Slideshow Timeline: Operation Choke Point

Published
  • March 19 2014, 9:41am EDT

The investigation that Justice Department officials have dubbed "Operation Choke Point" was first disclosed in March 2013. The probe aims to prevent fraudsters from accessing consumer bank accounts by choking off their access to the payments system. Its effects have been felt by banks, payment processors and companies that make short-term consumer loans over the Internet, with some industry officials arguing that at least some of the affected online lenders are legitimate businesses. Here is a look at key milestones of the investigation.

Justice Department Puts Banks On Alert

On March 20, 2013, federal prosecutor Michael Bresnick gave a little-noticed speech to the Exchequer Club in Washington in which he said that that Justice Department planned to crack down on banks that allowed online scammers to access the payments system. "Sadly, what we've seen is that too many banks allow payment processors to continue to maintain accounts within their institutions, despite the presence of glaring red flags indicative of fraud," said Bresnick, who was then the executive director of the Financial Fraud Enforcement Task Force. Bresnick has since gone into private law practice.

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Subpoenas Arrive

As Operation Choke Point got under way, the Justice Department sent more than 50 subpoenas to banks and payment processing firms, according to a presentation made by federal prosecutors in September. The banks that received subpoenas have not been identified, but a few have disclosed their involvement. They range from large banks, such as the $220 billion-asset PNC Financial Services Group (PNC), to small ones, like the $343 million-asset National Bank of California.

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Other Agencies Join in

In August, New York Financial Services Superintendent Benjamin Lawsky instructed 117 banks, including the nation's four largest, to develop safeguards aimed at preventing unlicensed online lenders from accessing the payments system. Lawsky also filed suit against online lenders that he said were violating New York's interest-rate cap. "We're really trying to take a shock-and-awe strategy," Lawsky said. "We want to make payday lending into New York, over the Internet, as unappetizing as possible."

Meanwhile, the Federal Deposit Insurance Corp. also stepped its reviews of banks' relationships with online lenders and other businesses that might pose heightened risk for banks.

Related Article: Banks Drafted into N.Y.'s Battle with Online Payday Lenders

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Online Lenders Fights Back

In September, the Online Lenders Alliance launched a public-relations campaign pushing back against the stepped-up scrutiny from federal and state authorities. Yes, the probe was focused on lenders that do not comply with the laws of the states where their borrowers reside, but Lisa McGreevy, the group's executive director, argued that fully licensed lenders were also being harmed by the government crackdown. "It's an across-the-board attack," McGreevy said.

Related Article: Is FDIC Waging Stealth Crackdown on Online Lenders?

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Justice Department Pushes for Settlements

Also during the fall, the Justice Department was pressuring banks that had received subpoenas to settle with the government. The strategy was to reach a settlement with one of the banks that could then be used as a template in talks with other banks, according to sources.At the same time, the Justice Department argued that its tactics were having their intended impact. "The system is working," a Justice official said in September, "and as a result, banks are cutting off processors, processors are cutting off scammers, and scammers are starting to get desperate for a way to access consumers' bank accounts."

Related Article: Banks Pressured to Settle in Online Lending Probe

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Four Oaks is First Bank to Settle

In January 2014, the Justice filed its first proposed settlement as part of Operation Choke Point. The tentative deal called for the $809 million-asset Four Oaks Bank in North Carolina to pay a $1.2 million fine, and to accept tight restrictions on its ability to do business with Internet consumer lenders. A 39-page complaint filed in federal court alleged that Four Oaks willfully ignored violations of the law in order to preserve a lucrative line of business. Four Oaks, headed by chief executive officer Ayden Lee, Jr., did not admit to any wrongdoing.

Related Articles: Four Oaks in North Carolina to Pay $1.2 Million in Fraud Case

Justice Department Turns Up Heat in Online Lending Probe

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Investigation Becomes Politicized

In recent months, Operation Choke Point has increasingly become a political football. Rep. Darrell Issa, R-Calif., who chairs the House Oversight Committee, wrote to Attorney General Eric Holder in January, requesting a slew of documents and suggesting that the probe was a veiled effort to eliminate even legal online lending. Around the same time, an anonymous online campaign, "Stop the Choke," sought to persuade conservative lawmakers to attack Justice's investigation. Then in February, Rep. Elijah Cummings of Maryland, the top Democrat on the House Oversight Committee, and 12 other congressional Democrats wrote to Holder urging the Justice Department not to cave in the face of Republican opposition.

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Congressional Dems Back DOJ on Operation Choke Point

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