Banking

Proposed Banking Rule Change Would Upend Oppressive 'Operation Chokepoint' Tactics

Protected financial access for politically targeted industries

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Financial access can make or break anyone in America. Being cut off from our payment systems is a bit like being unpersoned: Large swathes of the economy are suddenly out of reach while financial futures darken. Controlling financial access is a great way to control people, and the government knows this. It has manipulated access to financial channels as a way to manage society beyond the constraints of formal legislation.

The best example is Operation Chokepoint, a Department of Justice (DOJ) effort that put pressure on our banking system to cut off financial access for politically disfavored industries under the guise of cutting down fraud or money laundering. A recent proposed change in banking rules would give these industries better protection from such tactics.

Under the Obama administration, regulators such as the Federal Deposit Insurance Corporation (FDIC) and Office of the Comptroller of the Currency (OCC) issued threatening letters to financial institutions that processed payments for industries such as payday lenders, gun and ammunition firms, and cryptocurrency companies. The message was clear: cut back on business with these industries, or else. Banks got the hint, and affected firms found it harder and harder to find banking partners.

To be clear: the industries themselves were perfectly legal. It is no crime to sell fireworks or gold coins or bullets (with the proper federal and state licensing, of course). After all, if these firms were operating a de facto criminal enterprise, the government would have plenty of legal tools to take them down.

What the DOJ was arguing was that these industries were associated with a higher risk for fraud or money laundering. Rather than trying to go after each firm one by one—and surely some of the individual businesses within those industries were indeed engaged in such hijinks—the DOJ sought to put pressure on all of them at once by "choking" them of finance.

Bullying banks into doing the government's dirty work was a quick and easy way to get the job done. Even better: it was an extralegal method to get rid of businesses the feds didn't like too much anyway.

Operation Chokepoint was controversial when it was first revealed by the Wall Street Journal in 2013. Obviously, the affected industries cried foul, but Republicans also bristled at what they viewed as a covert politicization of the financial system. (No wonder, since targeted industries tended to include right-leaning trades such as arms sales and energy production.) The FDIC walked the program back a bit in 2015, but it continued in some form until the Trump administration wound it down in 2017.

This is not to say that banks are no longer a key channel for social control, just that the federal government no longer has a known operation to exploit it. Some states and their private sector counterparts have been all too happy to pick up where Operation Chokepoint left off.

For example, NY Gov. Andrew Cuomo directed his Department of Financial Services to issue Operation Chokepoint-style warning letters to financial institutions which provided services to the National Rifle Association. Climate change activists have turned similar tactics towards banks who process payments for oil and gas companies. Commentators and platforms routinely find trouble securing payment processing services. And it will keep going. Wherever there is a group who wants to shut something down, financial pressure will be a tempting tool of suppression.

Censorship-resistant and privacy-preserving cryptocurrencies such as bitcoin and Monero provide some relief to the problem of financial suppression. However, as Operation Chokepoint demonstrates, even cryptocurrency can succumb to financial controls through the on- and off-ramps that transfer digital currencies from fiat currencies and vice versa. This is no problem for people who can remain crypto-native, and have no need to touch US dollars, but that is a pretty small portion of the population at the moment.

Help may be coming from some unexpected quarters: the OCC, which less than a decade ago had led the charge with Operation Chokepoint. Under the leadership of acting director (and Bitcoin-friendly) Brian Brooks, the OCC has proposed a rule change that would make government-supported financial suppression much harder legally. It's legally clever, and makes use of an Obama-era law to stave off future Obama-style injustices.

The Dodd-Frank Act was a sweeping financial reform that, among many other things, authorized the OCC to ensure that nationally chartered banks provide "fair access to financial services, and fair treatment of customers." The intention was that minority customers be evaluated for creditworthiness on her or her own individual merits rather than the attributes of their broader group. In other words, a creditworthy individual shouldn't be punished because they belong to some group that is considered "high risk" in the aggregate.

The OCC would like to apply this thinking to industries through the proposed "Fair Access to Financial Services" rule. The largest banks in the country—those with more than $100 billion in assets—would be prohibited from red-lining politically disfavored industries just as they are prohibited from red-lining politically oppressed populations. Rather, a gun manufacturer or pornography company or payday lender must be evaluated on the terms of their individual creditworthiness.

