Contrary to the belief by some that the U.S. Department of Justice's Operation Choke Point has reached an end, a recent indictment brought as part of the initiative to root out financial fraud should serve as a stark reminder that OCP investigations and enforcement actions continue.
Last month the prosecutors in DOJ's Consumer Protection Branch, who led the investigations into OCP's previous targets, filed a 39-count criminal indictment in Nevada of Gareth Long, owner and operator of the third-party payment processor V Internet Corp, LLC. About a year ago the Consumer Protection Branch had announced a settlement with CommerceWest Bank for allegedly permitting V Internet to engage in fraudulent transactions with numerous merchants.
In announcing the Long indictment, Principal Deputy Assistant Attorney General Benjamin C. Mizer, the leader of DOJ's Civil Division, said: "As this case makes clear, we will investigate and pursue charges against individuals who abuse the financial information of American consumers." Banks, payment processors and others in the financial services industry should remain vigilant.
Unfortunately, as the investigations continue, so too have one of the unintended but collateral consequences of such vigilance: mass de-risking. Members of the industry have raised their hands in frustration and simply avoided lines of business typically associated with higher risk. This reaction to DOJ's enforcement initiative, and similar matters brought by the Federal Trade Commission and the Consumer Financial Protection Bureau, is certainly understandable. But is it necessary?
For its part, the DOJ has done much to help avoid widespread panic. Its allegations in the filed actions are fairly specific, and provide a good roadmap of the type of conduct to avoid. Moreover, DOJ's public comments in speeches, including one I gave before leaving the administration, press releases, and other statements have been unambiguous: Fraudsters should watch out; everyone else, remain mindful of your BSA/AML responsibilities and otherwise go about your business.
The admonition to a bank that it must pay close attention to its anti-money laundering obligations, of course, is not new or surprising, and guidance from the federal regulators on proper management of third-party relationships has been around for years. So why have so many in the industry been quick to de-risk?
When the government decides to shine its floodlights on bad conduct that, for one reason or another, originates from a particular industry or general type of business, it makes everyone else associated with that industry or business model understandably skittish, including all of the good actors. Thus, the question for those in the payments chain quickly changes from "Are we properly managing our risk?" to "How much leeway will the government give us if a bad actor or two slips through undetected?" Variations of this include: "How many bad actors will it take?" and "How bad does that bad actor have to be?" and, finally, "Is it really worth it?"
The de-risking reaction, of course, is not limited to Operation Choke Point. We also see it today with marijuana and correspondent banks, and whenever else there is increased governmental regulation and enforcement actions focused on particular conduct. All of the public statements in the world by DOJ or the regulators that they are only targeting the truly bad fraudsters, and that they are not going after minor violations, won't change the natural reaction to de-risk because there's simply no telling exactly where the government will decide to draw its phantom line.
So what is there to do? A recent speech by Comptroller of the Currency Thomas Curry about the increase in de-risking of foreign correspondent banks that pose a threat of terrorist financing is a start. Comptroller Curry began by noting that stopping the financing of terrorists is important. But, he observed, "It cannot be our only goal. A banking system that's truly safe and sound is also one that meets the legitimate needs of its customers and communities. Ensuring fair access to financial services while also combating threats to the system's integrity is surely one of the great challenges that regulators and financial institutions face today."
This observation is a good one, and the simple fact that he acknowledged the difficult tasks facing the industry is comforting.
Comptroller Curry, of course, also suggested that his agency might issue new guidance to address de-risking. If this guidance takes the form of a best practices document, rather than more prescriptive measures, and is implemented only after significant input from the institutions it regulates, then this could be a significant step in the right direction. Put simply, the government will get better results if it works with industry rather than against it, and acknowledges the terrible tension industry faces between serving a community and subjecting itself to increased scrutiny.
Only when the government truly understands the consequences of its actions (especially the unintended consequences), acknowledges those concerns to those directly affected, and works closely with them to address the challenges they face, can we expect that the multitude of good actors who desperately want to avoid the last resort of de-risking will be able to do so with relative comfort.
Michael J. Bresnick is chair of the financial services investigations and enforcement practice at Venable LLP. He previously served as executive director of President Obama's Financial Fraud Enforcement Task Force, under which Operation Choke Point was created.