Operation Choke Point and adult entertainment

In June, a sheriff in Illinois called on Mastercard and Visa to stop processing payments for the classifieds ad site Backpage.com, which the law enforcer alleged was a hotbed of prostitution and sex trafficking. Within 48 hours, both companies had complied, leading Backpage to sue the sheriff for using the power of his office to circumvent legal avenues of addressing his allegations against the site, much as police had done to publishers deemed to be proliferating “impure” books in the 1960s.

The judge in the Backpage case initially granted the classifieds site a temporary restraining order to protect it from the sheriff’s continued efforts to destroy it, but in August, the judge refused to make this order permanent after evidence surfaced that at least one of the credit card giants had been conducting its own investigation of Backpage to determine whether to end their business relationship.

A spokesperson for MasterCard said that the company ultimately decided to cut ties with Backpage because it reserves the right to terminate unsavory or undesirable businesses. They’re not the only ones to rely on such vague reasoning — a number of payment processors and financial institutions have clauses stipulating that they reserve the right to prohibit transactions that may be seen to “tarnish” their reputation.

Though the Backpage case is ongoing, this turning point is a reminder of the power that a few entities have come to hold in a digital age where the use of cash is increasingly being made obsolete. By becoming reliant on the convenience of digital transactions, we have granted financial institutions unlimited power in legislating what business enterprises are acceptable to undertake and what products are acceptable to purchase.

THE TASK FORCE

Sheriff Tom Dart’s lobbying of MasterCard and Visa is not the first time that the government has employed extralegal means to target specific businesses. In 2010, rather than charging the owners or administrators of the site Wikileaks — a nonprofit that makes classified documents available to the public — the Department of Defense pressured Paypal, Visa and MasterCard to stop servicing the site, cutting off Wikileaks’ access to the donations that the site needed to continue running.

More recently, this approach has become more aggressive — and more organized.

At the end of 2009, President Barack Obama created the Financial Fraud Enforcement Task Force (FFETF) to hold accountable those who had participated in the subprime mortgage crisis, and curb fraud targeting economic recovery efforts.

“The task force is improving efforts across the government and with state and local partners to investigate and prosecute significant financial crimes, ensure just and effective punishment for those who perpetrate financial crimes, recover proceeds for victims and address financial discrimination in the lending and financial markets,” reads the FFETF site StopFraud.gov.

Running under the Department of Justice and chaired by the Attorney General of the United States, the FFETF involves senior officials from over 20 federal agencies, among them the Department of Homeland Security, Federal Trade Commission, Federal Deposit Insurance Corporation (FDIC), Federal Bureau of Investigation, Internal Revenue Service, and Immigration and Customs Enforcement. It is, in short, a massive coalition of investigative and regulatory bodies, which, since its inception, has established outposts in every state’s Attorney’s Office across the country.

The task force is comprised of a number of committees that focus on specific aspects of each anti-fraud operation, along with a number of working groups that target specific vectors of fraud, including residential mortgage-backed securities fraud, securities and commodities fraud, mortgage and loan fraud, grant and procurement fraud, relief program fraud, oil and gas price fraud, and one that specializes on general consumer protection. It is through this last, the Consumer Protection Working Group, that the FFETF became involved in one of the most aggressive and brutal government campaigns to informally ban otherwise legal businesses.

THE OPERATION

Operation Choke Point, like many initiatives undertaken by various aspects of the FFETF, was framed as an effort to combat fraud. In this case, the fraud was seen as being perpetrated by online merchants. The operation was called “Choke Point” because financial institutions working with third party payment processors — such as Paypal and Square — are seen by the FFETF as bottlenecks. Applying pressure to banks would trickle down to payment processors, and effectively cut fraudulent merchants from the marketplace.

In a March 20, 2013 speech made by FFETF executive director Michael J. Bresnick, laid out the Consumer Protection Working Group’s intent:

The reason that we are focused on financial institutions and payment processors is because they are the so-called bottlenecks, or choke-points, in the fraud committed by so many merchants that victimize consumers and launder their illegal proceeds. For example, third-party payment processors are frequently the means by which fraudulent merchants are able to get paid.

