[House Hearing, 113 Congress]
[From the U.S. Government Publishing Office]





                     GUILTY UNTIL PROVEN INNOCENT?
                   A STUDY OF THE PROPRIETY AND LEGAL
                 AUTHORITY FOR THE JUSTICE DEPARTMENT'S
                         OPERATION CHOKE POINT

=======================================================================

                                HEARING

                               BEFORE THE

                            SUBCOMMITTEE ON
                           REGULATORY REFORM,
                      COMMERCIAL AND ANTITRUST LAW

                                 OF THE

                       COMMITTEE ON THE JUDICIARY
                        HOUSE OF REPRESENTATIVES

                    ONE HUNDRED THIRTEENTH CONGRESS

                             SECOND SESSION

                               __________

                             JULY 17, 2014

                               __________

                           Serial No. 113-114

                               __________

         Printed for the use of the Committee on the Judiciary


      Available via the World Wide Web: http://judiciary.house.gov
      
      
      
                                    ______

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                       COMMITTEE ON THE JUDICIARY

                   BOB GOODLATTE, Virginia, Chairman
F. JAMES SENSENBRENNER, Jr.,         JOHN CONYERS, Jr., Michigan
    Wisconsin                        JERROLD NADLER, New York
HOWARD COBLE, North Carolina         ROBERT C. ``BOBBY'' SCOTT, 
LAMAR SMITH, Texas                       Virginia
STEVE CHABOT, Ohio                   ZOE LOFGREN, California
SPENCER BACHUS, Alabama              SHEILA JACKSON LEE, Texas
DARRELL E. ISSA, California          STEVE COHEN, Tennessee
J. RANDY FORBES, Virginia            HENRY C. ``HANK'' JOHNSON, Jr.,
STEVE KING, Iowa                       Georgia
TRENT FRANKS, Arizona                PEDRO R. PIERLUISI, Puerto Rico
LOUIE GOHMERT, Texas                 JUDY CHU, California
JIM JORDAN, Ohio                     TED DEUTCH, Florida
TED POE, Texas                       LUIS V. GUTIERREZ, Illinois
JASON CHAFFETZ, Utah                 KAREN BASS, California
TOM MARINO, Pennsylvania             CEDRIC RICHMOND, Louisiana
TREY GOWDY, South Carolina           SUZAN DelBENE, Washington
RAUL LABRADOR, Idaho                 JOE GARCIA, Florida
BLAKE FARENTHOLD, Texas              HAKEEM JEFFRIES, New York
GEORGE HOLDING, North Carolina       DAVID N. CICILLINE, Rhode Island
DOUG COLLINS, Georgia
RON DeSANTIS, Florida
JASON T. SMITH, Missouri
[Vacant]

           Shelley Husband, Chief of Staff & General Counsel
        Perry Apelbaum, Minority Staff Director & Chief Counsel
                                 ------                                

    Subcommittee on Regulatory Reform, Commercial and Antitrust Law

                   SPENCER BACHUS, Alabama, Chairman

                 BLAKE FARENTHOLD, Texas, Vice-Chairman

DARRELL E. ISSA, California          HENRY C. ``HANK'' JOHNSON, Jr.,
TOM MARINO, Pennsylvania               Georgia
GEORGE HOLDING, North Carolina       SUZAN DelBENE, Washington
DOUG COLLINS, Georgia                JOE GARCIA, Florida
JASON T. SMITH, Missouri             HAKEEM JEFFRIES, New York
                                     DAVID N. CICILLINE, Rhode Island

                      Daniel Flores, Chief Counsel
                      
                      
                            C O N T E N T S

                              ----------                              

                             JULY 17, 2014

                                                                   Page

                           OPENING STATEMENTS

The Honorable Spencer Bachus, a Representative in Congress from 
  the State of Alabama, and Chairman, Subcommittee on Regulatory 
  Reform, Commercial and Antitrust Law...........................     1
The Honorable Henry C. ``Hank'' Johnson, Jr., a Representative in 
  Congress from the State of Georgia, and Ranking Member, 
  Subcommittee on Regulatory Reform, Commercial and Antitrust Law     2
The Honorable Bob Goodlatte, a Representative in Congress from 
  the State of Virginia, and Chairman, Committee on the Judiciary     4

                               WITNESSES

The Honorable Stuart F. Delery, Assistant Attorney General, Civil 
  Division, U.S. Department of Justice
  Oral Testimony.................................................    17
  Prepared Statement.............................................    20
Adam J. Levitin, Professor of Law, Georgetown University Law 
  Center
  Oral Testimony.................................................   122
  Prepared Statement.............................................   125
Scott Talbott, Senior Vice President of Government Affairs, The 
  Electronic Transaction Association
  Oral Testimony.................................................   138
  Prepared Statement.............................................   140
David H. Thompson, Managing Partner, Cooper & Kirk, PLLC
  Oral Testimony.................................................   151
  Prepared Statement.............................................   153
Peter Weinstock, Partner, Hunton & Williams LLP
  Oral Testimony.................................................   168
  Prepared Statement.............................................   171

          LETTERS, STATEMENTS, ETC., SUBMITTED FOR THE HEARING

Material submitted by the Honorable Spencer Bachus, a 
  Representative in Congress from the State of Alabama, and 
  Chairman, Subcommittee on Regulatory Reform, Commercial and 
  Antitrust Law..................................................     8
Material submitted by the Honorable Doug Collins, a 
  Representative in Congress from the State of Georgia, and 
  Member, Subcommittee on Regulatory Reform, Commercial and 
  Antitrust Law..................................................    27
Material submitted by the Honorable Henry C. ``Hank'' Johnson, 
  Jr., a Representative in Congress from the State of Georgia, 
  and Ranking Member, Subcommittee on Regulatory Reform, 
  Commercial and Antitrust Law...................................    30
Material submitted by the Honorable Darrell E. Issa, a 
  Representative in Congress from the State of California, and 
  Member, Subcommittee on Regulatory Reform, Commercial and 
  Antitrust Law..................................................    80

                                APPENDIX
               Material Submitted for the Hearing Record

Prepared Statement on behalf of the Virginia Bankers Association.   187
Prepared Statement of the Community Financial Services 
  Association of America.........................................   191
Prepared Statement of the Independent Community Bankers of 
  America (ICBA).................................................   196
Prepared Statement of Marsha Jones, President, Third Party 
  Payment Processors Association (TPPPA).........................   198
Questions for the Record submitted to Honorable Stuart F. Delery, 
  Assistant Attorney General, Civil Division, U.S. Department of 
  Justice........................................................   207
Questions for the Record submitted to Adam J. Levitin, Professor 
  of Law, Georgetown University Law Center.......................   209
Response to Questions for the Record from Scott Talbott, Senior 
  Vice President of Government Affairs, The Electronic 
  Transaction Association........................................   210
Questions for the Record submitted to David H. Thompson, Managing 
  Partner, Cooper & Kirk, PLLC...................................   213

 
                     GUILTY UNTIL PROVEN INNOCENT?

                      A STUDY OF THE PROPRIETY AND

                    LEGAL AUTHORITY FOR THE JUSTICE

                  DEPARTMENT'S OPERATION CHOKE POINT

                              ----------                              


                        THURSDAY, JULY 17, 2014

                       House of Representatives,

                  Subcommittee on Regulatory Reform, 
                      Commercial and Antitrust Law

                      Committee on the Judiciary,

                            Washington, DC.

    The Subcommittee met, pursuant to call, at 9:34 a.m., in 
room 2141, Rayburn House Office Building, the Honorable Spencer 
Bachus (Chairman of the Subcommittee) presiding.
    Present: Representatives Bachus, Goodlatte, Issa, Marino, 
Holding, Collins, Smith of Missouri, Johnson, Garcia, and 
Jeffries.
    Staff Present: (Majority) Daniel Huff, Majority Counsel; 
Ashley Lewis, Clerk; Justin Sok, Legislative Assistant to Rep. 
Smith of Missouri; Philip Swartzfager, Legislative Director to 
Rep. Bachus; Jaclyn Louis, Legislative Director to Rep. Marino; 
Ellen Dargie, Legislative Assistant to Rep. Issa; Jon Nabavi, 
Legislative Director to Rep. Holding; (Minority) Slade Bond, 
Counsel; and Veronica Eligan, Professional Staff Member.
    Mr. Bachus. Good morning. The Subcommittee on Regulatory 
Reform, Commercial and Antitrust Law hearing will come to 
order.
    Without objection, the Chair is authorized to declare 
recesses of the Committee at any time.
    I am going to recognize myself for an opening statement.
    Let me welcome everyone to today's oversight hearing on the 
Justice Department's Operation Choke Point program.
    This Subcommittee has the duty of overseeing the Civil 
Division of the Justice Department, and today's hearing is part 
of fulfilling that important function.
    By way of introduction, I approach this issue as not just a 
Subcommittee Chair on the Judiciary Committee, but as Chairman 
emeritus and former Chairman of the Financial Services 
Committee.
    So this is a matter I have been following closely across 
both Committees for some time, as have Members on both sides of 
the aisle, including Congress Blaine Luetkemeyer from Missouri, 
who has done a lot of work and study on this program.
    The intent of Operation Choke Point may have carried a 
purpose that we would all agree with, and that is to prevent 
financial fraud. However, my continued concern is that the 
program threatens to dry up legitimate sources of credit and 
financing.
    Those left on the short end can often be the people who 
have the greatest difficulty in getting any credit at all. The 
program also can deny legitimate merchants access to financial 
networks they need to survive.
    In this economy, the last thing we need is to make it 
harder for businesses to operate and employ workers, and by 
that I mean legitimate businesses.
    Merchants that have been targeted by Operation Choke Point 
have not uniformly been called predatory lenders, as one might 
have presumed, but are a wide range of businesses, including 
coin dealers, firearms merchants, home-based charities, 
fireworks sellers, and even online dating services. That is a 
wide--very wide net. And one thing it immediately suggests is 
agency overreach.
    To date, the Justice Department has served more than 50 
administrative and investigative subpoenas on banks. Subpoenas 
are very expensive to comply with and can bring unwanted 
scrutiny.
    So the natural reaction of a financial institution might be 
simply to sever a connection with a particular merchant and be 
done with it.
    By forcing that kind of decision, a government agency is 
able to achieve a particular policy goal without touching the 
ball, to use a sports term. It strikes me that someone's due 
process rights are likely being violated.
    We have heard the Department of Justice and the relevant 
bank regulators say that the goal of Operation Choke Point is 
not to eliminate businesses that might--that some might deem 
politically problematic.
    However, after reviewing this issue, I am concerned that 
internal DoJ documents have revealed that, at a minimum, there 
have been an indifference to the risks that this policy poses 
to legitimate and lawful commerce.
    Our witness today--in fact, we have a memo from Assistant 
Attorney General Delery that acknowledges--and let me quote 
from that--``the possibility that banks may stop doing business 
with legitimate lenders,'' but concluded--and I will quote 
again--``that solving that problem, if it exists, should be 
left to legitimate lenders themselves who can present 
sufficient information to banks to convince them that they are 
wholly legitimate.''
    That sounds like guilty until proven innocent.
    Again, this is a program that I have followed with 
increasing concern. Last August I wrote Attorney General Eric 
Holder and FDIC Marty Gruenberg, asking both agencies to 
immediately stop any actions designed to pressure banks and 
payment processors to terminate business relationships with 
lawful lenders.
    The fact that we are holding this hearing shows that there 
are many serious concerns that have yet to be satisfactorily 
addressed.
    With that, let me again thank our witness for appearing 
today.
    And let me yield to the Ranking Member for his opening 
statement.
    Mr. Johnson. Thank you, Mr. Chairman.
    Ordinary people, mostly minorities, mostly African-
Americans, are being squeezed every day by the justice system.
    They are sometimes prosecuted on shoddy evidence. They are 
coerced to accept unfair and unjustified plea bargains offered 
by prosecutors with unchecked and unbridled discretion.
    And they are punished if they don't accept the plea and go 
to trial and get found guilty. They are threatened by these 
vindictive mandatory minimums, additional charges, and enhanced 
consecutive counts. So they plead guilty and still get a steep 
sentence.
    They are serving these steep sentences in overcrowded 
prisons in a country with the largest known prison population 
in the world. And, for many, an incarceration practically 
becomes a life sentence due to the shortage of second chances 
for criminal offenders.
    This is the state of our criminal justice system as it 
applies to ordinary folks, usually those from communities of 
color and without means. It is a system known as the new Jim 
Crow.
    In the 4 years since Dodd-Frank, not one single person who 
facilitated or contributed to the greatest financial crisis 
since the Great Depression has been prosecuted. Not one person 
has been held accountable for this immeasurable hardship 
through a public trial in the criminal justice system.
    Not one person has served as an example to those who would 
prey upon vulnerable members of society, including low-income 
minorities and the elderly, targeted with predatory loans which 
were then packaged and sold on Wall Street. And when they 
became nonperforming loans, these securities became worthless. 
Thus, the crash back in 2007.
    And all of this taking place at a time when the United 
States Supreme Court, our activist Supreme Court, is bestowing 
corporations, rewarding corporations, with the rights that 
people have. Citizens United. The First Amendment right to 
freedom of speech has been conferred upon corporations.
    And now with the Hobby Lobby decision, we have corporations 
with a religious right, a First Amendment right to freedom of 
religion to practice their religion.
    But I know of no corporation that has gone to church and 
paid tithes, listened to the sermon, and went out and acted 
like a Christian.
    I know of no corporation that has ever been to jail for 
operations on Wall Street or for--or Main Street. No 
corporation has ever been placed in jail. But, yet, they have 
the same rights that we have.
    Earlier this week the Department of Justice announced a 
settlement with Citigroup based on its misrepresentations about 
the inherent risks of sub-prime mortgages and other egregious 
behavior.
    This settlement includes a $4-billion penalty under the 
Financial Institutions Reform, Recovery and Enforcement Act, 
also known as FIRREA, F-I-R-R-E-A. Passed in the wake of the 
savings and loan crisis in the 1980's, FIRREA is a critical 
tool in uncovering and prosecuting illegal conduct.
    In today's oversight hearing, this Subcommittee will 
consider the propriety and legality, the propriety and 
legality, of Operation Choke Point, which is the formal name 
for a series of investigations by the Justice Department's 
Civil Division under FIRREA of banks that knowingly facilitate 
fraud that, in turn, affects the banks through unauthorized 
debits of consumers' accounts and other illegal activity.
    Some of my Republican colleagues have disparaged these 
investigations under the theory that they enable the party in 
power to destroy businesses it favors without proof of 
wrongdoing.
    But let's review the facts. The Justice Department has 
filed just one complaint against a financial institution as a 
result of Operation Choke Point. One.
    In this lawsuit, the Justice Department alleged that Four 
Oaks Bank knowingly provided direct access to the financial 
system to parties engaged in defrauding consumers and illegal 
activities, such as a Ponzi scheme, illegal online gaming, and 
unlawful lending.
    This bank not only permitted unlawful actors to directly 
access the financial system, it is alleged, it is also alleged 
that this bank allowed these parties to remove funds directly 
from consumers' accounts even after receiving thousands of 
complaints from consumers that these debits were unauthorized.
    In fact, at one point, the bank stopped keeping track of 
consumer complaints altogether, illustrating its willingness to 
overlook fraudulent activity. In return for knowingly 
facilitating fraud, this bank received $850,000 in gross fees 
from a third-party processor.
    Again, this is the only civil complaint filed by the 
Justice Department, and it was settled within days without 
going to trial and without any prosecution--criminal 
prosecution for actual fraud.
    Instead of thanking the Justice Department for protecting 
untold consumers and the broader financial system from fraud, 
my Republican colleagues have hurled unfounded accusations, 
accusing public servants of abusing their power to destroy 
businesses that they simply dislike.
    Although I am dumbfounded by this argument, one thing 
remains clear to me. For House Republicans, banks are still too 
big for regulations, too big for trial, too big to fail, to big 
for jail, too big to even investigate for fraud and money 
laundering, and too big to be held accountable for defrauding 
Americans.
    I thank the Justice Department for fighting on behalf of 
consumers, and I encourage you to continue its investigations.
    And I yield back.
    Mr. Bachus. Thank you, Mr. Johnson.
    At this time I recognize the Chairman of the full 
Committee, Mr. Goodlatte, for his opening statement.
    Mr. Goodlatte. Mr. Chairman, thank you very much, and thank 
you for holding this hearing.
    There is no dispute that consumer fraud is a real 
phenomenon. Approximately 10.8 percent of American adults fell 
victim to it in 2011. The Department of Justice should enforce 
the law vigorously on the villains who prey on our most 
vulnerable.
    There is also no dispute that Operation Choke Point is 
cutting off some fraudster access to the banking system. The 
bipartisan concern is that there is an unacceptable level of 
collateral damage.
    On this point, there appears to be a disconnect between 
statements from top officials and what is happening in 
practice. The official line is that Operation Choke Point is 
targeting fraudsters, not the whole industry.
    But the Committee has received numerous reports of banks 
severing relationships with law-abiding customers from 
legitimate industries that the Administration has designated 
``high risk.''
    For example, the Committee obtained a jarring account of a 
meeting between a senior FDIC regulator and a banker 
contemplating serving a payday lending client.
    The official told the banker, ``I don't like this product 
and I don't believe it has anyplace in our financial system. 
Your decision to move forward will result in an immediate 
unplanned audit of your entire bank.''
    This sounds more like strong-arming than law enforcement. 
It is naive to answer that the government is merely requiring 
banks to pay heightened attention to these clients, not 
disallowing them. That is not how the system works in practice.
    Banks are highly regulated entities. They are at the mercy 
of their regulators, and that makes them risk-averse. To banks, 
high-risk merchants often are simply not worth the heightened 
scrutiny.
    This thinking is so prevalent in the industry that it has 
been given a name: De-risking. The chairman of the Office of 
the Comptroller of the Currency lamented in a recent speech, 
``And whether or not DoJ intended it, it now seems clear that 
de-risking is occurring and wiping out legitimate business.''
    The Department of Justice can no longer claim this 
consequence is unintended. It allows Choke Point to continue 
without changes.
    I also question the Justice Department's legal authority to 
pursue this dangerously overbroad program. The Financial 
Institutions Reform, Recovery and Enforcement Act is one of the 
few statutes that gives the Department authority to issue 
administrative, investigative subpoenas in the civil context.
    Congress granted this authority in the wake of the savings 
and loan scandal to prevent fraud against banks. It applies to 
fraud affecting a Federally insured financial institution. 
Consumer fraud was not the focus.
    Nevertheless, the Department of Justice relies on a recent 
district court case interpreting ``affecting'' broadly. In that 
case, though, the bank was perpetrating the fraud.
    The district court, moreover, was careful to mention that 
the effects must be sufficiently direct and that there might 
come a point at which the effects on the bank are too 
attenuated.
    Such is the case with Operation Choke Point. It targets 
banks neither as victims nor as perpetrators. Instead, it is 
manipulating banks whose payment processor clients have 
merchant clients who may or may not defraud their customers.
    Accepting DoJ's legal authority requires one to believe 
that by ``affecting'' Congress meant to include fraud that was 
perpetrated not on banks and not even on their customers, but 
on the customers of their customers' customers.
    Similarly, the reputational risk is not analogous. In the 
Department of Justice's precedent, the bank was accused of 
cheating its own customers, which obviously drives away 
customers who do not want to be their own bank's next victim.
    By contrast, direct customers of banks targeted by Choke 
Point have no such concerns. Their bank is not defrauding them. 
The alleged problem is far removed from them and lies with the 
customers of their bank's clients' clients. In this setting, 
the prospect for reputational risk is highly attenuated, and 
DoJ's interpretation again appears highly strained.
    Many of the concerns I have shared are bipartisan. A 
Democratic colleague told the Administration he wants to be 
sure we do not throw out the baby with the bathwater by 
shuttering lawful businesses. On March 27, 2013, 11 Democrats 
and 12 Republicans wrote banking regulators expressing a 
similar concern.
    Good law enforcement is hard work and time-consuming. There 
are no shortcuts. Officers have to do the difficult work of 
identifying bad actors individually. They simply cannot profile 
entire industries.
    I welcome Assistant Attorney General Delery, and I want to 
know what he makes of the devastating collateral damage to 
which some of our other participants will bear witness.
    I also welcome all of our other witnesses and look forward 
to the discussion.
    Thank you, Mr. Chairman.
    Mr. Bachus. Thank you.
    Before I introduce Assistant Attorney General Delery--it is 
``Delery?''
    Mr. Delery. ``Delery,'' Mr. Chairman.
    Mr. Bachus. ``Delery.'' ``Delery.'' Okay. There are some 
different pronunciations. They did a phonetic thing which I 
don't think is quite on it.
    But before I make a formal introduction, I want to make two 
submissions for the record.
    First, I ask unanimous consent to place in the record 
written testimony from Dr. Douglas Merrill, a Princeton Ph.D. 
and former Chief Information Officer for Google.
    Mr. Bachus. Google is a singing corporation, aren't they? 
Isn't that what they are? Maybe that is iTunes. They are not a 
singing corporation, are they? I guess not.
    Mr. Johnson. Singing corporation?
    Mr. Bachus. You mentioned singing corporations. But anyway.
    He specializes in applying radical innovation to solve hard 
problems, including the problem of credit access for the under 
bank.
    He founded ZestFinance to use Google-style big-data math to 
provide credit to make smarter loans to under-served 
populations at lower rates.
    His algorithm has enabled ZestFinance to slash default 
rates by half and offer up to 50 percent savings for borrowers. 
Then Operation Choke Point nearly destroyed his business.
    He concludes that--and I quote--``More than 100,000 under-
banked Americans overpaid tens of millions of dollars in fees 
because both ZestFinance and its partner, Spotloan, were 
limited by Choke Point.''
    Also like to submit for the record former FDIC Chairman 
Bill Isaac's letter. I ask unanimous consent to place in the 
record a letter from Bill Isaac, former Chairman of the FDIC, 
to the youngest member of the FDIC's board of directors in 
history--no. He is the youngest member of the FDIC's board of 
directors in history, appointed by President Carter.
    He explains that the Bank Secrecy Act and anti-money 
laundering provisions are--and again I quote--``are not 
intended to impose a duty on banks to ensure that their 
business customers are complying with every law in every State 
or that the businesses are treating customers fairly and 
delivering good value.''
    He also writes that, ``Operation Choke Point is one of the 
most dangerous programs I have experienced in my 45 years of 
service as a bank regulator, bank attorney, consultant, and 
bank board member.''
    Is there any objection to this submission? Hearing none.
    [The information referred to follows:]