The rule does not require that all large banks must do business with all, say, fossil fuel companies, just like banks are not required to extend credit to every single member of a protected class who applies for a loan. Rather, it is a nondiscrimination requirement. Large banks will not be allowed to cut off financial access for disfavored industries just because the government or some other powerful group leans on them to do so.

It's an interesting rule because it merely extends the logic of Dodd-Frank regulations that Democrats strongly supported. To oppose this rule while supporting Dodd-Frank, lawmakers would have to argue that it is okay to discriminate against some groups and not others. It would cement the situation as explicitly political.

Unsurprisingly, cryptocurrency law commentators have championed the rule as a strong check against the Operation Chokepoint-style suppression that choked the crypto industry in its infancy. The large banks that would be affected are balking a bit, arguing that there's not really a problem here at all. Public comments on the rule are due by January 4, which gives the Trump-appointed acting OCC director (and current nominee for a five-year term) Brooks plenty of time to finalize the rule before whatever goes down on January 20.

Some libertarians balk at the prospect of the government effectively telling private banks that they are not allowed to cut off financial access to a group for whatever reason. It's a decent point—after all, conservatives argue that religious groups should not be forced by the government to subsidize activities or provide services that violate their beliefs.

These critics say that ideological financial discrimination may result in innovative alternative financing, perhaps involving cryptocurrency. This is true, although unfortunate. For instance, the Lightning network payment app Strike was developed after founder Jack Mallers saw his family's marijuana business struggle to secure payment processing.

Yet as it stands, the government already tells private banks that they are not allowed to cut off access to certain groups but leaves others open to financial ruin. The OCC is not about to rescind protections for currently protected classes; this rule change would bring consistency. As attorney Marco Santori pointed out, these large banks are already granted certain government privileges by virtue of their charter status—this change would put guardrails on the negative effects of that government-granted barrier to entry.

Furthermore, as mentioned, cryptocurrency activities themselves have already been cut off from financial access due to government pressure campaigns—could the financial vendors for alternatives like Strike one day be targeted? And large banks would be free to deny financing to truly insolvent or undeserving businesses. Finally, this rule change is ultimately a way of tying the government's hands as well. Operation Chokepoint-style schemes would be clearly illegal under the proposed rule.

It's great to see policymakers take the problem of power-driven financial suppression seriously. Policy can be a useful tool, but at the end of the day, there is a cultural problem that must also be addressed. More people need to be aware of the harms endemic to financial surveillance and control. We need to recognize what this kind of roundabout dispossession looks like and criticize it harshly when we see private actors engaging in it. Our financial freedoms will depend on it.

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  1. Expect to be cut off from everything if you don’t get vaccinated.

    1. “He causes all, both small and great, rich and poor, free and slave, to receive a mark on their right hand or on their foreheads, and that no one may buy or sell except one who has the mark”

      I guess left arm or asscheek technically doesn’t count.

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    2. Expect to be cut off from everything if you blow upon a cheap plastic flute w/o proper permission, as well! This is all well and good… If Government Almighty does NOT protect us from ourselves, and DANGEROUS use of not-properly-individually-approved personal use of potentially DEADLY medical devices… Then WHO will protest us?

      All was working well… And then Trump comes along, and STOPS some of the uses of these banking laws or threats-of-laws, that WERE protecting us! Truck Fump!!!

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    1. Why can’t the DOJ do something useful and target these gits?

  3. The question is, since these “Dear Colleague” letters are of dubious legality to start with, is this law going to make any difference to a government agency which thinks it is above the law? And they all think they’re above the law at this point.

    1. The process is often the punishment.

  4. Yeah, you can lean on crypto for now, while it is still growing. But that cat is out of the bag and there’s no way to stuff it back in. Eventually the only way to slow crypto will be to completely control the internet (including sniffing around for ad hoc wireless networks and physically shutting them down). And if Americans will tolerate that then we’ll have bigger problems than financing.

    1. Crypto can still be killed by, as the article says, squeezing the conversion points. Vanishingly few people have the assets or circumstances to be (and stay) crypto-only.

      1. If the banks are forced to half ass their services then the marketplace will force paths around them. Technology has a good track record of nullifying government activity. So theoretically, crypto-only would become increasingly viable.

