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

                      THE DEPARTMENT OF JUSTICE'S

                        ``OPERATION CHOKE POINT''



                               BEFORE THE

                       SUBCOMMITTEE ON OVERSIGHT
                           AND INVESTIGATIONS

                                 OF THE


                     U.S. HOUSE OF REPRESENTATIVES


                             SECOND SESSION


                             JULY 15, 2014


       Printed for the use of the Committee on Financial Services

                           Serial No. 113-90


91-154 PDF                     WASHINGTON : 2015 
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                    JEB HENSARLING, Texas, Chairman

GARY G. MILLER, California, Vice     MAXINE WATERS, California, Ranking 
    Chairman                             Member
SPENCER BACHUS, Alabama, Chairman    CAROLYN B. MALONEY, New York
    Emeritus                         NYDIA M. VELAAZQUEZ, New York
PETER T. KING, New York              BRAD SHERMAN, California
EDWARD R. ROYCE, California          GREGORY W. MEEKS, New York
FRANK D. LUCAS, Oklahoma             MICHAEL E. CAPUANO, Massachusetts
SCOTT GARRETT, New Jersey            WM. LACY CLAY, Missouri
PATRICK T. McHENRY, North Carolina   STEPHEN F. LYNCH, Massachusetts
JOHN CAMPBELL, California            DAVID SCOTT, Georgia
MICHELE BACHMANN, Minnesota          AL GREEN, Texas
KEVIN McCARTHY, California           EMANUEL CLEAVER, Missouri
STEVAN PEARCE, New Mexico            GWEN MOORE, Wisconsin
BILL POSEY, Florida                  KEITH ELLISON, Minnesota
    Pennsylvania                     JAMES A. HIMES, Connecticut
LYNN A. WESTMORELAND, Georgia        GARY C. PETERS, Michigan
BLAINE LUETKEMEYER, Missouri         JOHN C. CARNEY, Jr., Delaware
BILL HUIZENGA, Michigan              TERRI A. SEWELL, Alabama
SEAN P. DUFFY, Wisconsin             BILL FOSTER, Illinois
ROBERT HURT, Virginia                DANIEL T. KILDEE, Michigan
STEVE STIVERS, Ohio                  PATRICK MURPHY, Florida
STEPHEN LEE FINCHER, Tennessee       JOHN K. DELANEY, Maryland
MARLIN A. STUTZMAN, Indiana          KYRSTEN SINEMA, Arizona
MICK MULVANEY, South Carolina        JOYCE BEATTY, Ohio
RANDY HULTGREN, Illinois             DENNY HECK, Washington
DENNIS A. ROSS, Florida              STEVEN HORSFORD, Nevada
ANN WAGNER, Missouri
ANDY BARR, Kentucky
TOM COTTON, Arkansas
KEITH J. ROTHFUS, Pennsylvania

                     Shannon McGahn, Staff Director
                    James H. Clinger, Chief Counsel
              Subcommittee on Oversight and Investigations

              PATRICK T. McHENRY, North Carolina, Chairman

MICHAEL G. FITZPATRICK,              AL GREEN, Texas, Ranking Member
    Pennsylvania, Vice Chairman      EMANUEL CLEAVER, Missouri
SPENCER BACHUS, Alabama              KEITH ELLISON, Minnesota
PETER T. KING, New York              CAROLYN B. MALONEY, New York
MICHELE BACHMANN, Minnesota          JOHN K. DELANEY, Maryland
SEAN P. DUFFY, Wisconsin             JOYCE BEATTY, Ohio
STEPHEN LEE FINCHER, Tennessee       DENNY HECK, Washington
RANDY HULTGREN, Illinois             DANIEL T. KILDEE, Michigan
ANN WAGNER, Missouri                 STEVEN HORSFORD, Nevada
ANDY BARR, Kentucky
KEITH J. ROTHFUS, Pennsylvania

                            C O N T E N T S

Hearing held on:
    July 15, 2014................................................     1
    July 15, 2014................................................    37

                         Tuesday, July 15, 2014

Alvarez, Scott G., General Counsel, Board of Governors of the 
  Federal Reserve System.........................................     8
Delery, Hon. Stuart F., Assistant Attorney General, Civil 
  Division, U.S. Department of Justice...........................     6
Osterman, Richard J., Jr., Acting General Counsel, Federal 
  Deposit Insurance Corporation..................................    10
Stipano, Daniel P., Deputy Chief Counsel, Office of the 
  Comptroller of the Currency....................................    12