    
    
    
                   __________

    Mr. Bachus. At this time I would like to introduce our 
first witness, Honorable Stuart Delery. Is that right? Good.
    He was sworn in as Assistant Attorney General for the Civil 
Division on August 5, 2013, following confirmation by the U.S. 
Senate. He has led the division since March 2012.
    As an Assistant Attorney General, he oversees the largest 
litigating division in the Department of Justice. Each year the 
Civil Division represents some 200 client agencies in 
approximately 50,000 different matters.
    The Civil Division represents the United States in legal 
challenges to Congressional statutes, administrative policies, 
and Federal agency actions.
    He joined the United States Department of Justice in 
January 2009 as chief of staff and counsel to the Deputy 
Attorney General and later served as Associate Deputy Attorney 
General. From August 2010 until March 2012, he served as senior 
counsel to the Attorney General.
    Before joining the Department of Justice, Mr. Delery was a 
partner in the Washington, D.C., law firm of WilmerHale, where 
he was a member of the litigation department and the appellate 
and Supreme Court litigation practice group and a vice chair of 
the firm's securities department.
    He graduated from Yale Law School and the University of 
Virginia. He clerked for Justice Sandra Day O'Connor and 
Justice Byron R. White of the U.S. Supreme Court and for Chief 
Judge Gerald--and how do you pronounce--``Tjoflat''?----
    Mr. Delery. ``Tjoflat,'' Mr. Chairman.
    Mr. Bachus [continuing]. Of the U.S. Court of Appeals for 
the Eleventh Circuit.
    So we welcome your testimony. And you are recognized for 
that purpose.

TESTIMONY OF THE HONORABLE STUART F. DELERY, ASSISTANT ATTORNEY 
      GENERAL, CIVIL DIVISION, U.S. DEPARTMENT OF JUSTICE

    Mr. Delery. Thank you very much, Chairman Bachus, Ranking 
Member Johnson, and Members of the Subcommittee. Thank you for 
inviting me here today and for providing the Department of 
Justice the opportunity to describe our work designed to 
protect consumers from fraud perpetrated by certain merchants, 
third-party payment processors, and banks.
    The Justice Department has made it a priority to fight 
consumer fraud of all kinds. Fraud against consumers comes in 
many forms, from telemarketing fraud to mortgage fraud, from 
lottery scams to predatory and deceptive online lending, and 
often strips our most vulnerable citizens of their savings and 
even their homes.
    The Civil Division's consumer protection branch, along with 
the Criminal Division and the U.S. attorney's offices across 
the country, has worked for decades to protect the health, 
safety, and economic security of the American consumer.
    Based on its years of experience in combatting fraudulent 
merchants and by following the flow of money from fraudulent 
transactions, the Department has learned that some banks and 
third-party payment processors, which are intermediaries 
between banks and merchants, know that merchants are engaged in 
fraud and, yet, continue to process their transactions, in 
violation of Federal law.
    As a result, in November 2012, our attorneys proposed a 
concentrated effort to pursue fraud committed by banks and 
payment processors as a complement to other consumer protection 
work.
    This strategy aims both to hold accountable those banks and 
processors that violate the law and to prevent access to the 
banking system by fraudulent merchants, and this--this effort 
is sometimes referred to as Operation Choke Point.
    One of our investigations now has been resolved, as was 
mentioned earlier, and provides a useful example of our efforts 
in this area.
    In April, a Federal District Court in North Carolina 
entered a consent order and approved a settlement agreed to by 
the Department and Four Oaks Bank.
    According to our complaint, Four Oaks allowed a third-party 
payment processor to facilitate payments for fraudulent 
merchants despite active and specific notice of fraud.
    For example, Four Oaks received hundreds of notices from 
consumers' banks, including statements by account holders 
submitted under penalty of perjury, that the people whose 
accounts were being charged had not authorized debits from 
their accounts.
    Four Oaks had evidence of efforts by merchants to conceal 
their true identities. Four Oaks also had evidence that more 
than a dozen merchants served by the payment processor had a 
return rate over 30 percent, a strong sign that the bank was 
facilitating repeated fraudulent withdrawals. And, indeed, one 
merchant had a return rate of over 70 percent.
    According to our complaint, despite these and other signals 
of fraud, Four Oaks permitted the third-party payment processor 
to originate approximately $2.4 billion in debit transactions 
against consumers' bank accounts.
    So as the Four Oaks case demonstrates, the Department's 
policy is to base its investigations on specific evidence of 
unlawful conduct.
    Nevertheless, in recent months, we have become aware of 
reports suggesting that these efforts instead represented an 
attack on businesses engaged in lawful activity. And I thank 
you for the opportunity to clear up this misconception.
    Our policy is to investigate specific unlawful conduct 
based on evidence that consumers are being defrauded, not to 
target whole industries or businesses acting lawfully, and to 
follow the facts wherever they lead us in accordance with the 
law, regardless of the type of business involved.
    As with virtually all of our law enforcement work that 
touches on regulated industries, our work in this area includes 
communication with relevant regulatory agencies. Such 
communication is designed to ensure that we understand the 
industry at issue and that we have all the information we need 
to evaluate enforcement options in light of the evidence we 
uncover. That is nothing new.
    So, for example, for many years, banking regulators have 
warned banks about the heightened risks to consumers associated 
with third-party payment processors.
    In some of that guidance, FDIC has explained that, although 
many clients of payment processors are reputable merchants, an 
increasing number are not and should be considered high risk. 
And the FDIC has provided examples of high-risk merchants for 
purposes relevant to its regulatory mission.
    The Department's mission, however, is to fight fraud. And 
we recognize that an entity simply doing business with a 
merchant considered high risk is not fraud.
    So, in summary, our efforts to protect consumers by 
pursuing fraudulent banking activity are not focused on 
financial institutions that merely fail to live up to their 
regulatory obligations or that unwittingly process a 
transaction for a fraudulent merchant.
    But when a bank either knows or is willfully ignorant to 
the fact that law-breaking merchants are taking money out of 
consumers' bank accounts without valid authorization and the 
bank continues to allow that to happen, the Department will not 
hesitate to enforce the law.
    So thank you once again for the opportunity to appear 
before you today. And at this time, Mr. Chairman, I would be 
happy to answer any questions that you or the other Members of 
the Subcommittee may have.
    [The prepared statement of Mr. Delery follows:]
    
    
    
              __________
    Mr. Bachus. Thank you very much.
    First question will be Mr. Holding.
    Mr. Holding. Thank you, Mr. Chairman.
    You testified on Tuesday and, at that hearing, the FD--
well, the--on Tuesday, the FDIC testified that they had 
authored a somewhat notorious high-risk activity list that 
predicates Operation Choke Point scrutiny.
    You know, this is a somewhat dangerous list because it 
essentially tells banks that they shouldn't do business with 
certain industries, irrespective of the fact than an industry 
is operating entirely within the law, and most of these 
industries are legal under Federal, State, and local law. Some 
even have significant First Amendment protections.
    So did the Department, the DoJ, conduct a review of whether 
any of these restrictions would violate the First Amendment 
rights of Americans? And, if they did not, why not?
    Mr. Delery. So, Congressman, the list that you are 
referring to, I believe, that was discussed by the FDIC on--at 
the hearing on Tuesday is a list that the FDIC prepared for its 
purposes.
    As I said then, that was not something that the Department 
of Justice was involved in preparing. And whether a financial 
institution does business with a merchant that is in an 
industry on that list or any other list is not, under our 
policy, a basis for the investigations that we are talking 
about here.
    Mr. Holding. Does the Department have its own definition of 
high-risk activity that would create liability under Operation 
Choke Point?
    Mr. Delery. Right. So that is not the basis for the policy 
or the actions that we are taking here.
    Mr. Holding. But does the Department have their own 
definition, you know, of what seems to be somewhat of a term of 
art that is developing here?
    Mr. Delery. No. I don't believe so, Congressman.
    The investigations that we are conducting are based on 
evidence of fraudulent conduct by particular institutions that 
are based on traditional law enforcement activities or 
investigative techniques.
    So we are investigating institutions based on evidence----
    Mr. Holding. So you don't pay any attention to that 
definition? So you don't use the FDIC's definition or list? 
That doesn't go into your calculus in making a decision--
prosecutorial decision, Fourth Amendment decision?
    Mr. Delery. We are basing our investigations on evidence 
that we receive from various sources of actual fraudulent 
activity in a particular context. We are not looking at whole 
industries.
    So the information may come from a referral from a bank 
whose customers have been victimized or complaints from the 
customers themselves or from investigations that we are 
conducting into fraudulent merchants.
    Mr. Holding. Okay.
    Mr. Delery. So it is a standard series of investigative 
techniques.
    Mr. Holding. Let's go to the funding.
    The Department has a working capital fund used to support 
operations, and one part of that fund is known as the 3 percent 
fund that allows the Department to, you know, retain 3 percent 
of affirmative civil recoveries.
    You know, as this is a non-appropriated fund, there are no 
strings attached from Congress on how it is used and it 
inhibits oversight. You know, aside from an occasional question 
from Congress, the Department can use the money however it sees 
fit.
    So, you know, these funds are utilized to hire attorneys, 
file additional enforcement actions. So I am concerned this is 
unaccountable and non-transparent and somewhat of a slush fund.
    So I know you have been asked about this at another 
hearing. So, hopefully, you have had a chance to reflect and 
can answer it now.
    How much money is currently held in the working capital 
fund? And how much money is utilized to hire attorneys? How 
many FTE does this support? And can you provide to the 
Committee an accounting for the last 5 years including the 
unobligated funds held?
    Mr. Delery. So, Congressman, that was a subject that came 
up at the hearing on Tuesday. We are looking into responding to 
similar questions, and we would be happy to take those back as 
well. I don't have the specific answers on that here today. We 
could certainly get back to the Committee on that.
    You know--and, obviously, the Civil Division is not the 
only part of the Department that the 3 percent fund supports, 
and it only supports small and specified parts of--of the work 
that we do typically related to our affirmative--affirmative 
enforcement efforts.
    Mr. Holding. Thank you.
    Mr. Chairman, I yield back.
    Mr. Bachus. Thank you.
    I am going to recognize Mr. Collins for a unanimous consent 
request and then the Ranking Member.
    Mr. Collins. Thank you, Mr. Chairman.
    And especially in light of the vote series and other things 
and with other schedules.
    I have a letter here from TSYS, from Mr. Troy Woods, that I 
would like to enter into the record detailing concerns about 
Operation Choke Point, which highlight many of my concerns with 
this amazingly misguided program.
    Mr. Bachus. Hearing no objections, it is introduced.
    [The information referred to follows:]
    
