Financial Regulation

Choke Point Check-In: Constitutional Concerns in DOJ Targeting 'Risky' Businesses

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Albani Collection/Wikimedia Commons

"Furor grows" over the Department of Justice's (DOJ) "Operation Choke Point," writes Walter Olson of Cato's "Overlawyered." Chase bank has been closing porn star, payday lender, and other "high-risk" business bank accounts, possibly under DOJ pressure. And though this has been happening since at least May 2013, little attention was paid to the initiative until the recent closure of adult film star Teagan Presley's Chase account wound up throwing the DOJ dirty business into the spotlight. Now even Cosmo is talking about it. 

Operation Choke Point was initially pitched as a crackdown on web-based payday lending businesses that lend into states that prohibit it. Now it may have overreached into the wrong industry by targeting those in porn, wrote Iain Murray at National Review. Unlike, say, online gambling sites or Internet pharmacies, making pornography is a protected First Amendment activity. 

Also constitutionally protected, obviously, is buying and selling firearms—but businesses selling ammunition and guns are also on a list of potentially high-risk businesses that banks should look out for. Hans Bader of the Competitive Enterprise Institute looks closer at the potential legal case against Operation Choke Point:

The First Amendment can be violated by deliberately burdensome investigations, even in the civil context, when the investigation is aimed at a category of speech or speakers, see, e.g., White v. Lee, 227 F.3d 1214 (9th Cir. 2000) (unduly prolonged federal fair-housing investigation violated First Amendment). Indeed, it can violate the First Amendment so clearly that individual federal officials lose their qualified immunity and can be sued individually for damages, as the Ninth Circuit ruled in the White v. Lee decision. And as UCLA Law Professor Eugene Volokh and firearms law expert David Kopel have noted, restrictions can violate the Second Amendment even when they are aimed at sellers, rather than purchasers, of firearms. See, e.g., Kole v. Norridge (2013). So there are serious constitutional issues at stake here. Yet I see little legal commentary on the subject so far.

"Even if the porn industry had a statistically greater incidence of financial shenanigans than a representative cross-section of the country as a whole, that would not justify the government or financial regulators in suppressing it," writes Bader, citing a slew of cases to this point. 

But the DOJ and an anonymous Chase bank employee also piped up last week. The "Chase insider" told Mother Jones that porn star bank closings were part of "routine" banking practice and had "nothing to do with Operation Choke Point."

In a May 7 blog post, the DOJ insisted—without mentioning Operation Choke Point directly—that its dealings with banks were aimed at frauds targeting consumers that "cause significant harm to the American public," including lottery scams, fake business opportunities, and unscrupulous telemarketers—businesses that are "profiting from illegal activities as well as breaking federal law."

DOJ highlights the fruits of its efforts in what could be read, if you're cynical, as a veiled threat against banks who don't do what it says. The bulk of the post is devoted to the tale of North Carolina's Four Oaks Bank, which was processing transactions for online payday lenders operating without state licenses. Four Oaks now owes the DOJ $1.2 million.

One DOJ message is clear: It has the power to hold financial institutions responsible for the (real, regulatory, or perceived) transgressions of those an institution does business with. Even if there's not a nefarious DOJ plot to strangle the porn and firearms industries—and I don't think there is—there's a very real unsavoriness to the DOJ doing business this way. 

Meanwhile, Chase bank parent company JPMorgan is the subject of a Consumer Financial Protection Bureau complaint from economist and former Colombian finance minister José Antonio Ocampo over spontaneously closed financial accounts. Last week, the Financial Times reported that JPMorgan had closed the bank accounts of Ocampo and 3,500 other foreign government officials to avoid the compliance costs of continued business with these "politically exposed persons."

This isn't directly related to the DOJ's Operation Choke Point, but it's not unrelated either. And it's not benign. If it wanted to, the DOJ could cut off banking access to any class of merchants or people it feels like. And as demonstrated in the recent Four Oaks blog post, it wants us to know this.