Prepared statements:
    Alvarez, Scott G.............................................    38
    Delery, Hon. Stuart F........................................    45
    Osterman, Richard J., Jr.....................................    51
    Stipano, Daniel P............................................    60

              Additional Material Submitted for the Record

Capito, Hon. Shelley Moore:
    Written statement of the Third Party Payment Processors 
      Association (TPPPA)........................................    68
Green, Hon. Al:
    USA TODAY article entitled, ``Pots of marijuana cash cause 
      security concerns,'' dated July 13, 2014...................    77
Luetkemeyer, Hon. Blaine:
    Written responses to questions for the record from Hon. 
      Stuart Delery..............................................    80
    Written responses to questions for the record from Richard J. 
      Osterman, Jr...............................................    82
Maloney, Hon. Carolyn:
    Written responses to questions for the record from Scott G. 
      Alvarez....................................................    85

                      THE DEPARTMENT OF JUSTICE'S

                       ``OPERATION CHOKE POINT''


                         Tuesday, July 15, 2014

             U.S. House of Representatives,
                          Subcommittee on Oversight
                                and Investigations,
                           Committee on Financial Services,
                                                   Washington, D.C.
    The subcommittee met, pursuant to notice, at 10:03 a.m., in 
room 2128, Rayburn House Office Building, Hon. Patrick McHenry 
[chairman of the subcommittee] presiding.
    Members present: Representatives McHenry, Fitzpatrick, 
Bachmann, Duffy, Fincher, Wagner, Barr; Green, Cleaver, 
Maloney, Delaney, Beatty, Heck, and Kildee.
    Ex officio present: Representatives Hensarling and Waters.
    Also present: Representatives Garrett and Luetkemeyer.
    Chairman McHenry. The Subcommittee on Oversight and 
Investigations will come to order.
    Without objection, the Chair is authorized to declare a 
recess of the subcommittee at any time. Also, without 
objection, members of the full Financial Services Committee who 
are not members of the Oversight and Investigations 
Subcommittee may participate in today's hearing for the purpose 
of making an opening statement and questioning the witnesses.
    The title of today's subcommittee hearing is, ``The 
Department of Justice's `Operation Choke Point'.'' The Chair 
now recognizes himself for 5 minutes.
    In the spring of 2013, the Department of Justice launched 
what is known as ``Operation Choke Point,'' representing an 
expansive investigation of banks and payment processors with 
the objective of combating consumer fraud by choking out 
fraudsters' access to payment systems.
    This committee values the Department's procedural methods 
of proficiency, identifying and prosecuting fraudsters. And it 
appreciates its effect on our economic prosperity, as well.
    However, equally important to the Federal prosecution of 
alleged fraudsters are lawful methods by which the government 
and regulators identify and investigate those in question.
    For any division of government to seemingly circumvent 
lawful, judicious means of conducting Federal investigations, 
it not only subjects itself to rigorous congressional 
oversight, but it also betrays those whom it seeks to protect. 
And that is the American people.
    Directly contacted from enterprises and individuals, 
Congress has learned that after ``Operation Choke Point's'' 
onset, various lawful businesses were identified, and were 
notified that their bank accounts were being terminated.
    When these legitimate enterprises inquired about this 
sudden termination of their accounts, their banks expressed 
that it was a result of ``regulatory trends'' or ``heightened 
scrutiny,'' and explicitly denied any negative review of the 
account holder's financial risk.
    Upon receiving copies of account termination letters from 
targeted merchants, Members of Congress questioned why banks 
had unexplainably used the cliched teenage break-up excuse, 
``It's not you, it's me.''
    In the last year, to comprehend how ``Operation Choke 
Point's'' targets were identified and how banks were getting 
mixed up, members of this Committee and of the Oversight and 
Government Reform Committee here in the House have written 
letters to regulators and requested documents from the 
Department of Justice.
    From the committee's experience, the Department of Justice 
initially attempted to block congressional oversight and 
investigations of ``Operation Choke Point.'' But the DOJ has 
since provided 854 pages of internal memoranda, e-mail 
communications, and presentations that have provided some 
detail of its investigation.
    The initial findings are quite disturbing. Rather than 
directly investigate merchants for fraudulent activities, the 
Department of Justice subpoenaed banks and payment processors 
of targeted merchants to effectively compel them to choke off 
businesses from accessing the banking system.
    Consequently it seems that ``Operation Choke Point'' may 
have led to banks terminating their relationship with 
unjustifiably named, ``high-risk'' merchants out of fear of 
civil and criminal liability from the Department and other 
financial regulators, as well.
    Equally as troubling, ``Operation Choke Point's'' 
regulatory approach of employing an axe rather than a scalpel 
and informal operations suggests it, as another iteration of 
this Administration's game plan to circumvent the rule of law 
and Congress to achieve ideological objectives.
    Even worse, the Department of Justice and the FDIC have 
blocked the committee from meaningfully understanding 
``Operation Choke Point'' by failing to provide details about 
the program, and financial regulators have even misled this 
committee as to the breadth of their cooperation when engaging 
with banks.
    Even with this much established, the irony is that the full 
role of financial regulators in ``Operation Choke Point'' 
remains a mystery. That is why we had this hearing today.
    But then again, what a congressional inquiry has made clear 