    
    
    
                               __________
    Mr. Bachus. And the Ranking Member is now recognized.
    Mr. Johnson. Mr. Chairman, I would like to be recognized 
for the--only for the purpose of introducing by unanimous 
consent for the record a letter from Howard Langer, a professor 
at the law school of the University of Pennsylvania and a 
founding Partner of Langer, Grogan & Diver, PC, which describes 
his work against Wachovia Bank, which paid full damages to 
750,000 victims of approximately 130 mass market frauds.
    And I would also like to tender for the record a letter 
from the Americans for Financial Reform, a coalition of several 
dozen consumer and civil rights groups, urging this 
Subcommittee to suppress efforts to ensure that banks and 
payment processors avoid facilitating illegal activity by 
complying with long-standing due diligence requirements to know 
their customers, monitor return rates, and be alert for 
suspicious activity; and, also, a--the written testimony of 
Lauren Saunders, who testified on behalf of the National 
Consumers Law Center in Tuesday's hearing on the Operation 
Choke Point in the Committee on Financial Services; and last, 
but not least, several guidance documents issued under the Bush 
Administration on high-risk merchants and payment processors.
    I will tender these for the record.
    Mr. Bachus. Without objection, those materials are entered 
into the record.
    [The information referred to follows:]
    
    
    
              __________
    
    Mr. Bachus. And at this time the Ranking Member is 
recognized for 5 minutes.
    Mr. Johnson. If I might, Mr. Chairman, I would like to--
since I am the only--since I am the only Democrat here, I would 
like to wait until the other Republicans have asked their 
questions before I ask my questions.
    Mr. Bachus. Mr. Marino, would you like to be recognized?
    Mr. Marino. Thank you. Thank you, Chairman.
    Thank you, Ranking Member.
    Assistant Attorney General, welcome. I am sure you did a 
little reading on us beforehand and know that my background and 
my colleague to the right, Mr. Holding--we were U.S. attorneys 
and district attorney. I was a district attorney as well.
    And there is no one here in D.C. that is more of a law 
enforcement guy than I am. I have the utmost respect for U.S. 
attorneys and prosecutors. I have--had a great deal of pride 
and still do to work at Justice and to be nominated.
    I do have a concern with what is taking place--what appears 
to be taking place.
    You have been the one to be chosen to be here and explain. 
I give you courage for stepping up to the plate and doing that. 
It should reflect in your review when that comes up, and I 
think you are warranted a raise.
    But, given that, ``fraud'' is a very vague term. And we, as 
prosecutors, you, as a prosecutor--we have a great deal of 
power. You probably have more power than anybody on Earth when 
it comes to investigations, whether it is civil or criminal, 
and we know that civil cases do turn into criminal cases.
    And I had the same philosophy as you do. Follow the money. 
I did it with drug dealers. I did it with organized crime. I 
did it with money laundering.
    My concern is--I want you to, if you would, please, 
convince me that this is not a witch hunt, that this is not the 
Department of Justice--let's forget about the White House and 
the Administration.
    Because I always felt the Department of Justice--although I 
worked for the President, we were and are an independent agency 
that enforces the rule of law, not politics.
    And if memory serves me right--and I looked things up and 
memory does serve me right--that there is no definition in 
``fraud.''
    We talk about wire fraud or security fraud. There is really 
no definition in the Federal statute. Courts have made the 
determination as what the definition is.
    And just--I taught constitutional law a little bit, and I 
want to refer back to jury instructions that courts--that I 
have had courts use on describing to a jury what fraud is.
    And there is a lot more to this. But it is a general term 
which embraces an ingenious effort, all ingenious efforts, and 
means that individuals devise to take advantage of others. We, 
as prosecutors, can interpret that in numerous ways.
    Please tell me that that is not being used for political 
reasons.
    Mr. Delery. Well, Congressman, I can certainly tell you 
that it is not in the matters that I supervise and more 
broadly.
    And I am happy to address the issues that you have raised 
because I do agree with your general approach and I think that 
it is important for us to respond.
    And so I guess what I would do is point to the origin of 
these cases and how we came to pursue them and, as the best 
evidence of what these cases are about, the one that I 
mentioned earlier, Four Oaks, which was actually done in 
partnership with Mr. Holding's former district in North 
Carolina.
    And, you know, our policy in these cases is to investigate 
specific evidence of fraud based on evidence that consumers are 
being harmed, are being defrauded, not whole industries or 
businesses acting lawfully.
    We are holding financial institutions accountable for their 
own misconduct, for their own fraudulent conduct, not for the 
misconduct of anybody else.
    And so, if you look at Four Oaks, Four Oaks was a bank that 
facilitated transactions by a payment processor, even though it 
had hundreds of sworn complaints about unauthorized 
transactions, it had received warnings from NACHA, which is the 
electronic payments association, it received a warning by the 
Arkansas Attorney General's Office----
    Mr. Marino. I am familiar with that, and I have followed 
the facts on it.
    But you did make a statement that--you said, ``We at 
Justice decided to pursue these fraud cases.''
    Was it you that decided to pursue? Was it someone above 
you? Was it the attorney general or the DAG? Or did it come 
from the White House?
    Mr. Delery. So it came--it originated as a proposal from 
career lawyers in the Justice Department who had spent many 
years working on cases involving fraudulent merchants. And, 
based on that work, following the money, they noted the 
involvement of--knowing involvement of some payment processors 
and banks. And that was the genesis of these cases. And it was 
under my authority in the Civil Division that it was done.
    Mr. Marino. I think I am well over my time. We have to go 
and vote.
    But just as a prosecutor, promise me this, that we are 
following the law, that you are following the law, that these 
are genuine fraud cases that are not manipulated to look like 
fraud cases, and that we, as prosecutors, have a responsibility 
to focus on the rule of law and nothing else.
    Mr. Delery. I agree, Congressman. That has been the policy 
of these cases from the beginning and will continue to be.
    Mr. Marino. Thank you. I yield back.
    Mr. Bachus. Thank you.
    We have votes on the floor. So we will be recess--how many 
votes are there? Three votes. So we will----
    Mr. Smith, you could go ahead, but I think it is--there is 
only 3 minutes left on the floor.
    Would you prefer to ask a question or two?
    Mr. Smith. Could I ask quickly?
    Mr. Bachus. Okay. Go ahead. I am going to recognize Mr. 
Smith.
    Mr. Smith. Thank you, Mr. Chairman.
    My question--I have two. Has anyone at DoJ voiced concerns 
that Operation Choke Point could go too far and harm entire 
industries?
    Mr. Delery. Well, certainly, we have heard some of the 
reports that--you know, there have been reports in the press. 
We have had letters from Members of Congress. And we always 
take seriously the question about whether our efforts to combat 
fraud are affecting institutions that we are not, in fact, 
investigating.
    So that is something that we always are mindful of and take 
into account and review what we are doing to avoid those--those 
effects, and we are doing that in connection with these cases.
    Mr. Smith. So has anyone voiced concern at DoJ?
    Mr. Delery. I think what I would say is that we have 
responded--we have--we have heard the concerns that people have 
been expressed--that people have expressed and have responded 
by not only looking at what we are doing, but, also, taking 
affirmative steps to make clear to the public and to industry 
what our policy is about these cases, what we are and are not 
doing, so that we can avoid any unintended effects that go 
beyond what we are trying to do, which is to hold institutions 
accountable for fraud that they are committing.
    Mr. Smith. How many institutions have you all prosecuted 
from Operation Choke Point?
    Mr. Delery. So this set of cases grew out of some prior 
work, including the Wachovia case that was mentioned earlier. 
But of the ones--of the investigations that began, you know, in 
late 2012, early 2013, we have one resolution, the Four Oaks 
Bank case. There are other investigations that are still in 
process.
    Mr. Smith. So only one from Operation Choke Point?
    Mr. Delery. As I indicated, there are other investigations 
still in process, but only one res--one of them has been 
resolved at this point.
    Mr. Smith. Okay. You were in private practice at a private 
law firm. What is your estimate of the costs to comply with the 
average subpoenas that DOJ sent out under Operation Choke 
Point?
    Mr. Delery. Congressman, I don't know what the estimate 
would be. I think that, in this context, we have sent subpoenas 
where we had reason to believe that the recipient either--the 
recipient had information about fraudulent conduct, either its 
own or on behalf of somebody else.
    Because sometimes subpoenas seek information, you know, 
related to third parties. And, as is usually the case, we have 
a dialogue with the recipients to discuss the scope and how the 
best attempts--what the best process would be for responding.
    Mr. Smith. I think it is very important that any government 
agency, any Federal agency, let alone DOJ--that if they are 
asking or requesting something out of any industry or any 
individual or any taxpayer, they better know the ramifications 
of their ask and how much it is going to cost them. And the 
fact that you don't have any idea is very disheartening to me.
    Mr. Delery. And I think that that is something that our 
lawyers keep in mind as they are framing the--framing the 
subpoenas, to target them to the information that we need, and 
that is something that we are--we are mindful of in this and 
all of the other areas that we pursue.
    Mr. Smith. You need to be more diligent to make sure you 
can understand how much of a financial impact your asks are 
going to have on private industry and private citizens before 
you start asking.
    Thank you, Mr. Chairman.
    Mr. Bachus. Thank you.
    And at this time we will recess for votes on the floor and 
then we will return at the termination of those votes. Thank 
you.
    Mr. Delery. Thank you, Mr. Chairman.
    Mr. Issa [presiding]. The Committee will come back to 
order.
    The gentleman from Georgia is recognized.
    Mr. Johnson. Thank you, Mr. Chairman.
    This hearing appears to be in keeping with a couple of 
hearings that I have been associated with this week having to 
do with allegations of Presidential overreach, abuse of 
authority, even murmurs of impeachment. And this is a hearing 
that is in keeping with the spirit of those hearings.
    One hearing yesterday, in Armed Services, the Committee 
approved a subpoena for emails from Lois Lerner of the IRS. And 
then the Justice Department had a similar hearing. And so we 
are Benghazi, we are IRS, and now we are into the subject of 
the big Wall Street banking industry being singled out by this 
Administration, and being singled out for persecution and 
criminal prosecution because of allegations, unfounded 
allegations of consumer fraud and other alleged offenses.
    So far, I mean, a hearing, ``Guilty Until Proven Innocent? 
A Study of the Propriety and Legal Authority for the Justice 
Department's Operation Choke Point.'' Well, I have not heard 
any questions about the improper use of authority, legal 
authority, for the Justice Department's Operation Choke Point. 
And I have heard nothing about any financial service 
corporation being singled out for prosecution in the Justice 
Department's Operation Choke Point.
    Mr. Issa. Would the gentleman yield?
    Mr. Johnson. Yes.
    Mr. Issa. My staff has informed us that, from the 50 
subpoenas that were issued, only one was to a large bank and it 
wasn't a Wall Street bank. The 50 subpoenas that we know of 
were issued to credit unions and small community banks. I just 
wanted make sure the gentleman from Georgia knew that.
    Mr. Johnson. And that is a point well taken. But I think 
this hearing has devolved into a semi-spectacle with 
allegations of industry profiling, and I think we have kind of 
blown up some legitimate investigations and one civil action by 
the Justice Department into a misuse of authority by the 
President, oppressing banks. And this is not the case. And I am 
glad that my friend on the other side recognizes that.
    But I do want to ask you, sir, about the complaint filed 
against Four Oaks Bank. The Justice Department's complaint 
against Four Oaks Bank is the only civil action against any 
party as a result of Operation Choke Point. Isn't that correct?
    Mr. Delery. Yes, Congressman, it is one that has been 
filed.
    Mr. Johnson. And this is a community bank, or a regional 
bank, or a large commercial bank.
    Mr. Delery. Well, Four Oaks, I would say, I am not sure how 
to define it, it is probably regional, is how you would explain 
it. But I think one of the things that the evidence that we 
found, as reflected in the complaint, demonstrates is that an 
institution like that can process a very large number of 
transactions, more than 9 million for a single payment 
processor at $2.4 billion. So the numbers that we are talking 
about can be very large.
    Mr. Johnson. And in the complaint filed against Four Oaks 
Bank under FIRREA by the Department of Justice, the United 
States of America alleged that the bank ``knew or was 
deliberately ignorant of the use of its accounts and its access 
to the national banking system in furtherance of a scheme to 
defraud consumers,'' end quote. Although this complaint was 
settled, how would a court construe this actual fraud under 
FIRREA?
    Mr. Delery. I think if you look at the detailed allegations 
in the complaint, there was clear evidence of widespread 
information that the bank had about fraudulent transactions 
that it was processing. That information came from a number of 
categories, including complaints, sworn complaints by customers 
who had been victimized, by warnings from a State attorney 
general and from another organization, had evidence that one of 
the merchants was attempting to hide its identity, and it had 
very high return rates for more than a dozen merchants that 
were more than 30 percent--one was more than 70 percent--which, 
again, is a strong indication of fraud. Bank officials knew 
this information and, according to the complaint, continued to 
process it anyway. And that was the basis for the FIRREA action 
in that case.
    Mr. Bachus [presiding]. Thank you.
    Mr. Johnson. Well, now you didn't sue Four Oaks Bank 
because it provided services to high risk merchants, did you?
    Mr. Delery. The basis for the action was that the bank 
knew, knowingly facilitated, and in certain circumstances 
turned a blind eye to evidence that it had of fraud. So I do 
think that this case is a good example of the work that we are 
doing, which is to hold banks accountable for their own 
unlawful conduct under existing law.
    Mr. Bachus. Thank you.
    Mr. Johnson. Well, as a taxpayer I want to thank you for 
doing that.
    And I will yield back.
    Mr. Bachus. Thank you, Mr. Johnson.
    At this time, I recognize Mr. Issa.
    Mr. Issa. Thank you, Mr. Chairman.
    Thank you for being here today. I have got a number of 
questions.
    First of all, I would ask unanimous consent that the 
subpoena dated May 20, 2013, from the Department of Justice 
Consumer Protection Branch be placed in the record at this 
time.
    Mr. Bachus. Without objection.
    
