The Intersection: Jul 2014

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“Operation Choke Point” Presents New Challenge for Risk Managers

If you are a business owner, imagine that out-of-the blue you receive a letter from your bank stating that your account has been closed and the relationship between your business and the financial institution has been terminated. The cause of the termination is not due to financial unreliability, as you have a strong credit history. Nevertheless, your business is left with reduced access to the traditional banking system and you are forced to consider how—and indeed whether—your business can continue to operate.

This scenario has happened to several business owners in the United States over the past year. They attribute it to “Operation Choke Point,” an ongoing effort by the Department of Justice to crack down indirectly on certain businesses by forcing banks to stop processing transactions for them. Attorney General Holder and the Department of Justice have stated publicly that the targets of this crackdown are fraudsters, such as lottery scams and Ponzi schemes, and that the aim of Operation Choke Point is to “protect consumers from scam artists and collaborating institutions—in every circumstance and industry.” Others allege, however, that Operation Choke Point is also targeting industries that are legal but unpopular, such as firearm sellers, purveyors of adult materials and online payday lenders.

Unsurprisingly, Operation Choke Point is causing a growing political controversy. While some consumer advocates have supported the program as an effective way of combatting fraud, some Republicans in Congress have opposed the DOJ’s efforts on the grounds that the regulator is targeting legal businesses as well. In late May the House of Representatives passed an amendment to a spending bill, sponsored by Rep. Blaine Luetkemeyer (R-MO), which would prevent the DOJ from spending any more money on Operation Choke Point. Rep. Luetkemeyer has since introduced a bill that would grant legal protection to banks, as long as they can demonstrate that the businesses for which they hold accounts and process transactions are legal. This bill received a hearing by the House Financial Services Committee on July 15. In the Senate, Sens. David Vitter (R-LA) and Rand Paul (R-KY) have also introduced amendments seeking to curtail Operation Choke Point.

Regardless of the politics, Operation Choke Point is significant for U.S. businesses.  If claims by the program’s opponents are true, the broader lesson is that the executive branch has the ability to pursue its agenda through unusual means, including the co-option of the financial system. Businesses not only need to be aware of legislative and regulatory issues, they also must remain aware of administrative actions and the potential for actions due to obscure rules and administrative public policy agenda. In today’s atmosphere of little-to-no legislative progress, where the executive branch sees no other way to accomplish much, the risk of unconventional actions like Operation Choke Point increases.

Fortunately, businesses can push back against such actions using strategies similar to those deployed in a  public affairs campaign to defeat or support a piece of legislation or a proposed regulation. Businesses can also mitigate the risk of being targeted by a program like Operation Choke Point by establishing and maintaining relationships with influential allies who can engage with policymakers and the media. They should utilize social media and other digital and non-digital grassroots tools to keep consumers and other stakeholders aware of specific threats to the business and mobilize them to take specific actions like sending letters to Congress. They should consider using paid advertising to build a base of supporters and affect public opinion.

Operation Choke Point is an example of how the administration—through the DOJ—can use the financial system to impact policy outcomes for businesses. This underscores the importance for companies to pay attention, be proactive and remain prepared to respond to public affairs challenges beyond traditional legislative and regulatory threats.