[ … ] Sadly, what we’ve seen is that too many banks allow payment processors to continue to maintain accounts within their institutions, despite the presence of glaring red flags indicative of fraud, such as high return rates on the processors’ accounts. High return rates trigger a duty by the bank and the third-party payment processor to inquire into the reasons for the high rate of returns, in particular whether the merchant is engaged in fraud.

Nevertheless, we have actually seen instances where the return-rates on processors’ accounts have exceeded 30 percent, 40 percent, 50 percent, and, even 85 percent. Just to put this in perspective, the industry average return rate [ … ] is less than 1.5 percent, and the industry average for all bank checks processed through the check clearing system is less than one-half of one percent. Return rates at the levels we have seen are more than red flags. They are ambulance sirens, screaming out for attention.

During this speech, Bresnick spoke of the case against the First Bank of Delaware, where between 2010 and 2011, four payment processors had executed transactions totalling over $123 million, half of which were ultimately rejected. The bank did not investigate the reason for the high rates of return, and the government finally charged it with participating in a scheme to commit fraud under the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA), forcing the bank to pay a $15 million penalty and close its doors.

“Banks should endeavor not only to know their customers, but also to know their customers’ customers,” Bresnick exhorted. “Before they agree to do business with a third-party payment processor, banks should strive to learn more about the processors’ merchant-clients, including the names of the principals, the location of the business, and the products being sold, among other things. If they are going to allow their institutions to be used by others as a gateway to access the bank accounts of our nation’s consumers, banks need to know for whom they are processing payments. Because if they don’t, [ … ] they might later find themselves in the unfortunate position of the First Bank of Delaware.”

The logic of pressuring banks rests on the belief that payment processors act as a barrier that enables fraudulent merchants to escape the scrutiny banks are required, under the the Bank Secrecy and PATRIOT Acts, to exercise toward their customers.

The Bank Secrecy Act, which targets money laundering, requires financial institutions to have a Customer Due Diligence program that familiarizes banks with the types of transactions made by merchant-clients, while Section 326 of the USA PATRIOT Act requires financial institutions to establish a Customer Identification Program to ensure that they’re not providing services to a merchant involved in fraudulent activity.

However, the FDIC has already issued guidance for developing approval programs for payment processors, including conducting background checks of both processors and the merchants they do business with.

THE LIST

The task force emphasized the need for financial institutions and payment processors to exercise greater scrutiny of merchants to ensure none of those they serviced possessed “a threat of criminal or other unlawful conduct.” To comply, banks turned to guidelines issued the FDIC, whose involvement with FFETF efforts was well-established. This guidance came in the form of a list identifying businesses that the FDIC had labelled “high-risk.”

This list included ammunition sales, cable box descramblers, coin dealers, credit card schemes, credit repair services, dating services, debt consolidation services, drug paraphernalia, escort services, firearms sales, fireworks sales, “get rich” products, government grants, home-based charities, life-time guarantees, life-time memberships, lottery sales, mailing lists/personal information, money transfer networks, online gambling, payday loans, pharmaceutical sales, ponzi schemes, pornography, pyramid-type sales, racist materials, surveillance equipment, telemarketing, tobacco sales, and travel clubs.

The FDIC did not explain in its guidance why these businesses had been labeled “high-risk” and the banks did not ask. The reason would only become clear a year later, after Congress began looking into Operation Choke Point.

Shortly after the operation officially began in 2013, banks began closing the accounts of numerous merchants, even those that were operating legally in their jurisdictions and had maintained good credit histories with the banks in question.

The first businesses to feel the choke were payday lenders — companies that lend small amounts of money at high interest rates, on the understanding that the loan will be repaid as soon as the borrower gets their next paycheck. A number of banks issued ultimatums to these merchants, warning that their accounts would be shuttered if they didn’t stop providing those services. Soon, the efforts expanded, and banks began targeting diversified financial firms and check cashers.