is that this Administration and financial regulators have 
raised serious concerns of collaborated effort to facilitate an 
ideological crusade against industries profiled by the 
government through their abusive threat of launching Federal 
    This is not the intent of the rule of law in our system.
    The Department of Justice may have originally advertised 
``Operation Choke Point'' as an honorable, authentic 
investigation to combat consumer fraud.
    Yet, unfortunately, congressional investigations have begun 
to uncover the questionable legal authority of ``Operation 
Choke Point'' inappropriately compelling banks to serve as the 
moral compass and law enforcement for our market economy.
    This raises serious questions about the motives of and 
threats issued by the Department of Justice and financial 
    It is my hope that today's witnesses will assist this 
committee in better understanding the truth of ``Operation 
Choke Point'' by revealing the demonstrated actions of the 
Department of Justice and the FDIC to determine whether lawful 
businesses were indeed victims of an objectionable government 
    I will now recognize the ranking member of the 
subcommittee, the gentleman from Texas, Mr. Green, for his 
opening statement.
    Mr. Green. Thank you, Mr. Chairman.
    I thank the staff for the outstanding job it has done in 
providing us with intelligence. I would like to also thank the 
witnesses for appearing today.
    Mr. Chairman, we live in a world where financial and 
technological innovations present greater access and 
convenience for the American consumer. Unfortunately, this also 
provides the doer of fraudulent deeds greater opportunities to 
perpetrate crimes on consumers.
    In 2013, the Automated Clearing House processed 
approximately 22 billion transactions worth about $37.8 
    As innovative technologies evolve to benefit consumers, 
innovative methodologies must also evolve to protect consumers. 
Fraud detection and prevention methodologies are good for both 
consumers and businesses. Undetected fraud can bankrupt a 
consumer and put a business out of business.
    Today, we will examine the relationship between banks, 
their business associates known as processors, and the 
consumers. And in so doing, I think it appropriate to use at 
least one very elementary example so as to give some clarity to 
persons who may be watching who are not familiar with this 
    Typically, with a simple example, we would find that a 
person sitting at home is approached by a business that would 
like to have that person make a purchase. Let's assume that 
this is a telemarketer. This telemarketer will present the 
consumer with a product.
    If the consumer makes a purchase, that purchase is handled 
by a processor. A processor would be the company that works 
with the telemarketer. The processor receives the payment. The 
processor will then take the payment and deposit it in a bank. 
That bank then becomes the means by which the payments are paid 
to the telemarketer.
    And once these payments are made, let's assume that the 
consumer concludes that there has been an overcharge. A 
chargeback can occur. The chargeback is called to the attention 
of the bank. The consumer gets redress.
    The question becomes this: Is a bank required, or should a 
bank be required, to keep a record of chargebacks? And if the 
record of chargebacks is maintained, would one incident of a 
chargeback indicate anything more than a mistake? But if 10,000 
chargebacks occur, would that indicate activity? And if 
activity occurs, should activity be investigated?
    And if activity is investigated and is found to be 
fraudulent, should the bank have some responsibility if it knew 
that the activity was occurring but did nothing?
    There are serious questions to be answered. I believe we 
have capable, competent, qualified witnesses here today who can 
help us answer these questions. The question also occurs as to 
whether or not a bank has a duty to perform due diligence as it 
relates to the business associates it has who are doing 
business with other businesses.
    And if it does have the requirement to perform due 
diligence, can that due diligence be outsourced to a processor 
who does business with a telemarketer? And if it is outsourced, 
are there consequences associated with it? What level of due 
diligence must the processor employ? Does it have the same 
level of due diligence placed upon it as the banks? And can a 
lack of due diligence by a processor in some way impact the 
liability of the bank with which it is doing business?
    We really should take a close look at these questions, and 
we really should examine the difference between an incident and 
criminal activity. One occurrence, an incident; thousands of 
occurrences can be concluded to be activity. Should activity be 
investigated? And if so, should the banks provide intelligence 
such that the activity can be appropriately investigated?
    Mr. Chairman, I look forward to hearing the answers to 
these and many other questions from the witnesses that we have 
today. And I will yield back the balance of my time.
    Chairman McHenry. We will now recognize the gentleman from 
Missouri, Mr. Luetkemeyer, for 2 minutes.
    Mr. Luetkemeyer. Thank you, Mr. Chairman, for allowing me 
to participate today.
    ``Operation Choke Point'' takes a new approach to banking 
supervision. If you don't like a given industry, bend your 
authorities and force that industry out of the financial 
services space, making it impossible for it to survive.
    How does it work? DOJ staff who conceived of ``Operation 
Choke Point'' summed it up in a November 5, 2012, memo to Mr. 
Delery: ``Banks are sensitive to the risk of civil and/or 
criminal liability and regulatory action.'' In other words, DOJ 
can intimidate banks into doing what it wants by threatening 
them with subpoenas including with the regulators.
    Since last August, I have met with some of our regulators 
and even one of the witnesses on today's panel. In each of 
those meetings, the regulators agreed that casting a wide net 
and targeting legal industries is inappropriate. But despite 
that sentiment, ``Operation Choke Point'' continues.
    I am troubled that requests I have made for cooperation 