  5. Reason is running an article that is critical of an Obama policy and praises Trump for ending it?

    Nope. Nothing to see here. Move along. This does not promote the “Reason is leftist and hates Trump” narrative so it doesn’t exist.

    1. You’ve just got to ignore the TDS folks, sarc. Whether its pro Trump TDS or anti Trump TDS, it’s just best to ignore them.

    2. Under the Obama administration, regulators such as the Federal Deposit Insurance Corporation (FDIC) and Office of the Comptroller of the Currency (OCC) issued threatening letters to financial institutions that processed payments for industries such as payday lenders, gun and ammunition firms, and cryptocurrency companies.
      .
      .
      The FDIC walked the program back a bit in 2015, but it continued in some form until the Trump administration wound it down in 2017.

      Nope. This article does not exist.

      1. Yep, Reason was so offended by this affront to liberty they openly supported the guy who was in on it, and will no doubt seek to revive it. At which point the chin tugging and tut-tutting will commence in earnest.

        Well, not actual earnest, more like performative earnestness, sort of like your pretend concern for liberty that is defined by an inability to criticize anything on the left.

        1. like your pretend concern for liberty that is defined by an inability to criticize anything on the left.

          Only if you’re a simpleminded Trumpista who believes that anyone who disagrees with them is a leftist.

    3. I’m pretty sure that it was an accident. Andrea O’Sullivan isn’t a Reasonista regular.

      If it happens again Sullum will have a few words with her.

      1. No, poor you. You can’t crybaby about this article because it doesn’t trash your Dear Leader, therefore you can’t comment on it other than with mean girl schoolyard taunts.

        1. So broken.

  6. Operation Chokepoint was controversial when it was first revealed by the Wall Street Journal in 2013.

    That dirty Trump… Oh wait… I mean that dirty George W. Bush.

    1. It was only a controversy, not a scandal.

      1. Started out going after payday lenders – which was dubious at best – and the ‘credit repair companies’ (the ones that weren’t actually owned by or working directly for the lenders) but then got transmogrified by Holder et.al. to go after guns.

  7. before whatever goes down on January 20.

    Wait. Is this an admission that Trump isn’t completely dead in the water? Does O’Sullivan know something we don’t? Or is she implying (without evidence) that Trump might not leave office willingly?

  8. “It is no crime to sell fireworks or gold coins or bullets”

    Where the hell have you been? It will soon be a crime to even propose doing these things, or talk about a proscribed past when such things were legal.

  9. I am skeptical this will stop. Now that Biteme is loading his cabinet and staff with far left wingers we can expect more abuses against unflavored groups businesses and manufacturers.

    Keep enough cash on hand you could easily get cut off from any account.

    1. Then what?
      When cash is illegal, how you gonna eat?

    2. Unflavored manufacturers? Well, at least flavored ones will be okay. I prefer my manufacturers to be coffee-flavored.

  10. Or maybe the government should stop bailing people out.

  11. “To oppose this rule while supporting Dodd-Frank, lawmakers would have to argue that it is okay to discriminate against some groups and not others. It would cement the situation as explicitly political.”

    And your point is…?

    1. Feature. Not bug.

      1. Cuomo will just use this to ante up his rhetoric as to how he will have to go against the government to “do what’s right,”

  12. How about a law that says you cant stop processing an account unless they have defaulted nor can you stop the process of a clients credit card payment to a business such as gun shops. Since banking is required they are essentially a utility.

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  14. It’s not government oppression if you coerce the private sector to do it for you :^)

    1. Literally their legal argument:

      In 2018, the U.S. Supreme Court ruled the government must generally obtain a warrant to obtain such data from cellphone carriers, but Customs and Border Protection argues that because it is buying the information from a third party, not carriers, the decision does not apply.

      https://reason.com/2020/12/08/brickbat-closely-tracked/

      1. Government is just another word for oppression we do together.

  15. These are always tough issues. Glad to see HyR writings about things we can seriously discuss again, it’s been a while.

    Grey areas are hard, so it would be nice to have criteria by which “we” could decide whether an institution is government or private, and then adopt rules accordingly.

  16. The question will be how many capital Ds can be converted to oppose Operation Chokepoint? After all it could only be a matter of time before abortion clinics are put on Santa’s naughty list.

    Yes, I assume it will actually take putting abortion clinics on the naughty list for quite a long time, meaning >3 years, before any big D flips.

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