A number of banks cut ties with pawnbrokers in recent years. Now pawnbrokers are pushing back.
Pawnbrokers have been unfairly caught up in the Department of Justice antifraud initiative known as Operation Choke Point, according to an op-ed published Tuesday by National Pawnbrokers Association government relations liaison Fran Bishop. Critics of the DOJ investigation, which became public in March 2013, argue that it has prompted banks to close the accounts of legitimate businesses designated by the government as high-risk, including arms dealers, porn shops and payday lenders. Banks including SunTrust Banks and JPMorgan Chase began severing long-standing relationships with pawnshops after the launch of the probe, according to Bishop.
"In 2013, Operation Choke Point began pressuring the financial industry to cut off banking services to companies believed to be at high risk for fraud and money laundering," Bishop said in a related statement. "Despite not being a money-service business, and not named on the 2011 Federal Deposit Insurance Corp. list of high-risk businesses, the pawn industry was swept into this effort anyway."
Bishop argues that banks' overzealous reaction to the DOJ investigation is to blame for the wave of account closures. She notes in her op-ed that regulators have issued guidance urging banks to avoid unnecessarily severing relationships with legitimate businesses in the past year.
A JPMorgan Chase spokeswoman confirmed that the bank had opted to stop doing business with pawnshops and other businesses that rely heavily on cash but denied that Operation Choke Point was a factor in the decision. The bank was motivated by anti-money-laundering and know-your-customer compliance concerns, she said, referring to rules that require banks to scrutinize accountholders for signs of illegal activities.
SunTrust confirmed in an August 2014 press release that it had decided to stop serving pawnbrokers but made no mention of Operation Choke Point. "It is consistent with long-standing industry practice to review relationships to ensure they satisfy a range of business and risk considerations," the release states. "We have decided to discontinue banking relationships with three types of businesses specifically payday lenders, pawnshops and dedicated check cashers due to compliance requirements."
Operation Choke Point may well have led some banks to sever relationships with pawnbrokers, according to Rob Rowe, associate chief counsel of the American Bankers Association. But he added that a number of other factors also influence banks' decisions about which businesses to serve.
"Regulators are clearly focusing on AML compliance," Rowe said. "Every bank I've talked to in the last few years says that examiners are really closely scrutinizing [Bank Secrecy Act] efforts."
The fact that pawnbrokers are a cash-intensive business makes them higher risks despite the fact that they were not included on the FDIC's now-retracted list of industries that require particular scrutiny, Rowe said.
"Banks will look at industries like pawnbrokers and say, 'We don't have enough expertise or the staff resources to properly identify what's going on and track the transactions that are taking place,'" he said. But he said that banks have largely stopped cutting off industries wholesale, with the possible exception of legal marijuana businesses.
Better training for bank examiners and auditors could help banks become more comfortable serving pawnbrokers and other businesses that are perceived as risky, according to Rowe. Right now, examiners are under a lot of pressure to catch potential problems, which leads to an atmosphere in which regulators and banks may prefer to err on the side of caution. If examiners have clearer yardsticks for measuring when banks have done their due diligence, banks may be willing to reconsider the customers they are willing to serve.
"Examiners need to feel comfortable that when a bank has assessed risk and put controls in place, as long as those controls are in place, that should be enough," Rowe said.