    [The information referred to follows:]
    
    
    
    
                               __________
    Mr. Issa. Thank you.
    In this document, which I am----
    Mr. Bachus. Now we will start your time.
    Mr. Issa. Thank you. Thank you. That would be great.
    Mr. Bachus. Or are you still introducing your----
    Mr. Issa. I am done introducing.
    Mr. Bachus. Okay.
    Mr. Issa. But in this document it, which I am told there is 
at least 50 subpoenas identical to this other than the name, 
are you familiar with this document?
    Mr. Delery. I believe so. I certainly am familiar with ones 
like that. I am not sure about that one.
    Mr. Issa. We know that 50 subpoenas were served that were 
substantially similar or identical except for name. How many 
subpoenas did you serve similar to the one that you believe I 
have got here?
    Mr. Delery. Well, again, I do think some of the documents 
have indicated in the neighborhood of 50, which again, were not 
all necessarily identical.
    Mr. Issa. Well, let's go through them. You named one 
company in which you had, prior to the serving of the subpoena, 
allegations of wrongdoing and complaints by customers. Is that 
correct? I mean, that is a standard to go looking, is that you 
have allegations of a bank doing things wrong, and that would 
be a reasonable reason.
    Mr. Delery. Yes.
    Mr. Issa. You had that in the case of Four Oaks, right?
    Mr. Delery. Again, that certainly was the basis for the 
case. And as to all of the subpoenas----
    Mr. Issa. Well, you are not allowed to go on fishing 
expeditions just generally and harass banks, are you?
    Mr. Delery. In each of the----
    Mr. Issa. No, no, no, that is a question. You are not 
allowed to go and just harass for the sake of--you can't send 
subpoenas to every single bank. Let me rephrase that. The 
statute allows to you do it, but that is not your practice. Is 
that correct?
    Mr. Delery. That is correct. And in this case there was a 
reasonable suspicion, a reasonable basis for each of the 
subpoenas that were issued.
    Mr. Issa. Then since these cases have come to a close 
without prosecution, would you provide to us the reasonable 
suspicion in the case of the--or at least an outline of them--
in the case of these 50 subpoenas served?
    Mr. Delery. I think, Congressman, many of them relate to 
ongoing investigations.
    Mr. Issa. Obviously, only the closed cases.
    Mr. Delery. And so we can certainly look at the request. As 
I indicated earlier, we have a number of open----
    Mr. Issa. Okay. Well, let's go through this. It has earlier 
been testified that in fact these were just subpoenas and they 
were not intended to intimidate or cause people to change their 
behavior. Is that right?
    Mr. Delery. Right, they were intended to get information 
from institutions that we believed had evidence of fraud.
    Mr. Issa. So now listed in those evidence of fraud, in 
addition to Ponzi schemes, which are criminal, period, and if 
somebody knew about a Ponzi scheme, it is inherently a crime, 
right?
    Mr. Delery. That is my understanding, yes.
    Mr. Issa. There is credit card repair services, debt 
consolidation, online gaming, government grants, or will-
writing kits, payday and subprime. Threw in pornography, I 
thought that was good, that pornography is inherently something 
that you should tell people about. Online tobacco, is that 
unlawful?
    Mr. Delery. I am not sure what document you are looking at.
    Mr. Issa. I am looking at the examples that are in your 
subpoena. Your subpoena includes an attachment of a financial 
institution letter. Your subpoena, all 50 of your subpoenas 
included an intimidating list of firearm sales, pharmaceutical 
sales, sweepstakes, magazine subscriptions, online tobacco. You 
included FDIC high-risk list in there that includes a series of 
lawful businesses. Are you aware of that?
    Mr. Delery. So the guidance was attached----
    Mr. Issa. Sir, were you aware of that?
    Mr. Delery. I am aware that the guidance was attached to, 
my understanding, is not all of the subpoenas.
    Mr. Issa. Oh, okay. Well, we would love to have all of 
them.
    In testimony before the House Financial Services Committee 
on Tuesday you repeatedly disclaimed any involvement in the 
FDIC high-risk merchant guidance. Now, isn't is true that--
assuming that this is a correct document, we would like you to 
authenticate it here today, and we will provide it to you--this 
in fact shows that what you said in Financial Services just 
isn't so? You included the guidance. You said in Financial 
Services you didn't, and I quote, you repeatedly disclaimed any 
involvement with the FDIC high-risk merchant guidance, and then 
you include it in your subpoena.
    How is somebody supposed to think that you didn't 
participate in promoting this and you put it into a subpoena 
that threatens the hell out of a small community bank or credit 
union? How do you reconcile that?
    Mr. Delery. So I would be happy to answer that question, 
Congressman.
    Mr. Issa. I would be happy to get an answer to that one.
    Mr. Delery. The guidance that was attached is guidance that 
the FDIC provided. It discusses in general terms the risks that 
third-party payment processors can present----
    Mr. Issa. That is fine. But didn't by inclusion of that 
guidance, didn't you in fact by inclusion associate yourself 
with the position of the FDIC? And didn't you on Tuesday say 
just the opposite in the Financial Services Committee? So are 
you going to correct the record at Financial Services to 
disclose that in fact you had associated yourself, you had 
included the guidance, and you did in fact essentially team 
yourself with the FDIC for guidance that would say, credit card 
repair, payday subprime, online tobacco sales, firearm sales, 
ammunition sales, pharmaceutical sales, these are high risk, in 
a document you attached and then said that you are not 
associating yourself with the FDIC? Which is true?
    Mr. Delery. Congressman, I don't think that that is a 
complete description of what I said on Tuesday. Our policy in 
this area----
    Mr. Issa. Did you sign the subpoenas?
    Mr. Delery. Yes.
    Mr. Issa. I find your signature on the subpoena.
    Mr. Delery. Yes.
    Mr. Issa. You signed the subpoena. It had----
    Mr. Johnson. Mr. Chairman?
    Mr. Issa. I just want to make one point and I will close.
    Mr. Johnson. I just don't want you to badger the witness.
    Mr. Issa. I don't want to badger, I just want to make a 
point in closing, because I believe the Financial Services 
Committee has a real reason to relook at this gentleman's 
testimony. He signed the subpoenas, he attached the subpoenas, 
specific allegations of high risk, and then before the 
Financial Services Committee he testified that in fact he was 
not associated, and yet it was stapled to it.
    It is not common for subpoenas to have other documents and 
fliers stapled to them. Generally, a subpoena isn't owned by 
the issuing party.
    So I appreciate the gentleman yielding me the additional 
time. I thank the Chairman for his indulgence. And I will have 
a copy of this brought to the gentleman to refresh his memory 
of what he signed.
    Mr. Bachus. Thank you.
    Mr. Johnson. Well, I think it is only fair that he see the 
document that you are seeking to----
    Mr. Issa. And we are going to give a copy to him right now. 
But he signed it. I figure he saw it once.
    Mr. Bachus. He signed it.
    Mr. Johnson. He still deserves to see it.
    Mr. Bachus. Well, but he signed it. I mean, he signed it.
    Mr. Johnson. You mischaracterized what he signed, if he 
signed it, and you are drawing conclusions from it that are 
probably----
    Mr. Issa. Mr. Chairman, the gentleman may be right. I would 
like unanimous consent for the Attorney General to have the 
opportunity to see it.
    Mr. Bachus. Let me ask, is that it right there?
    Do you want to see it?
    I guess we could ask him if in fact is familiar with that.
    Mr. Johnson. Because he has not been able to explain one 
answer in response to the questions.
    Mr. Bachus. Do you have a motion? I mean, we will give our 
witness the opportunity.
    Are you familiar with that document?
    Mr. Delery. Yes, Mr. Chairman. I think it is one of the 
subpoenas, as I indicated.
    Mr. Bachus. Well, just by way of giving you an opportunity 
to explain, did you sign that subpoena?
    Mr. Delery. Yes.
    Mr. Bachus. Okay. And is that list of high-risk categories, 
is that attached to the subpoena?
    Mr. Delery. There is a footnote in one of the attachments 
to the subpoena that makes reference to certain industries or 
businesses that the FDIC may consider to be high risk. And I 
think that goes to the point of the discussion on Tuesday. I 
think if you look at the overall discussion on Tuesday, what I 
explained was that our basis for issuing the subpoenas was to 
pursue specific evidence of unlawful conduct, based on fraud 
against consumers, that we were not seeking to target any 
industry or business acting lawfully.
    And in fact I also said that the participation of a 
financial institution with any particular industry, whether on 
a high-risk list or otherwise, was not a basis for an action 
that we were pursuing. So I think that is what I was saying the 
other day, on Tuesday.
    Mr. Bachus. Actually, if you look on page 1 of that 
attachment, it not only refers to it, it lists different payday 
loans, tobacco sales, firearm sales, pharmaceutical sales, 
magazine subscriptions, sweepstakes. It actually narrows it to 
those categories. So it actually is a more concise list than 
the FDIC's list.
    Mr. Delery. I am not sure, Mr. Chairman, which page you are 
looking at on this point.
    Mr. Bachus. The revised guidance on payment processor 
relationships, dated January 31st, 2012.
    Mr. Delery. Yeah. I think I am looking at that. That is 
part of the FDIC----
    Mr. Bachus. It does say payday or subprime loans, 
pornography. You are not equating the two, are you?
    Mr. Delery. No.
    Mr. Bachus. Online tobacco or firearm sales, pharmaceutical 
sales.
    Mr. Delery. No, Congressman. No, Mr. Chairman. I think what 
we have said is that participating in any particular line of 
business is not evidence of fraud. That is not how we are----
    Mr. Bachus. Do you think it was appropriate to attach a 
list to your subpoena?
    Mr. Delery. I think that, as I understand it, the purpose 
of the attachment was to respond to questions about the issues 
and the potential for fraud that third-party payment party 
processors provide.
    I will come back.
    Mr. Johnson. We will have a second round.
    Mr. Bachus. Yeah, absolutely. And we will give everybody 
plenty of time. But firearm sales, I mean, that is----
    Mr. Issa. Mr. Chairman, one might say beauty is in the eye 
of the beholder. And this Administration considers firearm 
sales, ammunition, as somewhat less beautiful than others. But 
that is the reason that this whole high-risk list under 
Operation Choke Point is so problematic, it makes ideological 
decisions of what is high risk, rather than economic.
    Mr. Johnson. I would like to ask this witness whether or 
not it is true that this list that we are talking about of 
potentially illicit activities that banking institutions should 
be aware of----
    Mr. Bachus. Yeah, yeah, that is right. Illicit activities, 
that is a good word. Payday lending is illicit.
    Mr. Johnson [continuing]. Whether or not that list is 
something that predates the Obama administration. Isn't it a 
fact that the FDIC list of activities that is the subject of 
this discussion is a product of a prior Administration?
    Mr. Bachus. I can answer that. It was 2011, which was 3 
years into the Obama administration.
    Mr. Issa. Mr. Chairman, for the record, in 2008 there was a 
warning on high risk, but there was no specificity. They didn't 
name any entity. So it is very different to say beware of high 
risk.
    Mr. Bachus. And they didn't subpoena.
    Mr. Issa. They didn't subpoena. And if you a 50 percent 
return rate, that is high risk.
    Mr. Bachus. Let me say this, we are going to have a second 
round. So we will go to Mr. Jeffries.
    Mr. Johnson. Well, for the record, the OCC on September the 
1st of 2006 stated specifically listed industries associated 
with high volumes of unauthorized returns in a guidance 
document.
    Mr. Bachus. The Justice Department?
    Mr. Johnson. The OCC. And so these are not Justice 
Department guidelines, even though they were referred to in the 
subpoena.
    Mr. Bachus. But what we are talking about here is a 
subpoena that cost hundreds of thousands of dollars to comply 
with on occasions. And you are all familiar with the term, in 
fact anyone that has ever served on Financial Services knows 
the term de-risking. That is a term that is used by the Justice 
Department. De-risking names that companies like to avoid risk. 
If you send them a subpoena and you list companies that are 
``risky'' firearm sales----
    Mr. Johnson. Not companies, but industries.
    Mr. Bachus. Industries. They are going to avoid risk by 
jettisoning those customers. We all know that. You know that.
    Mr. Johnson. If there is any indicia of illegal activity 
that would derive from their actions.
    Mr. Bachus. Well, getting a subpoena and saying you are 
investigating fraud is a pretty, pretty strong method.
    Mr. Johnson. If you have a reasonable suspicion that a 
fraud has been committed, Mr. Chairman, I think that that is 
what our----
    Mr. Bachus. And one thing, Mr. Delery, one reason that we 
are so concerned about this, normally you go to a court and you 
get a subpoena, a court approves it. This is one of the few 
cases under FIRREA, as you know, where you don't have to get 
the court's approval. You can launch these things and the 
burden of proof is very low.
    Mr. Issa. Mr. Chairman, you are exactly right, and I think 
Mr. Johnson made the point very well, in that if there is 
evidence of fraud, which apparently there may have been in one 
case, then the subpoena would follow, if you will, almost the 
ordinary course, even though it doesn't need a judge.
    In the case of issuing 50, if there is not a specific 
allegation but rather a laundry list of industries that they 
should, if you will, de-risk themselves from, the chilling 
effect on those industries is undeniable.
    Mr. Bachus. Thank you.
    Mr. Jeffries, we are going to recognize you for 5 minutes 
now.
    Mr. Jeffries. Mr. Chairman, I appreciate the----
    Mr. Bachus. Five or 6 minutes, as everybody else has had.
    Mr. Issa. I ask unanimous consent the gentleman have 7 or 8 
minutes.
    Mr. Jeffries. After that colloquy, I was going to suggest 
10 or 15.
    And I would just suggest that I find it ironic, there is a 
lot of concern about lawlessness in this town and in this 
institution. I would just think that regular order should 
prevail on this Subcommittee, particularly a Subcommittee where 
we have got a topic so inflammatory in terms of the subject 
matter, guilty until proven innocent.
    And I guess I am struggling with that topic and reconciling 
its sort of explosive rhetoric with the notion that it seems 
that some Members have come into this Committee already 
presuming the guilt of the Justice Department and its activity 
connected with Operation Choke Point.
    And I guess hypocrisy is not a constraint in this 
institution. I have figured that out over my 18 months. But 
nonetheless, hopefully we can have an exchange where I get some 
understanding as to the facts related to this program and not 
simply political rhetoric directed at the Department of 
Justice.
    Now, it is my understanding that three separate decisions 
by courts in the Southern District of New York have upheld the 
Department of Justice's authority under FIRREA. Is that 
correct?
    Mr. Delery. Congressman, yes, those are referring to 
decisions that recognize the scope of the conduct that FIRREA 
prohibited in order to protect the integrity of the financial 
system.
    Mr. Jeffries. And would it be fair to say that some 
District of New York courts are amongst the most commercially 
sophisticated district courts in the Nation, just given the 
nature of the subject matter that they often find before them?
    Mr. Delery. Yes, I think that that is fair. And I would 
also point out that these are the only three cases that I am 
aware of addressing the question. So all three courts to have 
addressed it have answered the question the same way.
    Mr. Jeffries. Right. And these courts I believe also 
concluded that the phrase affecting a Federally insured 
financial institution includes financial institution that 
engages in fraudulent activity that harms itself. Is that 
correct?
    Mr. Delery. Yes.
    Mr. Jeffries. Okay. And in United States v. Countrywide, I 
believe the court dismissed the defendant's argument that 
Congress did not intend FIRREA to include financial 
institutions that are parties to fraud and in fact 
characterized that position that seems to be supported by some 
members of this panel as utterly unconvincing. Is that correct?
    Mr. Delery. I don't remember the phrase specifically, but I 
do think all three decisions, looking at the text, structure, 
and legislative history of the statute, concluded that it 
provides broad antifraud protection where fraud affects a 
federally insured financial institution.
    Mr. Jeffries. Okay. And I would just note for the record 
that we are preparing to sue the President based on alleged 
lawlessness, and some within the House of Representatives have 
concluded that the Article III court system should be the 
arbiter as to whether this President has engaged in 
``lawlessness.'' And that is fine. That is the prerogative of 
the majority in the House of Representatives.
    But as it relates to this particular subject matter before 
us, as you have pointed out, every single court to look at the 
legality and the Justice Department's legitimacy to move 
forward as it has, has concluded that you are well within the 
boundaries of the law. And in fact, at least in one instance, 
has basically characterized the arguments being made by 
defendants and or their sympathizers as baseless in law.
    And so there are a lot of things that we as a Committee and 
we as a Congress could be focused on. Certainly, I think the 
effort to hold financial institutions accountable for their 
actions and to make sure that consumers in the United States of 
America and those that we represent aren't harmed by reckless 
behavior, seems to be an appropriate thing for the Department 
of Justice to be engaging in, particularly given the fact that 
reckless behavior by financial institutions writ large caused 
the collapse of the economy in 2008, plunging us into the 
greatest economic crisis since the Great Depression.
    And so I support the effort and applaud you, the Justice 
Department, for continuing to do what is necessary in the best 
interest of the American people. And I expect that as 
additional cases wind their way through the court system, they 
will equally be determined to be frivolous.
    And I yield back.
    Mr. Bachus. I am sorry, you yield back?
    Mr. Jeffries. Yield back, with 5 minutes to spare.
    Mr. Bachus. Okay, thank you. That was a shock to me. I 
wasn't expecting that. Thank you, Mr. Jeffries.
    Mr. Holding?
    Mr. Holding. Mr. Chairman, I have had my turn.
    Mr. Bachus. All right, thank you. I guess it is my turn.
    Mr. Delery, in testimony on Tuesday you repeatedly stated 
that this is normal law enforcement initiative, and we are only 
interested in actual fraud. So you have issued 50 subpoenas. Is 
that correct?
    Mr. Delery. That is the ballpark for the number.
    Mr. Bachus. Okay. How many settlements have you procured?
    Mr. Delery. Again, as I indicated, so far there is one case 
that has been resolved; others are ongoing. And obviously some 
of those subpoenas----
    Mr. Bachus. When did you start issuing these subpoenas?