“Without color of law and based on a political agenda, unelected bureaucrats at the Department of Justice are coordinating with some bank regulators to deny essential banking services to companies engaged in lawful business activities,” wrote former FDIC chairman William M. Isaac some months after the story about these efforts broke in the Wall Street Journal. “If lawful payday lenders and check cashers can be driven out of the banking system because someone in the government doesn’t like them or what they do, what lawful businesses are next?”

Isaac was not wrong in worrying this was only the beginning. Not long after payday lenders and check cashers began to feel the choke came the reports that gun and ammunition sellers and tobacco shops were being cut out of the financial system too.

And then came porn performers — some of whom saw not only business accounts closed, but personal accounts as well. Indeed, banks closed the account of at least one person simply because he was married to a porn performer.

As everyone who has worked in policy knows, defining “pornography” is much harder than it appears. The adage “better safe than sorry” can have truly unfortunate consequences, as JPMorgan Chase illustrated when the financial powerhouse terminated its relationship with a condom company. The move drew ire from the left, who — despite having differing opinions on the value of “adult” content — tends to agree on the importance of barrier protection as a matter of public health.

For the left, it was a foreshadowing of what might happen in a different administration, should an initiative like Operation Choke Point be allowed to stand as precedent.

“While the list might not bother you today because you dislike the activities of the targeted companies, will you still feel the same way if or when the next President Nixon takes office?” Isaac asked. “This is a very slippery slope.”

Unfortunately, this was a warning the left would ignore. Chase eventually resumed its business relationship with the condom company, and little more was said in the progressive press.

The targeting of gun sellers, on the other hand, had generated an equal amount of outrage from the right, and mobilized the conservative base. Only they seemed to connect the dots between closures affecting “adult” businesses and those impacting gun shops and payday lenders.

THE INVESTIGATION

House Republicans are unlikely allies, but there they were. In early 2014, Representative Blaine Luetkemeyer called on the Department of Justice and FDIC to allow banks to serve legitimate businesses tarnished by the “high-risk” list.

“Regulators don’t have the right to pick which businesses are moral,” he warned. “They are there to enforce the law, and that’s where their regulatory business stops.”

The House Oversight Committee, chaired by Darrell Issa, kicked off a probe into Operation Choke Point not long after. Its findings, released on May 29, 2014, were disturbing: the Department of Justice had issued over fifty subpoenas to banks and payment processors as a way to compel compliance and cut off certain businesses from the banking system.

These subpoenas were issued under Section 951 of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA), which are not subject to judicial authorization, apply to anything and anyone the Attorney General deems relevant to an inquiry, and empowers the government to bring civil lawsuits for violations or conspiracies to violate a number of white collar offenses. FIRREA provides for hefty penalties: $1 million per violation, $5 million for continuing violations, or financial penalties reflecting the gains made by a defendant.

The House Oversight Committee report argued that FIRREA was being used improperly by the Department of Justice, noting that it had been enacted in response to the savings and loan crisis of the 1980s as a means to target entities that commit fraud affecting a financial institution, not the financial institutions themselves.

“Documents produced to the Committee indicate that, in furtherance of Operation Choke Point, the Department [of Justice] has radically and inappropriately expanded its own authority under FIRREA,” the report stated. “In an end-run around this requirement [that the alleged fraud affect a financial institution], the memorandum [acquired by the Committee from the Department of Justice during its investigation of FFETF] posits that providing normal banking services to an allegedly fraudulent merchant creates a variety of ‘risks,’ and that these risks may ‘affect’ the institution. The memorandum even concedes that these risks are strictly hypothetical, candidly admitting that ‘the financial institutions we are investigating have not suffered any actual losses.’ [ … ] Ultimately, the Department’s tortured legal analysis has turned FIRREA on its head: Section 951 was intended to help the Department defend banks from fraud; instead, the Department is using it to forcibly conscript banks to serve as the ‘policemen and judges’ of the commercial world.”