over the past year have fallen on deaf ears. To that end, I 
have taken the step of trying to solve the problem by offering 
a bill, the ``End Operation Choke Point Act,'' under which 
financial institutions will be granted the safe harbor 
necessary to serve legally operating customers--key words: 
legally operating customers.
    Equally important, legislation will ensure that DOJ will 
not be able to act unilaterally in a broad-brush approach in 
attacking legal industries.
    Mr. Chairman, I look forward to the discussion on what I 
find to be an indefensible and irresponsible approach to 
    I yield back.
    Chairman McHenry. We will now recognize the gentlelady from 
Ohio, Mrs. Beatty, for 2 minutes.
    Mrs. Beatty. Thank you, Mr. Chairman, and Mr. Ranking 
Member. And thank you to our witnesses today. You have already 
heard definitions of ``choke point.'' We have actually heard 
some ``thank you's'' to the Department. And then, we have heard 
the axe versus the scalpel.
    Today, we look forward to hearing from you. And Mr. 
Chairman, I think this hearing is quite timely. We also know 
that we are on a parallel track with the House Judiciary 
Committee, which is also looking at this. While ``Operation 
Choke Point'' is a fairly recent undertaking, as you have 
heard, by the DOJ, designed to root out consumer fraud from the 
United States fiscal markets.
    I think today in hearing from you, we need to determine, if 
we go back in history to when we heard we were ``too-big-to-
jail,'' if we should have done more to prosecute. And now we 
are hearing Administration or Department objectives are too 
    So, here is where I am in my opening remarks. Each year, 
consumers, banks, merchants and third-party payment processors 
conduct trillions of dollars of legitimate electronic 
transactions in a safe and efficient manner, maybe because 
oftentimes the DOJ has applied the scalpel to make sure that 
things are tweaked so we are able to protect our consumers.
    Now, where I agree with the Act is that there are bad 
actors and they persist today. Unlicensed lenders make loans 
that violate State usury laws, or out-of-the-country Web sites 
may conduct unlawful online gambling rackets, just as an 
example. When banks or third-party payment processors 
facilitate automatic consumer bank withdrawals that enable 
unlawful activity to occur, it has a devastating impact on the 
lives of those consumers, our communities. And it also affects 
the good actors.
    This hearing is supposed to evaluate ``Operation Choke 
Point'' with an eye towards ensuring that businesses operate 
lawfully and are not denied access to banking services.
    Thank you, Mr. Chairman.
    Chairman McHenry. We will now recognize our witnesses. Our 
first witness is Mr. Stuart Delery, who is the Assistant 
Attorney General for the Civil Division at the U.S. Department 
of Justice. He was sworn in as Assistant Attorney General on 
August 5, 2013. He has led the Division since March of 2012. As 
the Assistant Attorney General, Mr. Delery oversees the largest 
litigating division in the Department of Justice.
    Mr. Delery joined the Department of Justice in January of 
2009 as Chief of Staff and Counselor to the Deputy Assistant 
Attorney General. He later served as an Associate Deputy 
Attorney General. And prior to that, he served as Senior 
Counselor to the Attorney General.
    Mr. Delery graduated from Yale Law School and the 
University of Virginia.
    Our second witness is Mr. Richard Osterman, who is 
currently serving as the Acting General Counsel to the Federal 
Deposit Insurance Corporation. Mr. Osterman is the Deputy 
General Counsel for Litigation Resolution Branches in the Legal 
Division of the FDIC. The branch provides litigation counsel 
for the FDIC and comprehensive legal support for the FDIC's 
resolution receivership functions.
    Mr. Osterman has served as Assistant General Counsel for 
the General Litigation Section, which includes appellate 
litigation and so on and so forth. And prior to that time, he 
was Assistant General Counsel for the receivership operations 
and the litigation sections, which, as we know, were very busy 
during that era.
    He has a B.A. from Swarthmore College and a J.D. from the 
University of Baltimore School of Law.
    Out third witness is Mr. Daniel Stipano, who is the Deputy 
Chief Counsel in the Office of the Comptroller of the Currency. 
He served as Acting Chief Counsel from October 2004 to August 
2005. As Deputy Chief Counsel, Mr. Stipano supervises the OCC's 
enforcement, compliance, litigation, community and consumer law 
and administrative and internal law divisions. He also 
supervises the OCC district council staffs in the OCC's 
southern and western districts. Quite a busy portfolio he has.
    Mr. Stipano received his J.D. from the Marshall-Wythe 
School of Law at the College of William and Mary in 1983. He 
also received a B.A. degree from Union College in 1980.
    And finally, Mr. Scott Alvarez is the General Counsel for 
the Board of Governors of the Federal Reserve System. Mr. 
Alvarez joined the Board in 1981 as a Staff Attorney and became 
a Senior Attorney in 1985. In 1989, Mr. Alvarez was then 
appointed to the Board's official staff as the Assistant 
General Counsel and was named Associate General Counsel in 
1991, and then became General Counsel in 2004.
    He has had quite a distinguished career at the Fed and he 
has worked with Board members and senior staff to develop 
policies and legal positions on domestic banking issues. He has 
been responsible for legal analysis relating to bank 
acquisitions and mergers.
    He earned a B.A. in economics from Princeton University in 
1977 and a J.D. from Georgetown University of Law Center in 
    Thank you for coming back before our subcommittee. You all 
are familiar with the lighting system. Green means go. Yellow 
means hurry up. Red means stop. You will have 5 minutes to 
summarize your opening statements. I would just counsel you 
that these microphones are very directionally sensitive. They 
are the best of modern technology from 2 decades ago, so please 
use them appropriately and bring them very close to your face 
and mouth.
    And we will now recognize Mr. Delery for 5 minutes.


