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NOT WORTH IT: Many banks would rather close the accounts of customers who could get them in trouble than become "surrogate regulators" or "targets" for punishment, says Richard Riese, a compliance expert at the American Bankers Association.
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Porn Account Closures Show Banks Erring on Far Side of Caution

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A new war is brewing between banks and their customers, and the fight is going public.

PR black eyes of the past would have come from ATM surcharges or foreclosure injustices. Now, news reports are stacking up about angry customers — payday lenders, check cashers, telemarketers, gun dealers and even adult entertainers — who are complaining that their accounts have been, or could be, unfairly terminated.

The businesses say they are legitimate, but banking regulators and the Justice Department are warning that these and other businesses are high risk for money laundering, consumer fraud and other crime. Pressure is being applied through stalled merger approvals and the lingering threat of lawsuits.

The pornography sweep in particular only strengthens bankers' suspicions that regulators are forcing them to play the role of morality police. And it raises more practical questions for bankers: How do they balance public perception and compliance? What industry will they feel compelled to shut out next?

"Banks are left to guess who deserves access to the banking system and who doesn’t," says William Isaac, a former Federal Deposit Insurance Corp. chairman who recently stepped down as chairman of Fifth Third Bancorp (FITB). Isaac, who is now head of the financial institutions group at FTI Consulting, has advised payday-lending companies.

JPMorgan Chase (JPM) has closed accounts of individuals or businesses associated with the adult entertainment industry, several media outlets have reported. In one case, the adult film actress Teagan Presley posted on her Twitter site a copy of the alleged letter from Chase saying her account would be closed on May 11. Presley's husband, film producer Joshua Lehman, told Business Insider, "it was because of our industry."

Presley later tweeted, "So @chase are you going to close my kids savings acct now cause my name is on there too just like you did my personal acct."

JPMorgan declined to discuss these reports or answer how widespread the account closures are.

In another instance, PayPal has blocked attempted transactions by porn-affiliated customers, and in the case of porn star Teal Conrad, she was "banned for life," Al Jazeera reported on Apr. 30. In an email to American Banker, PayPal said it does not comment on specific customers. PayPal "does not discriminate against the people who use our services. We will not and have never closed a PayPal account based on what a customer does for a living," it said.

They were only the latest in a recent string of incidents where banks seem to be shutting off any exposure to industry groups deemed risky by regulators. JPMorgan, in one example, has began closing the accounts of foreign officials and diplomats, in an attempt to avoid being sued or fined by regulators over anti-money-laundering violations, the Financial Times reported on Wednesday.

BankUnited (BKU), in Miami Lakes, Fla., closed the account of a Florida gun dealer after he launched an online store for his business, Miami New Times reported on Apr. 21. BankUnited did not respond to a request for comment.

The whole effort to weed out money laundering and other misuses of the payment system has been building for a couple of years, says Thomas Vartanian, a banking attorney at Dechert. It began with the Financial Fraud Enforcement Task Force, of which both the FDIC and the Department of Justice were members, and has culminated in Operation Choke Point, the Justice Department's crackdown on online consumer fraud. One of Choke Point's big cases was the settlement it reached with Four Oaks Bank of North Carolina, which had been doing business with online lenders.

"The Department of Justice is setting itself up as a significant force in the bank regulation world," Vartanian says.

A Justice Department spokeswoman declined to comment for this story.

Banking regulators are backing up their warnings with tough action, also. The most prominent example is the delay of M&T Bank's (MTB) agreement to acquire Hudson City Bancorp, based on the banks' substandard compliance processes related to the Bank Secrecy Act and anti-money laundering. M&T has been forced to twice delay the deadline for closing the Hudson City deal, as it upgrades its compliance technology to satisfy regulators.

What makes the whole issue more complicated — and emotional — is deciding where to draw the line. Do strip club owners and stars of adult films present the same threat to the banking system as, say, international cartels laundering ill-gotten funds?

Though the issue has gotten a lot of attention lately, porn purveyors have historically had persistent troubles with their financial institutions, says Alan Begner, an Atlanta attorney who represents adult entertainment businesses, including strip clubs.

Neither he nor his clients have ever really discovered the main reason banks seem to dislike them, especially when they generate millions of dollars in fees for the banks, Begner said.

"Some of my clients over the years have gotten letters from their banks saying their money is no good here anymore and they need to take their business elsewhere," Begner says. "Then if you try to find out why, you can't."

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Comments (4)
The slippery slope has become a cliff, and legitimate businesses are falling over it. Where does this stop? Are we now in a country where if the gov't frowns on a business (no matter how legal), the private sector must shun that business or face consequences itself? I thought we were the USA, not the USSR!
Posted by commobanker | Tuesday, May 13 2014 at 10:15AM ET
@commobanker Banking institutions have been an arm of law enforcement for more than a decade now. All banks a required by law to file suspicious activity reports with their regulators and law enforcent agencies if the bank believes that a crime MAY have been committed.
Posted by GMahler | Tuesday, May 13 2014 at 11:40AM ET
There has only been one DOJ case which they rest their laurels on. The entire short term lending industry online and storefront operators have been affected by this Chokepoint campaign as 50+ banks have closed long standing commercial accounts. FDIC also supported the effort with staff attorneys and through their bank examiners. Consumer finance operators must comply with 18 federal laws and various state laws including AML and other fraud detection provisions. This is an abuse of power.
Posted by Mary Jackson | Tuesday, May 13 2014 at 5:36PM ET
A new award-winning documentary, "Risky Business: A Look Inside America's Adult Film Industry," examines many of the current issues surrounding the adult film industry, including the discrimination many performers face, as with Chase Bank. The film's website is RiskyBusinessTheMovie dot c0m
Posted by ShortsAndSandalsEnt | Wednesday, May 14 2014 at 11:26PM ET
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