operation Choke Point, which sought to identify fraudsters by requiring banks and payment processors to report evidence that their customers are committing fraud.[1]
DOJ’s approach has come under fire from—among others—Darrell Issa, the Republican Chairman of the House Committee on Oversight and Government Reform.[2] Issa alleges that Operation Choke Point is an abuse of DOJ’s power and that its true goal is “to target online lenders and the payment processors who serve them.”[3] For evidence, Issa relies on a slide from a DOJ attorney’s presentation that states “Cutting off the scammers’ access to the payment systems is relatively efficient and fast, and protects consumers proactively as we investigate.”[4]
Issa may be correct that Operation Check Point might make it more difficult for online payday lenders to do business, but only to the extent that online lenders’ activities raise suspicions of fraud. Payday lenders moved online in recent years as some states increased regulation to a level that essentially banned the loans.[5] By operating online, lenders can make illegal loans to borrowers in those states, and it is difficult for state regulators to do anything about it.[6]
Some payday lenders also violate the law by debiting customers’ accounts without proper authorization.[7] The payment processors who serve as middlemen for the lenders give them access to consumers’ bank accounts, often without notifying the consumer that the lender has this access.
If a certain payment processor has higher than normal rates of customers disputing its debits from their accounts, that is strong evidence (though not conclusive) that the payment processor’s customers are engaging in this type of fraud. That is why Congress passed the Bank Secrecy Act, after determining that information from banks would have “a high degree of usefulness in criminal, tax, or regulatory investigations.”[8] That statute aimed not only to assist prosecutors but also to cut off criminals’ access to the legitimate banking industry.
Issa’s objections may score him some political points, especially with the financial industry, but DOJ is on solid legal footing. Regulations promulgated under the Bank Secrecy Act require that a bank report transactions if it “knows, suspects, or has reason to suspect that … [t]he transaction involves funds derived from illegal activities.”[9] Using that reporting requirement to target fraud is new, but it is completely within the scope of the Act.
Online lenders and payment processors would fall within the scope of Operation Choke Point (which targets scammers) only if they have an unusually high number of customers claiming that a payment was unauthorized. If they are knowingly and systematically requesting unauthorized payments, then they are, in fact, a criminal enterprise. Banks and payment processors may lose that business, but that is not a flaw in DOJ’s approach. Industry groups also expressed concern that legitimate online lenders may have difficult finding a bank willing to do business with them, as banks will now be wary of potential investigations or prosecutions.[10] If this problem arises, it only arises because online lending is often designed to circumvent regulations, but that is probably cold comfort to law-abiding lenders. Still, the same could be said of other industries that generate suspicion, like cash-based businesses. Congress was certainly aware of this potential deterring effect, but it thought that the information banks can provide to law enforcement is worth it.
Denying criminal enterprises access to the financial system by preventing banks from turning a blind eye to their customers’ activities is precisely the result intended by the Bank Secrecy Act’s reporting requirements. Congressman Issa and others who criticize DOJ’s attempt to protect consumers apparently want to draw a distinction between blue collar and white collar crime that the law does not recognize.