    Mr. Delery. It was in early 2013, so a little more than a 
year ago.
    Mr. Bachus. Eighteen months ago, 17 months ago, 16?
    Mr. Delery. Right.
    Mr. Bachus. And Four Oaks Bank is the only one that--so 
zero lawsuits or prosecutions, right?
    Mr. Delery. Again, there are ongoing both civil and 
criminal investigations.
    Mr. Bachus. Investigations, but no prosecutions.
    Mr. Delery. Not so far.
    Mr. Bachus. Okay. So you have issued 50 subpoenas.
    Mr. Delery. And again, some of the subpoenas related to the 
same matter.
    Mr. Bachus. To the same bank?
    Mr. Delery. Or to seeking information about the same--not 
necessarily to the same bank, but to related organizations or 
institutions that might have information----
    Mr. Bachus. But 50 different financial institutions 
received subpoenas?
    Mr. Delery. I am not sure that that is right. I think it is 
in the ballpark of 50 total.
    Mr. Bachus. The cases you cite, you talk about a 30 to 50 
percent return rate or chargeback. That is pretty doggone high. 
I mean, that would alert anyone to something unusual going on. 
How did you come up with that 30 to 50 percent?
    Mr. Delery. So I referred to the merchants that are 
identified in the Four Oaks complaint. So there were more than 
a dozen merchants that Four Oaks knew about that had a return 
rate of over 30 percent. One was 70 percent?
    Mr. Bachus. Yeah, Wachovia, First Bank of Delaware, Four 
Oaks, I mean they all had return rates of 30 to 50 percent.
    Mr. Delery. Exactly, and Wachovia and First Bank of 
Delaware I think are also good examples, and the payment 
processor that was charged in connection with Wachovia, those 
are the prior cases that are----
    Mr. Bachus. Right. And you have highlighted that. I mean, 
Wachovia, First Bank of Delaware, all had these high return 
rates and chargebacks. And I am acknowledging that ought to be 
a red flag. But I notice your document request has a different 
return rate. It is 3 percent. It says that any customers' 
accounts that experience a return rate of 3 percent or greater 
in any 1-month period. So suppose you had someone that sold 
ammunition, magazine subscriptions, tobacco, firearms, coin 
shops, and they have had one check returned out of 25. That 
would put them under this category.
    Why did you go from 30 to 50 percent to 3 percent? Three 
percent not over a year, but 3 percent in any 1-month period, 
which actually could be 3 checks within 1 month for somebody 
that did 100 checks. They could have three returned checks in a 
year fall under that.
    Mr. Delery. The 3 percent number comes from some of the 
information requests. That is not something that we viewed as a 
threshold for fraud and is not the basis for a charge.
    Mr. Bachus. But in your document request it says, number 6, 
on page 6.
    Mr. Delery. Right. In some of them we asked for information 
about returns over that number which was more than twice the 
average according to the industry groups. That was not intended 
to reflect----
    Mr. Bachus. And some industries are going to have a higher 
return rate. I mean, magazine subscriptions, there is nothing 
necessarily fraudulent about that.
    I guess what I am saying, you are asking financial 
institutions to go through and find out any customer they had 
that had 3 percent of their checks return in 1 month that did 
any of these ``high-risk'' businesses.
    Mr. Delery. I think that in connection with requests that 
we make, we often have a discussion about the scope and what 
information they can provide in the way that a recipient----
    Mr. Bachus. Well, but you asked all of them that. Then they 
have to hire lawyers. Then they have to have these discussions 
with you? And a small payday lender or ammunition seller or 
somebody selling tobacco, I mean, they have got to hire a 
lawyer, they have got to come to you, they have got to come to 
you and say, hey, can we? Do you ever modify that 3 percent?
    Mr. Delery. My understanding is that there were discussions 
with some of the recipients about the scope and, again, what 
information they had that could be provided and what would be 
appropriate. So, again, that is a standard approach in----
    Mr. Bachus. But in fact in 4 it says, documents sufficient 
to identify payment processors or merchants or clients that 
experienced a return rate of 3 percent or greater in any 1-
month period. Don't you think that is pretty low? That is a 
pretty wide net. I mean, that is a pretty wide net, isn't it?
    Mr. Delery. Again, that was a request for information that 
was set at a level that was double the industry average, as I 
understand it.
    Mr. Bachus. But in all your testimony you have highlighted 
companies that had--3 percent is not evidence of fraud, is it?
    Mr. Delery. I agree with that.
    Mr. Bachus. Okay.
    Mr. Delery. And we have not viewed it as that.
    Mr. Bachus. Right.
    Mr. Delery. I thinkit was an effort to find information.
    Mr. Bachus. But you are going down to 3 percent, but you 
admit that 3 percent in 1 month is not evidence of fraud.
    Mr. Delery. Not that amount per se. We don't have a 
absolute threshold for that.
    Mr. Bachus. Okay. Thank you. Well, it is an absolute--I 
mean, it is in your subpoenas, it is 3 percent.
    Mr. Delery. As a request for information, that is correct.
    Mr. Bachus. Well, it is a subpoena, it is a subpoena, it is 
a legal document that the bank has to go out and find all these 
people. You agree that banks like to avoid risk, right?
    Mr. Delery. I mean, that would be my understanding.
    Mr. Bachus. And they avoid it by de-risking. And in this 
case I am not saying you purposefully, personally wanted to 
have these banks jettison these clients, but they are going to 
avoid risk. You send them something, you attach a list of 
different businesses.
    And it is also interesting that this list from the--I 
apologize. That is Rachel at Card Services. I would love for 
you all to go after them.
    The ones that you highlighted actually in this thing you 
attached, and this was a document I guess you all prepared 
because you refer to the FDIC, you just talk about examples. 
And you use tobacco sales, pharmaceutical sales, payday and 
subprime loans, pornography, magazine subscriptions.
    But, General, some that you didn't include were escort 
services or drug paraphernalia, which was on the original list. 
So kind of interesting that Ponzi schemes, pornography, you 
didn't include those, you included firearm sales, ammunition 
sales. Kind of interesting. How did you highlight that over 
pyramid schemes, pornography, or escort services?
    Mr. Delery. So, Congressman, these materials were prepared 
by the FDIC for their own regulatory purposes. And to my 
knowledge, the Department of Justice did not participate in 
choosing the examples.
    Mr. Bachus. When you attach this to your subpoena don't you 
realize that sends a message?
    Mr. Delery. Well, I think that it is important, if I could, 
to clarify again, that doing business with any particular 
industry, whether on a high-risk list of a regulator or not, 
was not the basis for receiving any of the subpoenas. We 
selected the recipients of the subpoenas because we had reason 
to believe that the recipients had evidence of fraud that was 
being conducted by either a financial institution or somebody 
else against a consumer. And the sources of information were 
prior investigations into fraudulent merchants or cooperating 
witnesses.
    Mr. Bachus. Yeah, I think when you issue a subpoena to a 
bank and you say, we are looking for fraud, and you say, 
ammunition sales, firearm sales, payday lending, you have to 
acknowledge that many banks said they have cut these folks 
loose. Tobacco sales.
    Mr. Delery. Congressman, I think it is also important to 
note that we have, in response to questions, taken a number of 
steps to make clear to the industry and to the public what we 
are and are not doing. And so, going back to last year, we have 
met with industry groups, we have communicated with them, we 
have written to Members of Congress to make clear that doing 
business with any particular industry we don't view as evidence 
of fraud.
    And so I do think we take seriously the questions of 
effects on other institutions and have therefore been working 
publicly and with industry to explain what we are and are not 
doing To avoid that kind of result.
    Mr. Bachus. My Democratic colleagues have said they want to 
wrap this up. So let me just simply say to you that this is 
having the effect of shutting down these companies, whether 
that was intended or not. So thank you.
    Mr. Johnson. Mr. Chairman?
    Mr. Bachus. Oh, you have another question. Sure.
    Mr. Johnson. I would ask you to yield to me for a couple of 
questions.
    Mr. Bachus. Sure. I am sorry, two questions, or however 
many questions.
    Mr. Johnson. The National Automated Clearing House Network 
Association, which governs the ACH Network through its self-
regulatory operating rules, has repeatedly referred to banks as 
the gatekeepers of the ACH Network. Do you agree with that 
characterization of banks? Yes or no?
    Mr. Delery. I certainly agree that merchants need access to 
the banking system through a financial institution, if that is 
what that means. I am not familiar with that.
    Mr. Johnson. And the ACH Network connects more than 12,000 
financial institutions while over $40 trillion in value is 
supported annually through the ACH Network representing more 
than 22 billion transactions. And the average rate of returns 
or chargebacks is less than 1.5 percent on the ACH Network. 
Please discuss whether higher return rates trigger certain 
diligence requirements for banks and payment processors.
    Mr. Delery. Well, certainly, Congressman, I think that 
among the evidence that we look to in evaluating fraud, 
particularly high return rates would be in that category as 
reflected in the Four Oaks case. Again, our cases are based on 
situations not just where a financial institution unwittingly 
processes a fraudulent transaction, but where they knowingly 
allow fraudulent merchants to access the payment system through 
their institution or deliberately look the other way against 
evidence of fraud, for example, by having a control in place 
and then turning it off to avoid seeing the answer. And a high 
return rate could be and has been, for example, in the Four 
Oaks case, evidence of repeated fraudulent withdrawals by 
consumers.
    And I do think it is important to remember that at bottom 
these cases are about fraud against consumers. They started by 
noting the endless variety of fraud, different types of scams 
that consumers face all across the country, and by following 
where the money went from those scams to particular banks and 
payment processors that are not following the rules.
    Mr. Johnson. And an indication that the rules are not being 
following is a high rate of return. And the industry standard 
is about 1.5 percent. Isn't that correct?
    Mr. Delery. Yes, that is my understanding.
    Mr. Johnson. And the subpoena that my friends from the 
other side keep referring to puts the institution to which the 
subpoena was directed on notice that a 3 percent return rate is 
something that they should pay attention to.
    Mr. Delery. I guess the way I would say it, Congressman, is 
that some of the subpoenas asked for return rates over 3 
percent, that that would be twice the ordinary average. Again, 
we did not view and do not view that level as evidence of 
fraud. The type of return rates we are talking about in Four 
Oaks, 30-plus, up to 70 percent, would be evidence of fraud.
    Mr. Johnson. A 70 percent return rate would certainly 
authorize a civil action against that particular institution.
    And with that I will----
    Mr. Bachus. And you have no debate for anyone on that.
    And let me close by saying, the Democratic Senator from 
Hawaii, 11 members of Financial Services, Democrats, have 
written expressing their concerns over legitimate businesses 
being shut down.
    And I will close by just, I want to read this to you, just 
to say go back, consider this. Powder Horn Outfitters sells 
shooting, archery, and fishing equipment in Hyannis, 
Massachusetts. It was recently turned down for a loan by its 
longtime bank. Powder Horn's owner says this. He cites 
Operation Choke Point. ``Our loan was turned down not because 
of our credit. We had perfect financials and had been working 
with the same manager for 20 years. It was just because 
question sell guns, and they said that to us specifically, you 
sell guns.'' So it is having that effect.
    Mr. Delery. And, Mr. Chairman, hopefully this hearing, 
among other things, helps to explain our position that that is 
not the basis of the actions that we are bringing. We will 
continue our efforts to make clear what our policy is, which is 
to pursue fraud.
    Mr. Bachus. Hopefully you will take some of our concerns, 
like this 3 percent and others, into consideration, because I 
know that a lot of companies that are losing their bankers. 
Three percent in 1 month. And you said and I have said that in 
certain industries 3 percent is not that unusual. There are 
industries that deal with certain demographics, the average is 
1.5, there are going to be stores in certain areas that are 
going to have 3, 4 percent, particularly in 1 month.
    Consumer fraud is real. Go after that, not after an archery 
store. Thank you.
    Mr. Delery. Thank you.
    Mr. Bachus. And you are dismissed. And we appreciate your 
testimony and your candor.
    Mr. Bachus. Good morning. So this is our second panel, and 
we have an esteemed group of witnesses, starting out with 
Professor Levitin, Adam J. Levitin, Georgetown University Law 
Center.
    Professor Levitin is a professor at Georgetown University. 
That pretty much goes without saying, doesn't it? But he 
specializes in bankruptcy, commercial law, and financial 
regulation. His research focuses on consumer and housing 
finance payments and debt restructuring.
    He currently serves on the Consumer Financial Protection 
Bureau's Consumer Advisory Board, and he has previously served 
as the Bruce W. Nichols Visiting Professor of Law at Harvard 
Law School, and the Robert Zinman Scholar in Residence at the 
American Bankruptcy Institute, and the Special Counsel to the 
Congressional Oversight Panel for the Troubled Asset Relief 
Program.
    Prior to joining the Georgetown faculty, Professor Levitin 
practiced in the Business Finance and Restructuring Department 
of Weil--is that Gotshal?
    Mr. Levitin. Weil, Gotshal. But if you would like to 
curtail the biography. There is no reason everyone here needs 
to hear it.
    Mr. Bachus. Okay. And Weil, Gotshal & Manges?
    Mr. Levitin. That is right.
    Mr. Bachus. LLP. And served as law clerk to the Honorable 
Jane R. Roth on the United States Court of Appeals for the 
Third District.
    Professor Levitin received his JD from Harvard Law School, 
a masters in--is that philosophy?
    Mr. Levitin. It is actually an M.Phil in history.
    Mr. Bachus. Okay.
    Mr. Levitin. You are going to make my mom very proud.
    Mr. Bachus. And an AM from Columbia University, and an AB 
from Harvard College. His scholarship had won several awards, 
including the American Law Institute's Young Scholar's Medal.
    We welcome you.
    Mr. Scott Talbott, senior vice president of government 
affairs at the Electronic Transactions Association. He is 
responsible for developing and executing ETA's Federal and 
State legislative and regulatory strategies on behalf of ETA's 
more than 500 member companies.
    Prior to joining ETA, Mr. Talbott served senior vice 
president for public policy at the Financial Services 
Roundtable where he directed the overall policy strategy, 
managed the daily legislative and regulatory advocacy efforts, 
and directed communications. Mr. Talbott also served as counsel 
to the organization and managed the
    Roundtable's political action committee.
    He has received numerous accolades in his tenure, including 
being named the top lobbyist by the Hill in both 2009 and 2011, 
as well as a winner for his work during the economic collapse 
of 2008 by the Washingtonian magazine.
    In 2010 he appeared in the Oscar winning film ``Inside 
Job.'' So you are a movie star, right? How about that. I didn't 
know that, Scott. Once named NPR's favorite bank lobbyist. He 
is a frequent contributor to both national and international 
media.
    He joined the Roundtable in 1994 after working in the tax 
department's of Arthur Anderson and Ernst & Young. He received 
his BA from Georgetown University cum laude and his JD from 
George Mason University School of Law. So we have two 
Georgetown professors and a student.
    Mr. David H. Thompson, managing partner, Cooper & Kirk. Mr. 
Thompson is a managing partner at that firm and joined the firm 
at its founding. Mr. Thompson has extensive trial and appellate 
experience in a wide range of matters. In commercial matters 
Mr. Thompson has had significant trial experience in litigating 
large claims for plaintiffs and defendants.
    Serving as the de facto general counsel to several private 
companies, Mr. Thompson has developed significant practical 
business experience. Mr. Thompson has taken hundreds of 
depositions of senior executives, expert witnesses, high-
ranking government and university officials, employees, and 
union leaders.
    So you know how much subpoenas can cost, right?
    Mr. Thompson. Yes, sir.
    Mr. Bachus. Thank you.
    Mr. Thompson also has extensive experience in 
constitutional litigation. Mr. Thompson has litigated numerous 
cases involving freedom of speech, civil rights, voting rights, 
taking of property, Second Amendment and separation of powers 
issues.
    Ah, Mr. Thompson also served as an adjunct faculty member 
at Georgetown University Law Center and a visiting professor at 
the University of Georgetown Law School, D.C. campus.
    Mr. Thompson received his AB degree magna cum laude from 
Harvard University and received his JD degree cum laude from 
Harvard Law School.
    All right, we finally have a witness that doesn't have a 
Georgetown, Harvard background here.
    Our last witness is Mr. Peter G. Weinstock?
    Mr. Weinstock. Weinstock, yes, sir.
    Mr. Bachus. Weinstock. A partner at Hunton & Williams LLP. 
His practice focuses on corporate and regulatory representation 
of small to large regional and national financial institution 
franchises.
    During the past several years Peter has devoted substantial 
time to regulatory law enforcement and internal investigations 
of financial institutions. He is co-practice group leader of 
the Financial Institutions Section. He has counseled 
institutions on more than 150 M&A transactions, as well as 
provided representation on security offerings and capital 
planning.
    Mr. Weinstock has authored numerous articles in bank 
publications. His article ``Acquisitions of Failed Banks 
Present Risk and Opportunity'' was honored by the RMA Journal 
in 2011. He has spoken at over 150 banking conferences and 
seminars and is recognized at a top speaker and writer in his 
field.
    He received his BA from State University of New York and 
his J.D. From Duke University School of Law. He is a member of 
the Texas Bar.
    Mr. Weinstock. Better basketball, Mr. Chairman, than 
Georgetown University.
    Mr. Bachus. You did what?
    Mr. Levitin. Object.
    Mr. Weinstock. Better basketball than Georgetown 
University.
    Mr. Bachus. At Duke. That is right. Georgetown is kind of a 
whipping boy for Duke. Recently. All right.
    Each of our witnesses' written statements will be entered 
into the record in its entirety.
    And I am not going to ask you to restrict it just to 5 
minutes. So if you want to take a little longer, don't feel 
rushed. But, anyway, you will see a light will turn red and 
kind of begin to wrap it up then.
    All right. At this time Mr.--Professor Levitin, we will 
start with you.

