Previously unreleased documents from the Justice Department on Operation Choke Point shed new light on the law enforcement effort, including how it came to identify certain banks and whether it was concerned about the impact it could have on law-abiding companies.
Following are five takeaways from the documents:
Payday lending was a concern, but not the exclusive focus
Some of Operation Choke Point's opponents have portrayed the probe as a coordinated effort to shut down the payday loan industry. The documents released Thursday, taken together, offer a more nuanced picture.
Operation Choke Point grew out of a consumer protection group, established in 2012, within the inter-agency Financial Fraud Enforcement Task Force. That group's mission statement discusses payday lending as one area where consumers may be vulnerable to fraud, but it also mentions schemes targeting service members, student consumer fraud, and other industries.
A November 2012 memo that asked for the establishment of Operation Choke Point never specifically mentions payday lending. But later documents suggest that payday lending became more of a focus over time.
In an April 2013 note asking for the issuance of new subpoenas, an unidentified Justice Department official wrote: "We are expanding Operation Choke Point to include entities that transact business on behalf of payday lenders." A DOJ memo from July 2013 referred to "service member fraud and payday lending" as "high priority areas."
Bank regulators helped point DOJ to certain banks
Approximately 50 banks and six payment processors have received subpoenas as part of Operation Choke Point, and the DOJ documents reveal how at least some of those institutions were identified.
The Federal Trade Commission provided leads about certain banks, according to a May 2013 memo. The FTC investigates merchants that defraud consumers, and it had access to information about which banks specific merchants were relying upon.
The Federal Reserve Bank of Atlanta, which runs one of the nation's two automated clearing house networks, also turned over its regular "Dashboard Reports," according to the May 2013 memo. Those reports identify banks that have high rates of returned ACH transactions, which the DOJ used as an indicator of potential fraud. The Atlanta Fed gave the reports to the Justice Department in response to a subpoena, the memo states.
DOJ hoped to use investigative leads from the FTC and the Atlanta Fed to make a quick splash.
"I propose that we identify and engage ten suspect banks within 150 days," Assistant Attorney General Joel Sweet wrote in the November 2012 memo that proposed the establishment of Operation Choke Point. "This alone is likely to cause banks to scrutinize their accounts relationships and, if warranted, to terminate fraud-tainted processors and merchants."
Banks were targeted because of limited prosecutorial resources
Some critics of the DOJ have complained that prosecutors are mainly going after banks, rather than the merchants suspected of actually defrauding consumers. DOJ officials justified their strategy as the best way to make a major impact, given the department's limited resources.
"We are targeting banks more than payment processors, and payment processors more than merchants," Michael Blume, director of the DOJ's consumer protection branch, wrote in September 2013. "Any one case, whether against a bank, a processor, or a merchant, takes substantial time and attention from our team. Bank cases will deter other banks, thereby stopping the processing of transactions for fraudulent merchants."
"This practice is not optimal and may present litigation risks," the memo continues. "But it may be necessary to prevent the initiative from grinding to a halt due to resources used pursuing merchants and processors."
Justice Department officials see Choke Point as a success
In a six-month status report, Blume gave a glowing assessment of the investigation.
"All signs indicate that Operation Choke Point is having an unprecedented effect on banks doing business with illicit third-party payment processors and fraudulent merchants," Blume wrote in the September 2013 memo.
"We believe we already have denied fraudsters access to tens, if not hundreds, of millions of dollars from consumers' bank accounts, and that amount will increase daily and indefinitely. This unparalleled level of deterrence is corroborated by payment processors and banks that have informed us that they have stopped providing services to fraudulent merchants."
The DOJ's upbeat appraisal is the flip side of the critique lodged by banks, payment processors, payday lenders and others. Choke Point's supporters and critics both say the probe has had a major impact, but they differ in their evaluations of that impact.
If banks cut off accounts for legit online lenders, it's not DOJ's problem
There are online lenders that operate legally, as well as firms that make loans in violation of state laws. The DOJ was aware of that distinction, and acknowledged in a September 2013 memo that legitimate firms might be harmed by Operation Choke Point. But DOJ officials brushed that thought aside as someone else's worry.
"Although we recognize the possibility that banks may have therefore decided to stop doing business with legitimate lenders, we do not believe that such decisions should alter our investigative plans," Blume wrote.
"Solving that problem if it exists should be left to the legitimate lenders themselves who can, through their own dealings with banks, present sufficient information to the banks to convince them that their business model and lending operations are wholly legitimate."
The Republican-led House Oversight Committee mocked the Justice Department's reasoning in its report on Operation Choke Point.
"Such an expectation 'if they are legitimate, they can prove it' is patently absurd, and reminiscent of the formulation that 'if one is not a witch, then they will sink rather than float,'" the report states.