    Mr. Delery. Thank you, Mr. Chairman.
    Chairman McHenry, Ranking Member Green, and members of the 
subcommittee, thank you for inviting me here today. And thank 
you for providing me and the Department the opportunity to 
describe our work that is 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 United States Attorneys' 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 combating fraudulent 
merchants and by following the flow of money from fraudulent 
transactions, the Department has learned that some third-party 
payment processors, which are intermediaries between banks and 
merchants, know that their merchant clients are engaged in 
fraud, and yet continue to process their transactions in 
violation of Federal law.
    Further, our experience in these cases has been that some 
banks, in violation of the law, either know about the fraud 
that they are facilitating or are consciously choosing to look 
the other way. As a result, in November 2012 our attorneys 
proposed a concentrated effort to pursue the fraud committed by 
the banks in paying the processors as a complement to the other 
consumer protection work that we are doing.
    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. This effort is 
sometimes referenced as ``Operation Choke Point.'' One of our 
investigations has now been resolved and provides a useful 
example of our work 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 accountholders, under 
penalty of perjury, that the people whose accounts were being 
charged had not authorized the debits from their accounts.
    Four Oaks 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. Indeed, one merchant had a return rate 
over 70 percent. Four Oaks also had evidence of efforts by 
merchants to conceal their true identities.
    So according to our complaint, despite these and many 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. As the Four Oaks 
bank 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 represent 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.
    Now, 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 
    That is nothing new. And for many years, banking regulators 
have warned banks about the heightened risk to consumers 
associated with third-party payment processors. In some of that 
guidance, the FDIC has explained that although many clients of 
payment processors are reputable merchants, an increasing 
number are not, and should be considered high risk. 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 that is simply doing business with 
a merchant considered high risk is not fraud. So in summary, 
our efforts to protect consumers by pursuing fraudulent bank 
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 knows or it is willfully ignorant to the 
fact that law-breaking merchants are taking money out of 
consumers' accounts, we will take action. So thank you, once 
again, and I look forward to answering the questions that you 
and the members of the subcommittee may have.
    [The prepared statement of Mr. Delery can be found on page 
45 of the appendix.]
    Chairman McHenry. Mr. Alvarez, you are recognized for 5 