  TESTIMONY OF ADAM J. LEVITIN, PROFESSOR OF LAW, GEORGETOWN 
                     UNIVERSITY LAW CENTER

    Mr. Levitin. Good morning, Mr. Chairman Bachus, Ranking 
Member Johnson, and Members of the Subcommittee. Thank you for 
inviting me to testify today.
    Criticism of Operation Choke Point reflect a lack of 
understanding of payment systems, in general, and the Automated 
Clearing House, or ACH, payment system in particular.
    Critics of Operation Choke Point claim that the Department 
of Justice has overstepped its legal authority under FIRREA, 
which is predicated on crimes that affect Federally insured 
financial institutions.
    Operation Choke Point's critics claim that consumer frauds 
do not affect financial institutions. They are wrong. When a 
bank transmits a payment request in the ACH system, the bank 
warrants that the request was authorized by the consumer and 
that the requester complies with the laws of the United States.
    This means that banks are vouching for the legitimacy of 
the payments in the ACH system. When payments turn out to be 
unauthorized or illegal, banks have liability. A similar 
situation exists for credit and debit card payments where banks 
are on the hook for chargebacks that merchants are unable or 
unwilling to pay.
    Consumer fraud very much affects Federally insured 
financial institutions. Accordingly, Operation Choke Point is 
squarely within the Department of Justice's statutory authority 
under FIRREA.
    Now, you may hear that the Department of Justice is abusing 
the concept of reputational risk. But I would note that there 
is a single mention of reputational risk in the only complaint 
filed in Operation Choke Point, that--the complaint against 
Four Oaks Bank.
    Whatever issues there are with the concept of reputational 
risk, they do not at this point appear to be part of Operation 
Choke Point, and I think we should be very careful not to 
conflate the Department of Justice's civil investigation of 
specific fraud with other regulatory activity by prudential 
regulators. I think it is important that we keep them separate.
    Critics of Operation Choke Point have also argued that the 
Department of Justice is trying to shut down legitimate, but 
disfavored, industries. This concern is unfounded.
    Operation Choke Point focuses on banks that choose to 
process transactions that they know are fraudulent or that 
willfully ignore clear evidence of fraud. Operation Choke Point 
is about ensuring the banks comply with their anti-money 
laundering operations.
    The basis for the Department of Justice's suit against Four 
Oaks Bank was that Four Oaks did not have reasonable controls 
in place and ignored the presence of really glaring red flags 
indicating illegal activity.
    That said, there are objective measures of industries with 
higher consumer fraud rates, namely, the rate of ACH 
transactions that are returned as unauthorized. When dealing 
with these industries, banks cannot be lax in anti-money 
laundering compliance, and they may need to conduct further 
diligence.
    Now, this does not mean that banks need to look through 
every image on a customer's porn Web site to see if there is 
child pornography or examine every payday loan for a Military 
Lending Act violation or ensure that every firearm sold by a 
customer is not sold to a convicted felon.
    But banks do need to take reasonable steps to determine 
that their customer is doing a legitimate business and these 
are legitimate industries, but banks have to verify what the 
business actually is and not to ignore red flags like high 
unauthorized transaction return rates, high volumes of consumer 
complaints, or false representations of U.S. domiciles, was the 
case in Four Oaks Bank.
    This is not making the banks cops. Instead, it is just 
emphasizing that banks cannot willfully turn a blind eye to 
illegal activity.
    Concerns about spillover effects are also overstated. There 
are anecdotes, but no verified evidence of Operation Choke 
Point affecting legitimate businesses. There are no verified 
cases of banks terminating customer accounts because of 
Operation Choke Point.
    Payday lenders have been having problems with bank account 
terminations for over a decade. In 2006, payday lenders 
testified about this to Congress. This is a problem that 
predates Operation Choke Point.
    But even if Operation Choke Point were resulting in account 
terminations, it is not clear why this would be a problem, per 
se. Compliance with anti-money laundering regulations has 
costs, and that is especially true in dealing with high-risk 
businesses. Some banks may very well rationally decide that it 
isn't worthwhile to serve these businesses.
    For other banks, however, Operation Choke Point is a 
business opportunity. Some of our nearly 7,000 banks will serve 
these high-risk businesses, but they will do so at a higher 
price, and this is just the free market at work.
    In other words, Operation Choke Point might result in 
higher costs of banking services for higher risk merchants. 
There is nothing wrong with that. Banks should be pricing for 
risk, and high-risk merchants should have to pay their own 
freight.
    The thing is high-risk merchants don't want to pay higher 
costs. They would rather be subsidized by getting a pass from 
anti-money laundering laws. And that is what they are here 
asking you for.
    There is no reason that we should be subsidizing high-risk 
businesses like escort services, payday lenders, pornographers, 
or purveyors of racist material. Yet, pressuring the Department 
of Justice to back off Operation Choke Point is an attempt to 
subsidize these high-risk businesses, and it is an attempt to 
do so that comes at the expense of homeland security. Congress 
shouldn't be doing that.
    Operation Choke Point is a legitimate exercise of the 
Department of Justice's authority under FIRREA to investigate 
and prosecute frauds affecting Federally insured financial 
institutions. Banks need to take their anti-money laundering 
responsibilities seriously. Operation Choke Point should be 
applauded, not criticized.
    Thank you.
    [The prepared statement of Mr. Levitin follows:]
    
    
    
    
                               __________
    Mr. Bachus. Thank you.
    Mr. Talbott.

TESTIMONY OF SCOTT TALBOTT, SENIOR VICE PRESIDENT OF GOVERNMENT 
        AFFAIRS, THE ELECTRONIC TRANSACTION ASSOCIATION

    Mr. Talbott. Chairman Bachus, Ranking Member Johnson, 
Members of the Subcommittee, my name is Scott Talbott. I head 
up government affairs for the Electronic Transactions 
Association. ETA appreciates the opportunity to participate in 
the Subcommittee's hearing on the Operation Choke Point.
    ETA is an international trade association representing 
companies primarily involved in all aspects of electronic 
payments. We focus on credit cards, debit cards, and prepaid 
cards. In 2013, we processed over 100 billion transactions for 
about $5 billion worth of goods and services. We are the choke 
in Choke Point.
    In summary, the ETA strongly supports vigorous enforcement 
of existing laws and regulations to prevent fraud, but we 
believe that Operation Choke Point is the wrong execution of 
the right idea.
    The payments industry has always been committed to fraud. 
It is part of what we do. And I am not here to defend 
fraudulent actors.
    Consumers in the United States choose electronic payments 
over cash and checks because they have zero liability for 
fraud. And the cost of that fraud is generally borne by ETA 
members. So ETA members commit massive amounts of resources in 
time and money into detecting and eliminating fraud.
    Every participant in the payment system has developed 
effective due diligence programs to both prevent fraudulent 
actors from accessing the payment system and to terminate 
access from fraud is determined. For example, last year, 5 
percent of merchant applications were denied and ETA members 
terminated more than 10,000 fraudulent merchants.
    As you know, fraud never stops. It never sleeps. And so the 
industry can--must continuously develop new techniques to fight 
it. With the expansion and ubiquitousness of the Internet, that 
creates new challenges. As we build a 10-foot wall, the crooks 
build an 11-foot ladder.
    So, in response, ETA developed new guidelines that we have 
put out for the entire industry, not just ETA members, that 
represent 100 pages of due diligence designed to increase the 
underwriting methods and enhance the ability of the industry in 
this new day and age to detect and eliminate fraud.
    These guidelines are drawn based on existing rules that 
exist both at individual companies and across the payments 
ecosystem, and they also draw from Operation Choke Point. It is 
part of the regulatory environment that we operate in. And so 
we have included many references and similar concepts in the 
guidelines.
    Our concerns with Operation Choke Point are that it 
neglects the payments industry's efforts in this area to detect 
and eliminate fraud. It creates a confrontational approach that 
has a chilling effect on the payments industry's ability and 
willingness to report fraudulent merchants to law enforcement 
mainly because the payments industry believes that they may be 
subject to enforcement action if they do report.
    And this harms three categories of merchants. One, we have 
seen evidence of companies dropping whole classes of merchants. 
We see increased costs for merchants, not just those in high-
risk categories, but across the system. And we see--we could 
see a restriction of access to the payment system in the future 
for new merchants trying to gain it.
    What our main particular focus is with Choke Point, what 
our main concern is, is that regulators and law enforcement 
agencies seem to be changing the long-standing policy of only 
focusing on those payment companies who have actively engaged 
in fraud.
    It appears that OCP is--Operation Choke Point is trying to 
hold law-abiding payment companies liable for something as 
simple as a high return rate or simply providing merchants 
access to the payment system. If this is the case--and this is 
our fear, that the consequences I just mentioned will come to 
bear.
    The Operation Choke Point is not just limited to--as 
everyone knows, to Department of Justice. Other regulators and 
law enforcement agencies appear to be getting into the game or 
adopting similar approaches. For example, ETA members have 
received communications from the FTC with Operation Choke 
Point-like questions involved.
    We believe there are more targeted and more efficient ways 
to detect and eliminate fraud. The payments industry makes a 
better partner than a target in this effort. A cooperative 
approach, like combining self-regulatory efforts, like the 
ETA's guideline, are more likely to strike the right balance 
than the blunt law enforcement action contained in Operation 
Choke Point.
    Another idea is to create a reasonable safe harbor that 
would allow law-abiding payment companies to report fraudulent 
merchants to law enforcement without fear of triggering an 
enforcement action.
    ETA stands ready to work with regulators and law 
enforcement toward our common goal of detecting and eliminating 
fraud.
    Thank you again for the opportunity to testify before the 
Subcommittee, and I welcome any questions you may have.
    [The prepared statement of Mr. Talbott follows:]
    
    
    
                                   __________
    Mr. Bachus. Mr. Thompson.

                TESTIMONY OF DAVID H. THOMPSON, 
             MANAGING PARTNER, COOPER & KIRK, PLLC

    Mr. Thompson. Mr. Chairman, Ranking Member Johnson, and 
Members of the Subcommittee, thank you very much for including 
me on this panel today.
    The Department of Justice, working with the FDIC, the OCC, 
and the Fed have conspired to choke off and strangle legitimate 
businesses by depriving them of access to the financial system. 
Many of the victims of Operation Choke Point are legitimate 
businesses.
    These agencies have undertaken this operation without any 
Congressional authorization and, although they may disapprove 
of these industries, neither the FDIC nor the OCC nor the Fed 
have any power to shut down lawful businesses. They can ensure 
the safety and soundness of banks, but they have no authority 
to condemn wholesale lawful industries.
    To make matters worse, the Department of Justice and the 
banking agencies have failed to provide these law-abiding 
companies with any opportunity to be heard and to defend 
themselves. Instead, they have acted through back-room--a back-
room campaign of veiled threats and regulatory intimidation.
    I come to you today on behalf of the Community Financial 
Services Association of America, the leading trade association 
for short-term credit providers, and its members have been 
targets of Operation Choke Point.
    It is important to understand the mechanism by which these 
agencies have brought about their desired result. The banking 
agencies have targeted disfavored industries by expanding the 
definition of reputational risk. This is the club that they 
yield and wield.
    The agencies had previously and consistently defined the 
concept of reputational risk to refer specifically to the risk 
of a bank's reputation that arose from its own services and its 
own products. A bank's reputation could suffer, in other words, 
if it provided substandard products or services.
    But the agencies had never before held--said that a bank 
needed to assess the reputation of its customers as part of its 
management. Banks ensured their good reputation by meeting the 
needs of their customers, not by judging the popularity of 
their customers.
    This is, of course, not to say that a bank had no need to 
evaluate its customers. A bank is required to have procedures 
in place that ensure that it does not engage in illegal 
activity or facilitate the commission of crimes by its 
customers. This risk is encompassed under the rubric of 
compliance risk, however, not that of reputation risk.
    A bank was never required before to have procedures in 
place to ensure that it did not have customers who, though 
lawfully engaged in demonstrably lawful businesses, might 
simply be unpopular with the public or with the current 
Administration.
    In imposing this new interpretation of reputation risk upon 
the banking industry, the agencies have consistently chosen to 
proceed without providing the public with notice and an 
opportunity to comment, and this is a fatal flaw in this 
regulatory regime.
    It violates the Administrative Procedures Act. It violates 
the due process clause. And these violations have real-world 
consequences. Members of the association I represent have had 
scores of banking relationships severed in the aftermath of 
Operation Choke Point.
    And the key point to understand is that these relationships 
have been long-standing. They have harmoniously coexisted with 
safety and soundness requirements and anti-money laundering 
regimes. And now over 80 banks have severed these 
relationships. Lightening might strike in the same place twice 
on occasion, but it doesn't strike 80 times over and over and 
over again by coincidence.
    And something has changed. It is not the return rates of 
the short-term lending industry. It is not their return--their 
risk profile. There is nothing in the free market that has 
changed. It is Operation Choke Point that has changed. That is 
the driving force behind these decisions.
    Thank you, Mr. Chairman.
    [The prepared statement of Mr. Thompson follows:]
    
    
    
    
                               __________

    Mr. Bachus. Thank you, Mr. Thompson.
    Mr. Weinstock.

