Why Operation Choke Point is Unconstitutional

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In certain corners of the business world, complaints have arisen over the past year against Operation Choke Point, a program set up by the Federal Deposit Insurance Commission (FDIC) and the Department of Justice (DOJ) to crack down on illegal lending operations by choking their access to bank accounts. Chief among the targets have been companies that engage in lending fraud, Ponzi schemes, and other legally dubious ventures that are considered risky by most banks. In the minds of supporters, the program is a rightful cause that protects consumers from predatory lending organizations. 

However, the program doesn't stop at companies that lend pay advances to struggling Americans at triple the interest. The skilled writers here at Ultius will highlight how Operation Choke Point has also gone after gun sellers, coin dealers, and adult entertainers. This has sparked an outcry among First and Second Amendment advocates, who claim that the operation is an unconstitutional act of federal overreach that threatens the free market. 

Opponents of Operation Choke Point

Last year, the charges were led by the U.S. Consumer Coalition (USCC), which alleged that the initiative was conceived to destroy certain industries. In December 2014, the Coalition had its suspicions confirmed by a congressional report compiled by the Subcommittee on Economic Growth, Job Creation and Regulatory Affairs, the findings of which implicated the FDIC and the DOJ in targeting businesses on moral grounds.

According to the USCC, the "report confirms that the Obama Administration program is a clear abuse of government power" ("Congressional Report").

The Coalition further asserts that Congress was hoodwinked by the Administration about the program's intent:

Evidence collected from the FDIC shows that despite the Administration’s claims to the contrary, legal industries are being targeted by federal regulators. The Administration is unilaterally branding businesses as ‘high risk’ and intimidating banks into cutting them off from the financial system without due process. The report makes clear the Administration is attempting to single-handedly regulate industries out of existence without a legal, public, or legislative process. ("Congressional Report")

As the report further illustrates, the language used by regulators included stealth phraseology like "reputational risks" to lure skeptics of the program. 

Apparently, regulators threatened to nix the credit lines and shutter the accounts of any business deemed objectionable by the government, such as medical marijuana dispensaries. If banks failed to comply with these policies, financial institutions would be subject to audits on all services supplied to the types of businesses targeted by Operation Choke Point. Among the first to lash out at these findings was House Oversight Committee Chairman Darrell Issa (R-CA), who decried the program as an unlawful attempt by the government to crush certain types of businesses. 

Choke Point's chief architects

As the auditor and regulator of at least 4,500 U.S. banks, the FDIC placed the following types of businesses on its unfavorable list: gun and ammunition sellers, cash transfer networks, dating companies, cigarette stores, online gambling, payday advance services, pornography, fireworks sellers, telemarketing firms, surveillance supply stores, and coin dealers. Purportedly, dissension waged within the FDIC as to which course of action would effectively bring banks into compliance with the program, which was ultimately criticized by the agency's former Chairman William Isaac in a Nov.21, 2014, Wall Street Journal op ed. Arguing that the program would lead to a slippery slope of free market curtailment, he concluded with the following warning:

The same power the government uses today to deprive ammunition dealers or check-cashing businesses of banking services could tomorrow be used against convenience stores selling sugary sodas, restaurants selling high fat foods, or family-planning clinics. Congress should act immediately to choke off Operation Choke Point. (Isaac)

In essence, 7-Eleven and Krispy Kreme could be the next in line for a choke if the program continues unabated.

As indicated by certain emails, regulators showed their personal distaste for the law-abiding businesses targeted by Operation Choke Point. For instance, the label "pornography" was used as a buzzword in an email sent to a bank with the intent of having a PayDay loan account shuttered; the email was sent by Marguerite Sagatelian, who serves as Senior Counsel on the FDIC's Consumer Enforcement Unit. The email—in which she relays advice handed to her by the agency's Deputy Director of Policy and Research, Jonathan Miller—reads as follows:

Jonathan heard where we were coming from, but nonetheless wants to retain a reference to pornography in our letters/talking points. He thinks it’s important for Congress to get a good picture regarding the unsavory nature of the businesses at issue. He repeated that “one is judged by the friends one keeps,” and he seems to feel strongly that including payday lenders in the same circles as pornographers and on-line gambling businesses will ultimately help the messaging on this issue. (Harkness)

Sagatelian prefaced these revelations by clarifying that the FDIC didn't seek to conflate its role as a regulator with that of a moral arbiter; it wimpy wished to impart "rational safety and soundness decisions" and discourage banks from involving themselves with businesses that make illegal transactions (Harkness). 

