Federal prosecutors are conducting 15 criminal and civil probes into whether banks and payment processors ignored signs of fraudulent transactions, according to documents released Thursday by the House Oversight and Government Reform Committee.
The Justice Department handed the panel nearly 600 pages of internal memos about “Operation Choke Point,” a controversial effort to cut off scammers’ access to the financial system. Committee Chairman Darrell Issa (R-Calif.) has been an outspoken critic of the operation, accusing the Obama administration of trying to shut down legitimate businesses it deems undesirable, such as payday lenders, under the guise of rooting out fraud.
Justice Department officials deny targeting any specific industries. They say the department is looking for high rates of returns for unauthorized debit transactions, an indication of fraud. It just so happens that those returns are prevalent among some merchants, including payday lenders, Internet gambling Web sites and as-seen-on-TV retailers.
Prosecutors have issued subpoenas to 50 banks and six payment processors that may have enabled merchants to illegally withdraw money from consumers’ accounts in a bid to boost their own take from the transactions, according to a November 2013 memo by Deputy Assistant Attorney General Maame Ewusi-Mensah Frimpong.
She said the department had opened criminal investigations into four payment-processing firms as well as a bank and “responsible bank official.” She wrote that the department had also launched civil investigations into 10 institutions and was negotiating settlements with three
Justice Department spokeswoman Emily Pierce said, “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.”
The agency redacted the names of the banks and processors under investigation, but some institutions have said they received inquiries from the department.
In March, PNC Financial disclosed in a regulatory filing that it had received a subpoena regarding the return rate for “certain merchant and payment processor customers.” The bank said it was cooperating with prosecutors. Meanwhile, Zions Bancorp of Salt Lake City said in a filing that it was under investigation for processing payments for “allegedly fraudulent telemarketers.”
So far, Operation Choke Point has scored one major settlement. Four Oaks Bank of North Carolina agreed in January to pay $1.2 million for allegedly allowing lenders to process $2.4 billion in illegal transactions.
Prosecutors say bankers waved off signs of fraud while pulling down more than $850,000 in payment-processing fees and customer refund requests. Four Oaks dismissed evidence that online lenders routing payments through the bank were making loans without being licensed in the states where the borrowers lived, according to the complaint.
Critics say the heightened scrutiny and threat of prosecution will lead banks and payment processors to stop doing business with any merchant considered to be high-risk. And without those financial services, law-abiding companies, not just a few bad actors, will be forced out of business.
“If the administration believes some businesses should be out of business, they should prosecute them before a judge and jury,” Issa said Thursday in a statement. “By forcibly conscripting banks to do their bidding, the Justice Department has avoided any review and any check on their power.”