                 TESTIMONY OF PETER WEINSTOCK, 
                 PARTNER, HUNTON & WILLIAMS LLP

    Mr. Weinstock. Chairman Bachus, Ranking Member Johnson, and 
Members of the Subcommittee, the U.S. Department of Justice 
created Operation Choke Point ostensibly to combat consumer 
fraud. However, it has become apparent that the program instead 
seeks to irradiate disfavored business.
    To do so, the program uses aspects of FIRREA to threaten 
injunctions and civil penalties against banks that provide 
access to the payment system for certain merchants and payment 
processors to whom they provide services.
    Without access to the banking and payment systems, these 
entities are unlikely to continue operating. This was precisely 
the DOJ's goal from the outset.
    Banks are disassociating with customers engaged in lawful 
behavior, not simply customers whose activities may be 
fraudulent, as bankers try to define the next targets of the 
DOJ's efforts.
    The DOJ even acknowledged the prospects for such parties' 
banking relationships to be collateral damage to its 
initiative.
    With Operation Choke Point, the DOJ is starting from the 
premise that certain lines of business or industries are 
anathema and then working backward to find legal violations.
    Using FIRREA to implement Operation Choke Point, the 
government can issue subpoenas, take depositions, and seek 
civil damages against entities committing wire fraud or mail 
fraud, affecting Federally insured depository institutions. In 
doing so, the DOJ need only meet the lower evidentiary burden 
of proof by a preponderance of the evidence to demonstrate 
fraud.
    The DOJ's objective, however, is not to bring any action 
against those suspected of committing fraud, but to cause banks 
to ``scrutinize their account relationships and, if warranted, 
to terminate fraud-tainted processors and merchants.''
    As a result of the DOJ's use of FIRREA, banks have been 
forced to choose between, at a minimum, incurring significant 
discovery and compliance costs and potentially accepting costly 
penalties, on one hand, or terminating existing relationships 
with processors and merchants, on the other hand, even if they 
are operating lawfully.
    The DOJ has calculated the bank's sensitivity to the costs 
of responding to the DOJ's inquiries, let alone to civil and 
criminal liability and regulatory action. Their goal is to 
cause a bank to ``scrutinize immediately its relationships with 
processors and fraudulent merchants and to take necessary 
action,'' i.e., to cut them off.
    In Operation Choke Point, the determination of whether a 
merchant is fraudulent is determined by the DOJ based on a line 
of business rather than by any adjudication where those who are 
accused are afforded due process.
    DOJ believes that legitimate banks will become aware of 
perhaps unrecognized risks and corrupt banks will be exposed. 
In other words, a bank that does not agree with the DOJ's 
assessment, perhaps based only on return rates and violations 
of State laws which the DOJ concedes is only a red flag of 
potential fraud, will deem to be corrupt and subject to legal 
action.
    Operation Choke Point has had a chilling effect on banks' 
willingness to transact business with processors and merchants 
where the reward cannot compensate enormous costs and potential 
exposure.
    FIRREA was passed in response to the savings and loan 
crisis. The goal of FIRREA was to make those who committed 
outright fraud and insider abuse against depository 
institutions pay the price for those actions. The DOJ is 
clearly stretching the limits of FIRREA in the context of 
Operation Choke Point.
    With the current analysis by the DOJ, intent is turned on 
its head. Instead of using FIRREA to protect banks from fraud, 
the DOJ is prosecuting banks for conduct disfavored in 
businesses that are disfavored using discovery and draconian 
subpoena power. Entities shut out of one bank have little hope 
of establishing a subsequent banking relationship and will 
become defunct without an opportunity to defend themselves.
    While I am not championing the efficacy of payday lending, 
there are undoubtedly some organizations that operate lawfully 
and provide un-bank customers with a service that such 
customers believe is valuable, certainly one less dangerous 
than engaging a loan shark.
    Indeed, a review of the development of Operation Choke 
Point reveals the DOJ's new technique. As noted by internal 
memoranda on Operation Choke Point, the DOJ's primary target is 
the short-term lending industry.
    Brandishing FIRREA as a sword, DOJ chose to go after a 
number of banks that were doing business with third-party 
payment processors to get them to cease providing services to 
those entities.
    DOJ stunningly proposed identifying ten suspect banks for 
analyzing return rate data, among other criteria. However, the 
DOJ's standard for identifying fraud was arbitrary and relied 
almost exclusively on NACHA average return rates and potential 
violations of State law.
    NACHA does not define a 3 percent level. NACHA does have a 
1 percent level for unauthorized transactions as an indicator 
of fraud. NACHA doesn't have a level for not sufficient funds.
    The chilling effect of Operation Choke Point is not limited 
to DOJ actions. Instead, it is partially predicated on the 
notion that reputation risk arises when banks transact business 
with processors and high-risk merchants. What constitutes 
reputational risk, however, is not clearly defined.
    The FDIC issued a financial institution letter that 
explains reputation risk as a risk arising from negative public 
comment and adds any negative publicity involving the third 
party, whether or not the publicity is related to the 
institution's use of the third party, could result in 
reputation risk.
    Sarah Raskin, Federal Reserve Board Governor, explained 
reputation risk in a speech as the risk to enterprise value 
from--to brand recognition and customer loyalty. Raskin further 
added that supervision of banks is necessary in order to 
prevent the accumulation of reputation risk to the extent it 
constitutes a hidden exposure.
    These comments illustrate the vague and subjective standard 
now being wielded by the Federal Government against banks who 
are doing business with disfavored industry. The guidance 
plainly does not distinguish between lawful and fraudulent 
activity.
    Reputational risk is not legal risk. Regulatory authorities 
proffer no standard of how to evaluate whether, as Raskin 
states it, that reputation risk is accumulating and that any 
exposure is material to safety and soundness.
    The OCC and the Fed in the fourth quarter of last year 
issued guidance on third-party risk that requires financial 
institutions to risk-assess their customer base and to engage 
in extensive review of the compliance management systems of 
their customers. In effect, bankers now have to police their 
customers' compliance management systems.
    This goes well beyond the BSA's know-your-customer 
requirements. This gets into the burden on banks to police 
whether customer--disclosures to their customers are deceptive, 
whether customers are engaging in improper activity.
    Basically, they have to police all of their customers' 
activities. What cost is that imposing on third parties? What 
cost when the third parties have to have bank-like compliance 
management systems? And what is that going to do to our 
economy?
    So, undoubtedly, there is a chilling effect going on. 
Bankers are trying to evaluate high-risk customers and then 
determine which of those will be next on the regulatory or 
government list and then terminate them. Bankers are making the 
business decision to de-risk their customer base accordingly.
    Thank you.
    [The prepared statement of Mr. Weinstock follows:]
    
    
    
