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From Banking and Finance Law Daily, July 28, 2014

“Operation Choke Point”?

By Richard A. Roth, J.D.

In an apparent effort to defuse some of the criticism that has been aimed at “Operation Choke Point,” the Federal Deposit Insurance Corporation has attempted to “clarify” its concerns over bank relationships with third-party payment processors. According to the FDIC, it never intended to discourage banks from having relationships with any specific type of merchant engaged in a legal business; it only wanted to be sure those relationships are managed properly. The agency is reissuing three earlier Financial Institution Letters and a Supervisory Highlights article to clarify its expectations and to remove lists of merchant types that have led to “misunderstandings regarding the FDIC’s supervisory approach” (FIL-41-2014).

Choke Point. Operation Choke Point is a federal program that in part has its roots in the FDIC’s efforts to prevent merchants engaged in so-called high-risk activities from gaining access to the banking system through third-party payment processors. The original version of FIL-3-2012 offered a list of such businesses that included credit repair, debt consolidation, online gambling, payday and subprime loans, pornography, online firearms and tobacco sales, and pharmaceutical sales (see footnote 1). This list is being deleted, along with a comparable list in the Supervisory Highlights article.

According to some, Operation Choke Point has become a tool the federal government is using to attempt to put an end to businesses it finds to be objectionable, even though they are legal (see Banking and Finance Law Daily, May 30, 2014). Banks have complained that they have been pressured to end relationships with customers engaged in legal businesses because bank examiners say the relationships pose “reputational risk.” The agencies have denied these charges (see Banking and Finance Law Daily, July 16, 2014), but efforts to defund or block the program are pending in both houses of Congress.

FDIC restatement. According to the FDIC, the lists comprised activities the payment services industry had associated with high-risk activities because the activities were legal in some jurisdictions but illegal in others; were covered by varying state and federal regulatory regimes; or had resulted in high levels of complaints, returns, or chargebacks. However, the lists were “incidental” to the principal purpose of the guidance, which was to describe the risks that third-party payment processor relationships posed for banks and how banks should manage those relationships.

Listing specific businesses has resulted in “the misperception that the listed examples of merchant categories were prohibited or discouraged,” the FDIC concedes. The agency says its actual policy is that banks are neither prohibited nor discouraged from providing services to any business that is operating legally, as long as the resulting risks are managed properly. A bank that has risk assessment and management programs in place that comply with FDIC guidance will not be criticized for having business relationships with third-party payment processors, the FDIC pledges.

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