    Mr. Alvarez. Chairman McHenry, Ranking Member Green, and 
members of the subcommittee, thank you for the opportunity to 
testify about the Federal Reserve's supervisory activities 
relating to banking organizations and their account 
    The Federal Reserve believes it is important that banking 
organizations provide services to consumers and businesses 
whose activities comply with applicable law. It is equally 
important that banks do not facilitate or participate in the 
illegal activity.
    To this end, Congress, through the Bank Secrecy Act (BSA), 
requires banking organizations to establish and maintain 
programs designed to detect when services provided by the 
organization are being used for illegal purposes. Under the 
BSA, Federal Reserve-regulated institutions, like other 
depository institutions, must have an effective program for 
knowing and performing due diligence on their customers.
    Importantly, banking organizations must identify and report 
known or suspected violations of the BSA and other Federal 
laws, including reporting suspicious transactions related to 
money laundering activity. Criminal prosecutors at the 
Department of Justice and other law enforcement officials have 
direct access to the database that holds these suspicious 
activity reports and use this information to initiate 
    The Federal Reserve and the other Federal banking agencies 
have published an examination manual intended to provide 
practical and flexible guidance to examiners and banking 
organizations regarding acceptable customer due diligence and 
risk mitigation practices as part of an effective BSA program.
    Banking organizations are expected to have a risk 
assessment program that takes a number of factors into account 
in the review of customer relationships, including the 
standards the organization has in place to ensure compliance 
with applicable law, and the relationship that the customer 
seeks with the banking organization.
    The purpose of these policies is to ensure that banking 
organizations provide services to law-abiding customers. The 
decision to establish, limit or terminate a particular customer 
relationship is a decision for the banking organization. It is 
not the Board's policy to discourage banking organizations from 
offering services to any class of law-biding financial services 
    Many of the questions that have arisen with respect to the 
customer due diligence expectations of the Federal banking 
agencies relate to the involvement of non-banks as 
intermediaries or providers of financial services, including 
money services businesses (MSBs) and third-party payment 
processors. Money services businesses provide financial 
services such as check cashing, money remittance, and similar 
payment services. Some MSBs include large, globally active 
companies, while others are small businesses such as gas 
stations and convenience stores offering financial products and 
    By comparison, third-party payment processors are the bank 
customers who provide payment processing services to merchants 
and other entities, such as telemarketers and online 
businesses. Both MSBs and TPPPs engage in transactions with 
individuals and companies who are not direct customers of the 
bank. The Federal Reserve follows an interagency examination 
manual and guidance issued in 2005 by the Federal Banking 
agencies and the Treasury's Financial Crimes Enforcement 
Network (FinCEN), governing account relationships with MSBs. 
That guidance confirms that banking organizations may provide 
banking services to MSBs that operate lawfully.
    The Federal Reserve also follows the interagency 
examination manual and related guidance issued by FinCEN when 
evaluating the procedures banking organizations use to manage 
account relationships with third-party payment processors. The 
objective of this guidance and the Federal Reserve supervisory 
activities is to direct banking organizations to take 
appropriate steps to offer their services to legitimate and 
law-abiding customers and to minimize the risk of facilitating 
money laundering, terrorist financing or other illicit 
    Finally, ``Operation Choke Point'' is an initiative of the 
Department of Justice. The Department of Justice has the sole 
authority to indict or seek criminal fines or other sanctions 
and to criminally prosecute individuals or businesses for their 
    As we have testified previously, the Federal Reserve 
cooperates with the other agencies in various enforcement 
actions, including by providing information in response to 
subpoenas and other requests issued by the Department of 
Justice and the other Federal law enforcement authorities.
    Thank you for the opportunity to present the Federal 
Reserve's view on these important issues, and I am pleased to 
answer any questions you may have.
    [The prepared statement of Mr. Alvarez can be found on page 
38 of the appendix.]
    Chairman McHenry. Mr. Osterman, you are recognized for 5 