                 __________
                                   
    Mr. Bachus. Mr. Holding, recognized for questions.
    Mr. Holding. Thank you, Mr. Chairman.
    Mr. Thompson, thank you for your testimony.
    There is a little bit of a discrepancy amongst the panel 
here. In his testimony, Professor Levitin states that there are 
no verified cases of banks terminating accounts in direct 
reaction to Operation Choke Point.
    I heard you testify differently than that. So, if you 
could, please explain where that discrepancy comes from.
    Mr. Thompson. Sure. And perhaps it is definitional in terms 
of what we mean by Operation Choke Point. But what I mean by 
that is the coordinated effort by the Department of Justice, 
the FDIC, the OCC, and the Fed to target certain high-risk 
industries.
    And this is what we saw in that subpoena and the attachment 
to the subpoena. And if that is what we mean by it, we have 
heard numerous instances of banks saying, ``We are getting out 
of''--``We are exiting this relationship,'' relationships that 
often extend over a decade, almost 2 decades.
    And there has been no indication that there was a concern 
about the risk profile, that anything had changed in the risk 
profile of the short-term credit lender. Rather, it was 
regulatory pressure. That is what we are hearing, regulatory 
pressure, and it is clear that it is Operation Choke Point.
    Mr. Holding. And you are in the business of representing 
similarly situated entities on a daily basis. Correct?
    Mr. Thompson. Yes. That is right.
    Mr. Holding. The--you know, talking about these subpoenas, 
again drawing on your experience as a practicing attorney in 
this field, the--take a minute and walk through, you know, what 
happens when a client gets a subpoena like this. You know, what 
is the ripple effect? And, ultimately, at the end of day, you 
know, what does it cost them to respond?
    Mr. Thompson. Well, it is a very significant cost in any 
number of respects. It starts with just answering the subpoena, 
which means retaining lawyers, number one.
    Number two, typically, then these subpoenas are looking for 
emails. The cost of production can be hundreds of thousands of 
dollars just in computer resources to do an email sweep and 
then to produce, depending upon the volume of material that is 
sought.
    And often, of course, the subpoena is a prelude to further 
investigation, which would cost--could cost millions of 
dollars. And then you layer on top of that the bad publicity 
that comes from receiving this, the investigation.
    There is enormous pressure on the institution to make it--
the pain stop. And I suspect, although I don't know, that that 
is one of the reasons we see 50 subpoenas being issued, but 
only one case being--having to be filed, because there is huge 
asymmetric pressure when the government issues a subpoena on a 
recipient to try to make the pain stop.
    Mr. Holding. So if you are a financial institution, I mean, 
you are always looking at the bottom line, doing a cost-benefit 
analysis. Whether you take on a client or retain a client, you 
know, you certainly do a risk analysis as to whether they will 
be able to repay their loans, whether they will be a profitable 
customer.
    But then you add into that--you know, if they fall into one 
of these high-risk categories, as enumerated by the FDIC, the--
you look at that and say, ``You know, it could cost me a lot of 
money to have this person as a client.'' Correct?
    Mr. Thompson. You are absolutely right.
    And it is not limited just to that. Because, as one of the 
panelists--or Members of the Subcommittee indicated earlier, 
regulators have a lot of different ways to apply pressure on a 
financial institution.
    So, yes, you are right. The dollars and cents are huge. The 
negative publicity is very significant. But, also, you want to 
try to stay on the right side of your regulators. And if you 
defy them, they have innumerable ways to get even with you.
    Mr. Holding. Thank you.
    Mr. Chairman, I yield back, in light of the vote.
    Mr. Bachus. Thank you. I appreciate that, Mr. Holding.
    Do you want to go ahead and begin to ask one or two 
questions and then we will break in maybe 2 minutes? We have 3 
minutes left on the floor. Or do you want to come back?
    We will wait.
    We would like to come back. Are any of you all under a time 
restraint?
    All right. We will--there are two votes on the floor?
    Mr. Johnson. That means everybody is on the clock?
    Mr. Bachus. I think that may be probably 30 minutes. Why 
don't we do this. Why don't we come back at 10 till. Is that 
all right? Or 15 till? That will give you a chance to get 
something to eat. We are going to come back at 15 till. 
Probably won't come back. Let's say 20 minutes. 20 minutes.
    Mr. Weinstock. How long do you think we will go from there, 
Mr. Chairman?
    Mr. Bachus. 20 minutes max. We will be out of here by 1:00, 
1:15.
    Mr. Weinstock. Thank you.
    Mr. Bachus. Is that okay?
    Mr. Weinstock. I am not on the clock.
    Mr. Bachus. Oh, no. Okay. So you are not getting paid right 
now.
    Mr. Weinstock. I am here of my own volition.
    Mr. Bachus. We will try to get you out of here pretty 
quick.
    Mr. Weinstock. Thank you, Mr. Chairman.
    Mr. Bachus. Of course, a professor gets paid by teaching 
classes. So he is a little better----
    We will recess at this point.
    [Recess.]
    Mr. Bachus. The Subcommittee will come to order.
    My first question will be for Mr. Weinstock.
    Mr. Weinstock. Yes, sir.
    Mr. Bachus. Well, actually, no. That question has been 
asked. So George asked that question. I just saw where I marked 
it off.
    Mr. Talbott, people might be skeptical of the idea of an 
industry policing itself. Are there any economic incentives 
that explain why one could expect that the payment industry 
would do a good job of fighting fraud?
    Mr. Talbott. Sure. Thank you, Mr. Chairman. Appreciate the 
question.
    Because fraud, in case of credit card or debit card, that 
is visited upon the consumer comes bank to not the consumer--
the network rules prohibit banks or processors from charging 
the customer--because that fraud comes back to the payments 
industry, we have to bear the cost of that fraud.
    We have a direct pecuniary interest ensuring that fraud is 
kept off the system. So in addition to it being good public 
policy, it is--comes directly out of our bottom line. So we 
have every incentive to ensure that fraud stays off the system.
    Mr. Bachus. All right. Thank you.
    Mr. Weinstock. Mr. Chairman, can I add a comment?
    Mr. Bachus. Yes.
    Mr. Weinstock. One thing people don't realize is NACHA 
applies fines very quickly if there are unauthorized 
transactions and the bank can't show proof that the customer 
authorized the transaction.
    After three, four instances, that equals a fine of over six 
figures. So it is not like it is a toothless exercise. If they 
don't pay the fines, they can get kicked out NACHA.
    Mr. Bachus. Okay. Thank you.
    Mr. Levitin. Mr. Chairman, if I may add, I agree with all 
of that. But I think it is important to note that it is--only 
part, not all, of fraud costs come back to industry.
    Because what it--you don't have perfect enforcement going 
on because a lot of consumers will just lump it on a small-
dollar fraud. It is not worth complaining about $10 or $20 that 
are wrongfully debited.
    So when consumers complain, yes, the industry is at risk, 
but consumers often don't complain about small-dollar frauds.
    Mr. Bachus. Professor, same point that we are discussing. 
You did--I think in your testimony you were the one that 
covered the fact that--you said a payday lender is out of 
business if he--out of business or insolvent, the payday 
lender's bank bears the loss, and that that is one reason--
justification, you know, for----
    Mr. Levitin. That's correct.
    Mr. Bachus. They can--but let me ask you this. You then 
went on and said banks already charge those merchants much 
higher fees for banking service precisely because of the risks 
they pose, over on page 11.
    So you--you know, you say that there is some risk, but then 
in another paragraph, you acknowledge that a bank can just set 
a higher fee. And you mention that there are a lot of 
businesses that just have higher return rates, I mean, as a--as 
a matter of just their business. So----
    Mr. Levitin. Sure. Return rates do vary by industry. And it 
is important that we distinguish between absolute return rates 
and return rates because of unauthorized transactions. Not 
every return--ACH return is because of an unauthorized 
transaction.
    Mr. Bachus. Yeah. And I agree with that. But, still, banks 
have an ability to adjust.
    Mr. Levitin. Oh, I agree completely, Mr. Chairman, and that 
is actually, I think, the important point, which is that, if 
Operation Choke Point is imposing higher costs on high-risk 
merchants, there will be some banks--we have got almost 7,000 
banks in the United States; it is far more than any other 
country has--there will be some banks that see this as a 
business opportunity and say, ``Hey, archery store that got 
closed down, come to us. We are going to charge you more, but 
we will take your business. We will do the diligence on you. We 
can get comfortable with you. It is going to just cost you 
more.''
    And the market should correct this. You know, it may not be 
a perfect correction, but we should see a market correction.
    Mr. Bachus. Let me say this to you. You know, I know--I 
notice that you--and you are the witness that was called by 
the--by the Democratic party, you know--I mean, Democratic 
colleague. You actually talked about two or three times that 
justification for this is anti-money laundering.
    Mr. Levitin. I am sorry, Mr. Chairman. I didn't understand.
    Mr. Bachus. You said--you, you know, criticized our 
attempts to hamper the Justice Department's enforcement of 
anti-money laundering law and, you know, you actually say that 
is what they are trying to do, prevent anti-money laundering.
    Because that is the justification for this program. Right?
    Mr. Levitin. I think that is correct, sir. Operation Choke 
Point, if you look at the actual complaint, that is the--you 
know, the--the--it--the problem that was alleged with Four Oaks 
Bank was a failure to essentially know your customer. With the 
Bank Secrecy Act anti-money laundering----
    Mr. Bachus. And that has to do with money laundering.
    Mr. Levitin. That is right. And it is important to 
recognize that, when you have an anti-money laundering problem, 
even if it is from, let's say, a payday lender, that can 
actually implicate much broader things because, if a bank 
doesn't know its customer, it doesn't actually know what that 
transaction is.
    Just because a business says it is a payday lender, it can 
also be, you know, engaged in other business, allowing other 
transactions to be routed and look like they are payday loans.
    Mr. Bachus. Right. Yeah. And, you know--and I mention this 
because that is an argument that we are hearing from some of 
our colleagues.
    You know, you say Operation Choke Point is ultimately an 
anti-money laundering enforcement that requires the banks to 
take their know-your-customer duties seriously.
    And that is--the Justice Department, you know, on one hand, 
has said it is for this reason, but then they said, well, 
actually, it is to prevent money laundering.
    But do--do payday lenders launder a lot of money? Is there 
any evidence of that?
    Mr. Levitin. As to actual money laundering, I don't know of 
any evidence on that. We do know that there is high return 
rates, however.
    Mr. Bachus. Well, yeah. But I am talking about--you know, I 
am talking about money----
    Mr. Levitin. And--well, I think it is important that we 
define what we are talking about with money laundering. Money 
laundering is not limited to narcotics or terrorism. Money 
laundering is just proceeds of any illegal transaction.
    Mr. Bachus. Yeah. Right.
    Mr. Levitin. And to the extent that you have illegal 
transactions going on in any industry, payday loans or what 
have you, then, yes, there can be a money laundering problem.
    Mr. Bachus. Are these hundred-dollar loans? But you said 
there is no evidence that the----
    Mr. Levitin. I don't know of any evidence. I have never 
investigated this.
    Mr. Bachus. Yeah. Right. Okay.
    Mr. Levitin. I would note, though----
    Mr. Bachus. I am sure potential is there for any----
    Mr. Levitin. Of--sure.
    Mr. Bachus [continuing]. By any industry. I mean, you know, 
in fact, people buy cars. One of the primary ways is they go to 
a car dealership. They buy a very expensive car. Then they turn 
around and they sell it. And they deposit the proceeds and they 
launder it that way. But, you know, car dealerships are----
    Mr. Levitin. There is a particular concern, though, in that 
some payday lenders are also money services businesses and they 
are sometimes engaged in doing international remittances. And 
that raises particular money laundering concerns.
    Mr. Bachus. I think the--you know, if you are talking about 
a hundred dollars at a time, it is kind of hard to----
    Mr. Levitin. Well, that--but that is the way to do money 
laundering. It is called smurfing.
    Mr. Bachus. No. No. Actually----
    Mr. Levitin. You do it in small transactions so you don't 
get----
    Mr. Bachus. You know, cars are a $10,000 transaction, I 
think. Money laundering, through--you know, when they do drugs 
to money, they are converting--they are not doing it a hundred 
dollars----
    Mr. Levitin. Actually, I disagree with you on that, sir, 
because banks have--have to file suspicious activity reports 
for anything over $10,000.
    The idea is you keep your--if you want to be a money 
launderer, you keep your transactions small and you don't put 
them at 9,999 because that is also suspicious. You make smaller 
transactions, not necessarily a hundred.
    Mr. Bachus. No. No. I----
    Mr. Levitin. But you break it up into little pieces----
    Mr. Bachus. Maybe 2,000, 3,000. Or you buy--you know, there 
are--people buy appliances and they ship them back--out of the 
country. You know, there is a lot of that.
    But I have seen no--I mean--I have never seen any evidence 
that people are cashing their paychecks--I mean, a paycheck is 
a--that is a--that is not cash.
    They are actually taking a check. And there is no need to 
money-launder that. And they are turning it into cash. They are 
not turning cash into a check.
    So--but, anyway, I--we are--I have done 7 minutes. We 
will--my colleague will do 7. And then we will turn--I just was 
pointing out----
    Mr. Johnson. Okay. Thank you.
    Professor, you are a professor. And you three gentlemen, 
Mr. Talbott, Mr. Thompson, and Mr. Weinstock, are practicing 
lawyers. Is that correct?
    Mr. Talbott. Yes.
    Mr. Thompson. Yes.
    Mr. Talbott. I am a lobbyist----
    Mr. Johnson. You are a lobbyist.
    Mr. Talbott [continuing]. With a law degree.
    Mr. Bachus. He is government affairs.
    Mr. Talbott. I am not apologetic.
    Mr. Bachus. You are government affairs.
    Mr. Johnson. The three of you also have clients; do you 
not?
    Mr. Thompson. Yes. Yes, sir.
    Mr. Bachus. And, Mr. Thompson with Hunton & Williams--oh. I 
am sorry.
    Mr. Weinstock with Hunton & Williams, you have many clients 
in the financial services industry; do you not?
    Mr. Weinstock. Yes.
    Mr. Bachus. And how about you, Mr. Thompson?
    Mr. Thompson. I do not. In the past, I have represented, 
but not at present. I have some.
    Mr. Johnson. And Mr. Talbott?
    Mr. Talbott. Members of the association of ETA are payment 
companies. Some are financial institutions, per se. Others are 
not.
    Mr. Johnson. Okay. And--but, now, Mr. Thompson, you have 
done over 50 depositions. Did I hear that earlier?
    Mr. Thompson. I think it is several hundred, in fact. But 
only two of Members of Congress, Senator Snowe and 
Representative Meehan back in the McCain-Feingold case.
    Mr. Johnson. Okay. And you did that work in connection with 
your job responsibilities where?
    Mr. Thompson. At Cooper & Kirk. I have been there since 
1996.
    Mr. Johnson. And so that law firm does represent clients in 
the financial services industry?
    Mr. Thompson. We have. Yes.
    Mr. Johnson. And so--and I--and I suppose, in a perfect 
world, a perfect corporate world, a perfect free market 
corporate world, a perfect free market Ayn Rand-style world, 
there be no regulations on banks at all.
    Would you agree with me on that, Mr. Talbott?
    Mr. Talbott. Theoretically, if you asked Ayn Rand, I think 
she would answer that question in the positive.
    Mr. Johnson. Well, how about you?
    Mr. Talbott. I think that there is a need in--for some 
regulations some places, financial services probably less so 
than other areas. But there is a value to having some 
regulations.
    Mr. Johnson. Mr. Thompson?
    Mr. Thompson. My clients are not contesting the validity of 
any of the regulations or----
    Mr. Johnson. No. My question is: Would you agree that that 
would be a perfect world for corporations, to not have any 
rules or regulations----
    Mr. Thompson. No.
    Mr. Johnson [continuing]. And they could pretty much self-
regulate?
    Mr. Thompson. No, Congressman. That----
    Mr. Johnson. Is that the kind of world that we want, Mr. 
Weinstock?
    Mr. Weinstock. I never read the book. So I am not exactly 
sure why a Rand-perfect world would be. But I think what we are 
all saying is what is appropriate is balance in regulation.
    Mr. Johnson. Well, now, how can we have reasonable 
regulations if the banking institutions don't want to deal with 
the potential loss of customers because they determine for 
themselves that their reputational risks--that the reputational 
risks are not worth the business and you have to also do more 
oversight, got to do more--the costs of doing business for 
certain businesses is high because of regulation, and you would 
prefer to not have to--for your clients to not have to incur 
those costs. And I understand that.
    But where do we draw the line? Where is regulation 
meaningful and reasonable and in the public interest?
    And so that is a fundamental question I think we have to 
deal with as opposed to an incendiary guilty-until-proven-
innocent study of propriety and legal authority for the Justice 
Department's Operation Choke Point.
    I mean, Operation Choke Point has only resulted in one 
civil action. Subpoenas have been sent out to other 
institutions. There are ongoing investigations.
    But a settlement in a civil case--and we are sitting up 
here wasting, you know, your time bemoaning the fact that your 
clients have to incur costs of doing business.
    I mean, you know, when is the--when do we--who protects the 
consumer, which is the real customer?
    Mr. Weinstock. Can I respond?
    Mr. Johnson. Yes.
    Mr. Weinstock. In terms of the level of regulation, as they 
say in East Texas, if you hang the meat too high, the dogs 
won't jump.
    And the problem for our client base, which they are 
community banks, they are the lifeblood of their local 
communities, is that, if the level of regulation is such that 
they have a duty to police all of their customers, their 
scripts----
    Mr. Johnson. Well, shouldn't that be just a normal cost of 
business, that you do your due diligence and you make sure that 
certain benchmarks are met with enhanced scrutiny, like rate of 
returns in excess of 1.5 percent?
    Isn't it--I mean, isn't that the regulations of your 
industry, Mr. Talbott?
    Mr. Talbott. Yes.
    Mr. Johnson. And so, if--if regulators or the Department of 
Justice notes some benchmarks that have been met which trigger 
suspicion, you all seem to be opposed to DOJ following up on 
that. You just want there to not be a loss of the customer----
    Mr. Weinstock. That is not what we are saying, Congressman.
    Mr. Johnson [continuing]. And you don't want a loss of the 
cost of doing business, and it just seems very Utopian to me.
    Mr. Weinstock. If--in terms of the 1\1/2\ percent, that is 
really a red hearing. That is an average based on lots of 
different NACHA transactions. The DOJ disowned the 3 percent, 
which was just mathematically doubling the 1\1/2\ percent 
average.
    NACHA, which is the agency that calculates the averages, 
never indicated that it is an indicator of fraud. The DOJ took 
it on itself and then at this hearing disowned the 3 percent.
    Unquestionably, banks have an obligation to know their 
customer. Banks are complying with that obligation to know the 
customer.
    Where this is all insidious is if the level of regulation 
and the level of supervision is such where the bankers don't 
believe they can ever chin the bar, they can ever jump and 
catch the meat.
    Then their smart thing to do is to de-risk, cut the 
customer off. And the costs we are talking about are access to 
the lifeblood of an electronic economy.
    Mr. Johnson. Yeah. Well----
    Mr. Bachus. Actually, we did 7 minutes. So it is 8\1/2\. 
You can go ahead, if you have got another question, and then I 
will----
    Mr. Johnson. I just wanted to ask Professor Levitin did he 
have anything he wanted to say in response to what we have 
heard.
    Mr. Levitin. Again, I would just say that I am not sure 
that--I am not sure I would agree with Mr. Weinstock.
    Certainly for some banks they will decide that it is not 
worthwhile serving high-risk customers. They just can't get--
that they are afraid that their compliance costs are just going 
to be too high to get comfortable with it.
    But we have nearly 7,000 banks. Unless we assume that we 
have a real market failure in the banking industry in this 
particular area, there will be banks that will step up and 
serve these high-risk clients.
    They will start specializing in it. They are going to do 
more diligence. It will cost them more. It will cost the 
clients more. It will cost Mr.--and high-risk businesses will 
have to pay more for access to the banking system.
    But that is exactly the way it should be. Parties should 
bear their own risk. If you are imposing costs on the system, 
you should have to internalize them. And I don't think there is 
anything wrong with that.
    Mr. Johnson. Well, I think that would be the way that Ayn 
Rand would want it to be.
    Mr. Levitin. I would just add it is not clear to me that 
markets exist except with regulation. If you try and imagine a 
totally unregulated market, I think that looks like the 
Mogadishu arms bazaar, and I don't think that is the way we 
want our economy to operate.
    Mr. Bachus. Let me start with that. I somewhat--I agree 
with you. I think that the market needs to be regulated.
    That is really why I am just, you know, disturbed about 
payday lenders, short-term lenders, being put out of business. 
Let me explain why. And I think history is a good teacher.
    Mr. Johnson talks about a perfect world. In a perfect 
world, there will be no payday lenders. But there always have 
been. In the South, do you know who the payday lender was in 
many cases?
    Mr. Levitin. It was often the employer.
    Mr. Bachus. It was--no. It was--there were some--some 
occasions where the employer--you are absolutely right. You had 
the company store where people bought things----
    Mr. Levitin. I was thinking of Faulkner, actually. He has 
got Old Man Snopes loaning sawmill workers a dime on Sunday. 
And they are supposed to pay it back with a penny the next 
week.
    Mr. Bachus. That is right.
    Mr. Levitin. Never asked for the dime back. Just keeps 
taking a penny every week.
    Mr. Bachus. And I actually had two employers and they--many 
times was a high interest rate. They don't loan money anymore. 
I mean, I don't know of any--very few cases. You don't have a 
lot of company stores.
    What you do have is you have the sheriff in those counties 
or you have a guy that is just a self-appointed guy that stands 
outside the--used to stand outside the gate when people got 
their paycheck. You know, he--or--you know, he--he was waiting 
to get his money back. During the week, he had loaned at a 50 
percent or a 30 percent.
    A lot of times, though, it was--it was totally unregulated. 
And people got their arms broken. People got their fingers 
mashed. People got beat up. So we--States wanted it regulated, 
and they set rules. And that is the rules we have today.
    So these payday lenders are--you know, if you--if they go 
out of business, you are going to have the guy at the gate 
getting his money back. And if he doesn't get his money back, 
kind of like in the--gambling used to be. You know, when you 
have unregulated gambling, people get--people get hurt, people 
get killed.
    So, really, you shut these down, you are going to have 
people loaning money. And they are going to be unregulated. 
They are not going to answer to anybody. So this isn't about 
regulation. It will be Mogadishu again, like you said, I mean, 
about something else.
    I just say consider that. And you talk to anyone that ran a 
plant in the South, they will tell you there was always a 
payday lender. And--you know, and a lot of times you share for 
the probate judge.
    That is how they made their money. There were other things 
that--they used to make their money on illegal whiskey by 
protecting some people. They were in the protection business.
    Mr. Levitin. Mr. Chairman, I think it is important to note 
that payday loans basically don't make money absent customers 
get stuck in a--in a debt trap.
    Let me illustrate. Online payday lenders buy leads. If you 
go to a Web site looking for a payday loan, that is actually a 
lead-generator's Web site----
    Mr. Bachus. No. I understand.
    Mr. Levitin [continuing]. Get auctioned off.
    Mr. Bachus. Professor, what I am saying, you know, you--in 
a perfect world, I would never argue with you that, you know, 
it--but I would tell you there will always be a payday lender, 
and it will be unregulated or regulated. Those are our two 
choices.
    You know, one thing you do is you talk about Congress 
should not be using its oversight power to subsidize these 
businesses. You say that twice.
    Mr. Levitin. That is correct.
    Mr. Bachus. And you say payday lenders, online gun shops, 
escort services, online gambling parlors--now, they are all 
illegal. That is flat out prohibited.
    Mr. Levitin. Actually, I am not sure that any of those are, 
per se, illegal. There is a small sliver of online gambling----
    Mr. Bachus. Yeah. The wire----
    Mr. Levitin. Similarly, escort services, if they are very 
narrowly only companionship----
    Mr. Bachus. Yeah. But I will just say most of your gambling 
online. You know, it is hard to stop. A lot of them are 
overseas. But purveyors of drug paraphernalia and racist 
material, pornographers that serve no clear public service.
    But, you know, you--when you get into saying that, you are 
equating short-term lenders. I mean, you are making a judgment 
there that--you are equating them to drug purveyors or drug 
paraphernalia. I know you don't intend do that.
    Mr. Levitin. No. No. No. Actually, I think for----
    Mr. Bachus. Or online gun shops.
    Mr. Levitin [continuing]. For the purposes of what I am 
saying, I very much intend--intend that because----
    Mr. Bachus. Okay.
    Mr. Levitin [continuing]. In terms of whether these are 
high-risk merchants or not, from a bank's perspective, it 
doesn't really matter what the ultimate transaction is. It is 
how much risk.
    And the porn Web site and the payday lender, if they are 
high risk, they are high risk. It doesn't--the specifics of the 
industry don't matter. It is high risk.
    Mr. Bachus. But, you know, I think--when you are talking 
about a criminal investigation by the Justice Department, I 
think it matters whether it is a legitimate business or a 
fraudulent business. That is my point.
    Mr. Thompson, FIRREA passed in 1989. It was never used 
until now against payment processors, was it?
    Mr. Thompson. Mr. Chairman, I am not an expert on that 
aspect of FIRREA, but I believe you are correct.
    Mr. Bachus. Yeah.
    Mr. Talbott, do you know.
    Mr. Talbott. Same answer. I think that is right.
    Mr. Bachus. Okay. I think that concludes our hearing today. 
I appreciate all our witnesses. Concludes the hearing.
    Did you have another question.
    Mr. Johnson. No, sir. I do not, Mr. Chairman.
    I just want to, for the record, thank the Chairman for his 
willingness to have these kinds of hearings that are not so 
structured and that--it prevents us from getting down into the 
meat of the matter. And so I want to thank you for----
    Mr. Bachus. Well, as you know, I am retiring after 22 years 
and I was a trial lawyer before I got here. And I don't think I 
could have ever tried a case on a 5-minute rule or even made a 
point, and it--the structure doesn't really lend itself.
    And not in this particular hearing, but in some hearings it 
causes the witness to filibuster by talking about anything but 
answering the questions. But then it also--because Members rush 
and I--I really hate to see Members do this, but they interrupt 
witnesses.
    If the witness wants to give a 2-minute response, they want 
a ``yes'' or ``no'' answer. And that is not always possible. 
You want to explain yourself.
    So you get--you really don't get a complete picture. You 
don't--you don't get--and then you have another witness wants 
to come in on what this witness said, which is good.
    But we--so the 5-minute rule I wish we would--would do 
something about that in certain cases. But I am sure a freshman 
sitting down here wouldn't want that. But we could always start 
at the bottom every other time.
    This concludes today's hearing. As I said, thank you for 
all our witnesses.
    Without objection, all Members will have 5 legislative days 
to submit additional written questions for witnesses or 
additional materials for the record.
    This hearing is adjourned.
    
    [Whereupon, at 1:18 p.m., the Subcommittee was adjourned.]
    
                            A P P E N D I X

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               Material Submitted for the Hearing Record