At no point has the Department of Justice pressed charges against any merchant identified as “high-risk,” or managed to establish that merchants affected by the FDIC “high-risk” list ever broke the law or intended to do so. The investigation also concluded that by including FDIC guidance implicating certain businesses as “high-risk” alongside its subpoenas, Operation Choke Point had in fact intended to discourage lawful businesses, with short-term lending as its primary, but by no means only, target.

“Operation Choke Point rendered the FDIC’s [guidance on ‘high-risk’ businesses] extremely significant,” read the report. “The initiative is predicated on a radical reinterpretation of FIRREA — that merely providing normal banking services to certain merchants creates a ‘reputational risk’ that is an actionable violation under Section 951. As a consequence of this reformulation, Operation Choke Point effectively transformed the FDIC guidance into an implicit threat of a federal investigation. Suddenly, doing business with a ‘high-risk’ merchant is sufficient to trigger a subpoena by the Department of Justice. Banks are put in an unenviable position: discontinue longstanding, profitable relationships with fully licensed and legal businesses, or face a potentially ruinous lawsuit by the Department of Justice.”

The documents produced during the course of the investigation satisfactorily demonstrated to the Congressional committee that the Department of Justice was counting on financial institutions’ fear of federal investigation to force compliance.

The Department of Justice has never disclosed — neither to banks nor Congress — the exact percentage of return-rates sufficient to trigger the investigation of a bank. Among the three banks that were taken to court by the Justice Department in conjunction with Operation Choke Point, the lowest return rate was 30 percent and the highest was 55 percent.

The report concludes:

Operation Choke Point was created by the Justice Department to “choke out” companies the Administration considers a “high-risk” or otherwise objectionable, despite the fact that they are legal businesses. [ … ] Acting in coordination with Operation Choke Point, bank regulators labeled a wide range of lawful merchants as “high-risk” — including coin dealers, firearms and ammunition sales, and short-term lending. Operation Choke Point effectively transformed this guidance into an implicit threat of a federal investigation.

The Department is aware of these impacts, and has dismissed them. Internal memoranda on Operation Choke Point acknowledge the program’s impact on legitimate merchants. Senior officials informed [then-Attorney General] Eric Holder that as a consequence of Operation Choke Point, banks are exiting entire lines of business deemed “high-risk” by the government.

The Department lacks adequate legal authority for the initiative. [ … ] Documents produced to the Committee demonstrate the Department has radically and unjustifiably expanded its Section 951 authority. [ … ] The Department’s radical reinterpretation of what constitutes an actionable violation under Section 951 of FIRREA fundamentally distorts Congress’ intent in enacting the law, and inappropriately demands that bankers act as the moral arbiters and policemen of the commercial world. In light of the Department’s obligation to act within the bounds of the law, and its avowed commitment not to “discourage or inhibit” the lawful conduct of honest merchants, it is necessary to disavow and dismantle Operation Choke Point.

The report cascaded, leading to hearings by the House Judiciary Committee and the House Financial Services Committee.

Then, in June 2014, a group of payday lenders sued the FDIC and other regulatory bodies, asking for injunctive relief against the informal guidance document that had labelled their business “high-risk,” on the grounds that it exceeded the angencies’ statutory authority, was arbitrary and capricious, and denied the short-term lending industry legal recourse.

“The ostensible basis of Defendants’ campaign against the payday lending industry (and other lawful but disfavored industries) is that providing financial services to such industries exposes the banks to ‘reputation risk.’ According to informal ‘guidance documents’ provided to the regulated institutions, ‘reputation risk’ arises from ‘negative public opinion’ about the bank’s customer, and ‘any negative publicity involving the [bank’s customer] . . . could result in reputation risk.'” the complaint states, citing a 2008 document from the FDIC, which was included along with a number of the subpoenas issued to financial institutions during Operation Choke Point.

