WASHINGTON The Justice Department has come under fire in recent months for its efforts to root out consumer fraud through banks, but Operation Choke Point appears to be gaining new momentum.
The agency settled a $1.225 million case against Plaza Bank of Irvine, Calif., on Thursday, alleging that it permitted a third-party payment processor to bilk consumers of millions of dollars. It came just two days after Justice settled a $4.9 million case with CommerceWest Bank over charges that the bank "ignored clear warnings" that one of its payment processors, V Internet Corp., was working with fraudulent merchants.
The new cases follow on the heels of several hearings and an investigation by House Republicans last summer, along with continued pushback from the financial services industry.
But observers said it's clear the Justice Department is once again pushing ahead.
"The congressional scrutiny clearly slowed down the DOJ investigations they were distracted. But I think the Justice Department is back to business," said Jeff Knowles, a partner at Venable who frequently represents financial institutions. "It's an open question whether they're going to launch any new investigations, but clearly they're wrapping up pending investigations that have been in the pipeline for some time."
Opponents argue the program is chilling legitimate business activity and deputizing banks to do the work finding fraud that should be left up to law enforcement.
Supporters of Choke Point contend that the CommerceWest and Plaza cases are proof that the agency is only going after cases where banks are complicit or willfully ignoring ongoing consumer fraud.
In the CommerceWest case, the government's complaint, filed in the U.S. District Court for the Central District of California, details numerous red flags the bank allegedly failed to catch, suggesting an arguably egregious lack of oversight.
"Over the course of more than a year, [the bank] ignored a series of glaring red flags, including but not limited to return rates exceeding fifty percent, thousands of complaints from consumers, and even multiple complaints from other banks whose customers had been victims of these fraud schemes," the complaint says.
Lauren Saunders, associate director at the National Consumer Law Center, said the CommerceWest case and the Justice Department's first $1.2 million Choke Point case against Four Oaks Bank in North Carolina, which was filed in January 2014, backed up Justice's position.
"In neither Choke Point case did DOJ go after legal businesses," she said. "Justice meant what it's been saying all along, that Operation Choke Point is aimed at illegal activity. That should wake banks up to make sure they have processes in place for knowing their customers and complying with anti-money laundering rules."
Similarly, the Justice Department claims Plaza Bank "knowingly permitted" the fraud at the processor, ignoring abnormally high rates of rejected transactions, hundreds of consumer complaints each month and inquiries from other banks and law enforcement. In that case, the Justice Department also claimed that Plaza Bank's chief compliance officer raised concerns about the activity at the processor, but was ignored by the bank's chief operating officer who, unbeknownst to the CCO, partly owned the processor.
Other Operation Choke Point deals are expected to be announced soon. The Justice Department issued more than 50 subpoenas to banks as part of the effort, and many of those investigations are still being resolved.
"We expect to have several more civil and criminal cases arising out of our investigations into consumer fraud by banks, third party payment processors and fraudulent merchants," said Emily Pierce, a Justice Department spokeswoman.
One key factor going forward will be whether additional banks, like CommerceWest, face criminal charges. Unlike Four Oaks and Plaza Bank, which were civil cases, CommerceWest consented under its two-year deferred prosecution agreement to a criminal count for failing to file a suspicious activity report, along with civil violations. That raises the stakes for banks, and could put the rest of the financial industry on notice.
"Banks file hundreds of thousands of suspicious activity reports every year, and they've done that in partnership with the Department of Justice and the banking agencies as partners in fighting fraud," said Knowles. "And now instead of the banks being viewed as working partners with government in combatting fraud on consumers, the government is actually pointing their gun and making the banks themselves the target of those activities."
The U.S. Postal Inspection Service, meanwhile, has claimed more than $2.9 million from V Internet's accounts at CommerceWest. Agents also seized significant property from the processor's owner, including five airplanes, a Land Rover, a Dodge Charger, multiple tractors, five all-terrain vehicles and a fire truck, purportedly bought with the illegal gains.
Still, critics of Operation Choke Point say they're still wary of the program and its effects on law-abiding merchants and processors, despite the Justice Department's recent settlement and efforts to reduce industry concern. The Federal Deposit Insurance Corp. sent a letter to banks in January urging them to consider customers on an individual basis rather than cutting off whole industries. The FDIC has said that it is not directly involved in Operation Choke Point, but critics have argued that regulators are distancing themselves because the effort has attracted so much scrutiny.
"If the strategy is to go after those committing fraud, we support and applaud those efforts. But if the strategy is to intimidate or scare legitimate financial institutions away from doing business with legitimate merchants, that concerns us," said Scott Talbott, senior vice president of government affairs at the Electronic Transactions Association.
He added that the group is "concerned Operation Choke Point is a tactic still out there in the system," in part because it can take time for changes in policy to trickle down to field examiners working with individual banks across the country.
Observers added that other agencies, including the Federal Trade Commission and the Consumer Financial Protection Bureau, are already adopting similar legal strategies to those used in Choke Point, signaling that even if Justice Department officials were to call off the initiative, its impact will likely live on.
"That approach wasn't limited to DOJ, and it's going to continue to be employed going forward," Knowles said.