In another email, an official with the FDIC's Division of Depositor and Consumer Protection acknowledged that the agency's chairman, Martin Gruenberg, always mentions the buzzword in letters that concern payday lenders, with the intent to paint a lurid picture of the types of businesses at hand. According to some of the other findings in the Subcommittee's report, the FDIC conflated legal operations such as coin dealerships and gun sellers with unlawful operations like Ponzi schemes and fraudulent debt-consolidation practices. 

Violations of the first, second, fourth, and fifth Amendments

As pointed out by National Review Columnist Iain Murray, the inclusion of pornography within the FDIC hit list could be the "Achilles heel" for Operation Choke Point (Murray). This is because pornography—unlike lending fraud—is a matter of free speech protected by the First Amendment. By attempting to intervene on the livelihoods of people within the adult industry by choking off their access to bank accounts, the operation becomes questionable from a Constitutional standpoint.

The most clear-cut case of feds putting a choke on porn involved the story of Teagan Presley and Chase Bank. A former actress for XXX movie-maker Digital Playground, she received a letter from the bank in April 2014 which stated that her account was being terminated on the grounds of her being too "high risk." Supposedly, the bank was a bit more blunt towards her husband, who also had his account nixed due to the couple's linked social security numbers. According to Teagan,

"[t]hey [sic] told him that it was because I’m a notorious adult star. Which is funny, because I’m kind of a goody-goody in the business, and I’m not even doing porn anymore," (O'Hara).

Operation Choke Point has also posed a threat to Second Amendment rights, as exemplified by the case that involved Powderhorn Outfitters, a Cape Cod sporting shop that also sells firearms. Last year, the shop's solid-credited owner, Marc Cohen, was denied a business loan by TD Bank, despite having banked with the institution for more than 20 years. According to Cohen, he was specifically told

"due to [his] involvement in firearms sales, [his] business [was] no longer welcome to have an account at [TD Bank]" (Riddell).

The controversy ultimately sparked a boycott of TD among Powderhorn loyalists in the area.

Monetary expert Mike Maloney has argued that Operation Choke Point also violates the Fourth and Fifth Amendments: the former of which protects people and businesses from unwarranted search and seizure, and the latter which guarantees due process under the law. The program—he insisted in a recent online op ed.—would force banks to gather personal info on customers without probable cause, and would also give banks an incentive to

"close their customers accounts based on spurious claims of 'reputational risk' without any form of due process," (Maloney).

As further laid out by Maloney, the program has procedural, market-oriented, and collateral problems. On the procedural front, it set a dangerous precedent for administrative regulatory action without congressional approval. Secondly, it places compliance costs on banks that would make it prohibitive to offer accounts to certain businesses. Lastly, it could have a rub-off effect on law-abiding businesses—as it already has—even if the chokes are geared towards fraudulent lenders.

Works Cited

"Congressional Report Confirms Obama Administration's Operation Choke Point Program is Abuse of Government Power." US Consumer Coalition. n.p. 8 Dec. 2014. Web. 1 March 2015.

Isaac, William. "Don’t Like an Industry? Send a Message to Its Bankers: With Operation Choke Point, the Justice Department’s targets have included vendors of firearms and fireworks." The Wall Street Journal. Dow Jones & Company. 21 Nov. 2014. Web. 3 March 2015.

Harkness, Kelsey. "These 7 Revealing Emails Show Federal Officials Scheming to Target Legal Businesses." The Daily Signal. The Heritage Foundation. 8 Dec. 2014. Web. 1 March 2015.

Murray, Iain. "Operation Chokepoint: Creeping into Unconstitutionality?" National Review. Jack Fowler. 8 May 2014. Web. 3 March 2015.

O'Hara, Mary Emily. "Is the DOJ Forcing Banks to Terminate the Accounts of Porn Stars?" Vice News. Vice Media. 27 April 2014. Web. 3 March 2015.

Riddell, Kelly. "Operation Choke Point forces bank to dump gun store." The Washington Times. News World Media Development, LLC. 28 May 2014. Web. 3 March 2015.

Maloney, Mike. "America is Choking: Operation Chokepoint." Hidden Secrets of Money. GoldSilver.com. 10 Feb. 2015. Web. 3 March 2015.