“The Defendant agencies have not provided banks with any objective criteria, in their informal guidance documents or anywhere else, for measuring ‘negative public opinion’ about a bank’s customers or for otherwise determining when a particular customer, or an entire category of customers, is sufficiently unpopular to present an unacceptable ‘reputation risk’ to the bank’s safety and soundness,” the complaint continues. “Nor does Defendants’ guidance on reputation risk distinguish between bank customers engaged in fraudulent or otherwise unlawful businesses or practices and customers engaged in lawful businesses and committed to ethical business practices.”

THE RESPONSE

In response to the House Oversight Committee report and the lawsuit, the FDIC began to distance itself from Operation Choke Point. Shortly after the lawsuit was filed, an agency spokesperson told the conservative news and opinion website Breitbart, “Operation Choke Point is a Department of Justice program. The FDIC does not participate in the program.”

In July of 2014, FDIC Chairman Martin Gruenberg claimed the devastating effects of its “high-risk” list on lawful merchants had been the result of a misunderstanding on the part of banks. The FDIC soon after issued a clarification, which explained that it included the businesses in its original guidance in order to illustrate “merchant categories included activities that could be subject to complex or varying legal and regulatory environments, such as those that may be legal only in certain states; those that may be prohibited for certain consumers, such as minors; those that may be subject to varying state and federal licensing and reporting regimes; and those that may result in higher levels of complaints, returns, or chargebacks.”

The FDIC’s clarification went on:

The lists of examples of merchant categories … were intended to be illustrative of trends identified by the payments industry at the time the guidance and article were released. Further, the lists of examples of merchant categories were considered to be incidental to the primary purpose of the guidance, which was to describe the risks associated with financial institutions’ relationships with [third-party payment processors] TPPPs, and to provide guidance to insured institutions on appropriate risk management for relationships with TPPPs.

Nevertheless, the lists of examples of merchant categories have led to misunderstandings regarding the FDIC’s supervisory approach to institutions’ relationships with TPPPs, resulting in the misperception that the listed examples of merchant categories were prohibited or discouraged. The FDIC encourages insured depository institutions to serve their communities and recognizes the importance of services they provide. In fact, it is the FDIC’s policy that insured institutions that properly manage customer relationships are neither prohibited nor discouraged from providing services to customers operating in compliance with applicable federal and state law. Accordingly, as part of clarifying our guidance, the FDIC is removing the lists of examples of merchant categories from outstanding guidance and the article.

Business owners who had already been impacted by Operation Choke Point didn’t think the clarification was good enough, and neither did lawmakers. Under pressure from Luetkemeyer and over 30 members of Congress, both the FDIC and the Department of Justice agreed to investigate Operation Choke Point, as well as allegations of false testimony to Congress by the FDIC.

In August, the FDIC and co-defendants tried to have the case by payday lenders dismissed, arguing that issuing guidelines does not constitute pressure, and that, as a result, payday lenders have no standing to sue.

“‘Scrutiny’ is not the same as ‘pressure;’ not even plaintiffs claim that the FDIC is barred from applying ‘scrutiny’ to banks’ third-party relationships when monitoring the safety and soundness of those banks’ operations,” the FDIC said.

Meanwhile, Luetkemeyer got to work in Congress, drafting legislation to bring an end to Operation Choke Point and prevent future extralegal attacks on legal businesses. If passed into law, this bill would prohibit federal agencies from formally or informally suggesting, requesting, or ordering a financial institution to terminate or restrict customer accounts unless the agency has material reason beyond “reputational risk.”

THE RETREAT

In January of this year, FDIC chairman Martin Gruenberg and vice chairman Tom Hoenig acknowledged wrongdoing on behalf of the agency and accepted a number of policies put forth by Luetkemeyer in his bill.

Shortly afterward, the FDIC issued a new guidance, telling banks to examine their customer relationships on a case-by-case basis before determining to close their accounts, rather than doing so based on perceived industry operational risk. In addition to the guidance, the agency has adopted a new policy that will require supervisory staff to issue recommendations for account termination to banks in writing that will clearly state the reason. “Reputational risk” is no longer enough.

Though satisfied by the agency’s initiative, Luetkemeyer’s bill was reintroduced in February and passed the Financial Services Committee in July.

Also in July, the Department of Justice cleared itself of wrongdoing in a report Luetkemeyer described as “quite frankly, to the point of a cover up.”

The Department of Justice Office of Professional Responsibility (OPR) concluded that the interpretation and use of the FIRREA statute is supported by current case law, pointing out that all courts that dealt with the issue have determined FIRREA may be used to address fraud schemes in which a financial institution suffered no actual monetary loss but increased institutional risk to itself by participating in or facilitating fraud. The investigation also noted that Operation Choke Point has resulted in three cases with negotiated settlements and consent judgments that have been accepted by three federal courts.

The OPR determined that Operation Choke Point did not improperly target lawful payday lenders, though it acknowledged that some involved in Operation Choke Point had a negative view of payday lending. Neither did the investigation reveal that Operation Choke Point intentionally targeted any of the industries listed in the congressional staff report (including pornography, tobacco or firearms sales).

The OPR report reads:

Starting in May 2013, the [Department of Justice] began including with the FIRREA subpoenas it issued three documents containing regulatory guidance [from the FDIC] regarding third-party payment processors, with a cover letter that read in part: “Enclosed is a subpoena requiring the production of documents in connection with an investigation of fraud. We look forward to your cooperation with our investigation. For your information, also enclosed is regulatory guidance concerning risks posed to banks and consumers by third-party payment processor relationships.”

According to the Department of Justice, the documents were included to “assist the subpoena recipient to understand what we meant by our use in the subpoena of the term ‘third-party payment processor'” because the Department of Justice did not believe that financial institutions had “a common understanding of the term.” They denied including the guidance as a means of encouraging or coercing banks to cut off “high-risk” businesses, and the OPR concluded that the Department of Justice had no reason to believe that enclosing FDIC guidance would lead banks to “prophylactically terminate” relationships with lawful businesses.

The inquiry also found that Operation Choke Point resulted in 60 subpoenas, issued between February and August 2013, at least six of which targeted payment processors.

To date, the Justice Department has filed three civil actions against financial institutions alleging violations of FIRREA and still has some civil investigations open based on information from the Operation Choke Point subpoenas. In addition, some U.S. Attorney’s Offices also have open investigations based at least in part on evidence obtained from the FIRREA subpoenas. Criminal investigations have been initiated against four payment processors.

The Justice Department is now focused on concluding the investigations that arose as a result of their efforts in Operation Choke Point, but it remains open to pursuing new investigations if it determines that banks, payment processors or fraudulent merchants are breaking the law or intending to do so.

THE AFTERSHOCKS

On the heels of the report clearing the Department of Justice came the formal announcement from the Obama administration that it had restricted the investigative powers of inspectors general, requiring the agencies’ watchdogs to get permission from agency heads before accessing materials for oversight investigations. The inspectors general first brought these restrictions to the attention of Congress in August of last year. It is unclear why the administration failed to disclose this change to the public for so long.

There is no evidence that the Department of Justice denied any requests made by its inspector general in the course of the Operation Choke Point investigation. Nevertheless, some members of Congress have argued that the administration’s restriction represents a serious conflict of interest.

Last month, the FDIC Office of the Inspector General released the findings of the audit of the FDIC in Operation Choke Point.

“We found no evidence that the FDIC used the high-risk list to target financial institutions. However, references to specific merchant types in the summer 2011 edition of the FDIC’s Supervisory Insights Journal and in supervisory guidance created a perception among some bank executives that we spoke with that the FDIC discouraged institutions from conducting business with those merchants,” the report reads.

The report elaborates on how views of senior FDIC executives influenced the approach toward certain businesses, specially payday lending:

“A heightened level of concern for payday lending by financial institutions … was reflected in the negative tenor of internal email communications among senior FDIC staff and others that we reviewed. In some cases, these communications involved instances in which FDIC personnel contacted institutions and used moral suasion to discourage them from adopting payday lending products or providing [payment] processing for payday lenders,” notes the report.

Using moral suasion, it should be noted, is to appeal to morality in an effort to modify a behavior or situation; however, in economics, to use moral suasion is to coerce a private entity to comply with the requests of an authority through the use of explicit or implicit threats not dictated by existing law.

The audit noted that the regulator does not have a formal definition of “moral suasion” in its policies, and that moral suasion is commonly used to influence better risk-management at financial institutions “before perceived problems rise to a level that necessitates an informal or formal enforcement action.”

The audit turned up three documented instances in which the FDIC discouraged financial institutions from providing services to lenders, two of which were made in writing and cited reputation risk. The audit acknowledges, however, that because the FDIC does not track its communications to financial institutions, there’s no way to know for certain how often such communications occurred.

Of over fifty subpoenas sent to financial institutions by the Department of Justice, an unknown number of which included the FDIC guidance, the FDIC audit interviewed the senior executives of only 19. Four of these senior executives expressed that they thought the “high-risk” list indicated the FDIC discouraged institutions from conducting business with those types of merchants.

Additionally, the audit determined that the FDIC had limited contact with the Department of Justice during the course of Operation Choke Point. In February 2013, the FDIC began collaborating with the Department of Justice and continued until August, when the Wall Street Journal broke the story. Following allegations that the Department of Justice and the FDIC were working together to pressure banks to cut certain businesses off, the FDIC chairman put a stop to the chummy relationship with the Department of Justice, limiting all communication to official requests.

The FDIC has implemented a plan to address the issues uncovered by audit. It has already removed references to “high-risk” merchants from its guidance, altered its supervisory policy and established an internal policy for documenting and reporting staff-issued recommendations and requirements to financial institutions for the closure of merchant accounts. As noted previously, the new policy no longer allows the termination of accounts for “reputation risk.”

“These actions were intended to make clear the FDIC’s policy that financial institutions that properly manage customer relationships and effectively mitigate risks are neither prohibited nor discouraged from providing financial services to customers, regardless of the customers’ business category, provided that the institutions operate in compliance with applicable laws,” the report states.

Last month, a federal judge rejected the FDIC and other regulators’ motion to dismiss the suit brought against them by payday lenders. In a opinion of more than 50 pages, U.S. District Judge Gladys Kessler ruled that lenders do have standing to sue, having sufficiently alleged facts that, if proven to be true, show that it was the regulators’ actions that led their banks to terminate their accounts.

“Plaintiffs have alleged that the stigma promulgated by defendants has resulted in lost banking relationships, and that the continued loss of banking relationships may preclude them from pursuing their chosen line of business,” Kessler wrote. “This is sufficient to constitute a ‘tangible change in status’ and implicate a protected liberty interest.”

Based on findings in the FDIC investigation by its Office of the Inspector General, the suit has a chance.

However, it is unclear that the end of Operation Choke Point will necessarily improve the situation faced by merchants selling adult products, as they continue to face significant stigma among payment processors. Notably, the Federal Financial Institutions Examination Council (FFIEC), a U.S. interagency body of five banking regulators (including the FDIC), continues to list “adult entertainment” as “high-risk” in the context of payment processors, despite a late 2014 revision to its guidance.

In April, a California bankruptcy firm launched a class action against the payment processor Square for discriminating against its legal business in its terms of service under California’s Unruh Civil Rights Act, which the state’s supreme court has interpreted to protect more classes than those listed by the original legislation. The case is on-going, and the plaintiff’s attorney has noted that merchants in the adult entertainment category are eligible to join.

A victory is far from certain, but something must be done about the wholesale restriction on legal industries.

Image by Randi Boice (Flickr, CC BY-NC-ND 2.0)

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