    Mr. Osterman. Good morning, Chairman McHenry, Ranking 
Member Green, and members of the subcommittee. I appreciate the 
opportunity to testify today on behalf of the Federal Deposit 
Insurance Corporation (FDIC) on the FDIC's supervisory approach 
regarding insured institutions establishing account 
relationships with third-party payment processors.
    I also will discuss the FDIC's interaction with the 
Department of Justice's consumer fraud initiative, ``Operation 
Choke Point.'' As the primary Federal regulator of State-
chartered financial institutions that are not members of the 
Federal Reserve System, the FDIC is responsible for supervising 
these institutions for adherence with safety-and-soundness 
standards, information-technology requirements, the Bank 
Secrecy Act, other anti-money-laundering laws, and consumer 
protection laws.
    The USA PATRIOT Act, enacted in 2001, added new due-
diligence requirements for banks under the Bank Secrecy Act, 
including requiring banks to establish and maintain a customer 
identification program. The purpose of the program is to enable 
banks to form a reasonable belief that they know the true 
identity of each customer.
    In its most basic form, knowing one's customer serves to 
protect banks from the potential liability and risk of 
providing financial services to an unscrupulous customer, and 
also to help protect the general public against illegal 
activity, including terrorist financing and money laundering, 
since banks are a common gateway to the financial system.
    The vast majority of transactions passing through financial 
institutions and payment processors are legitimate, and 
initiated by reputable merchants. However, certain kinds of 
business transactions or geographic locations may pose greater 
risk for suspicious or illegal activity.
    Where transactions from a customer or merchant client of a 
bank's third-party, payment-processor customer are not 
legitimate, there is a real risk for the bank, because it can 
be held legally responsible for facilitating those activities 
and transactions. Harm to the bank can range from operating 
losses attributable to unanticipated consumer reimbursements, 
to civil or criminal actions for facilitation of violations of 
    As challenging as it can be for financial institutions to 
understand the risks involved in activities of a direct 
customer, the difficulty is magnified when the activities 
involve third parties. Third-party payment processors may have 
relationships with numerous merchant clients for which they 
initiate transactions.
    As the financial services market has become more complex, 
the Federal banking agencies--the Federal Financial 
Institutions Examination Council (FFIEC) and the Financial 
Crimes Enforcement Network (FinCEN)--have issued additional 
guidance on several occasions alerting financial institutions 
to emerging risks, and suggesting mitigation techniques. Most 
recently, in September of last year, the FDIC issued guidance 
that clarifies and reminds institutions of the agency's policy 
on supervisory approach.
    It states that financial institutions that properly manage 
relationships, and effectively mitigate risks, are neither 
prohibited nor discouraged from providing payment-processing 
services to customers, regardless of the customers' business 
models, provided they are operating in compliance with 
applicable State and Federal law.
    The FDIC re-emphasizes policy to address any confusion that 
may have existed about our supervisory approach. We have 
reiterated this policy to our bank supervision managers and 
examiners to ensure that they are following this policy.
    In early 2013, the FDIC became aware that DOJ was 
conducting an investigation into the use of banks and third-
party payment processors to facilitate illegal and fraudulent 
activities. The FDIC has a responsibility to consider the 
potential risks such activities could pose for safety and 
soundness of our institutions.
    We frequently coordinate with other agencies in supervision 
of our institutions. Accordingly, FDIC staff communicated and 
cooperated with DOJ staff involved in ``Operation Choke Point'' 
based on an interest in DOJ's investigation into potential 
illegal activity that may involve FDIC-supervised institutions. 
FDIC attorneys were performing their duties as lawyers for the 
agency in furtherance of the FDIC's mission.
    In conclusion, our supervisory approach focuses on 
assessing whether financial institutions are adequately 
overseeing activities and transactions they process, and 
appropriately managing and mitigating risks. We are not focused 
on particular businesses.
    Each bank must decide the persons and entities with which 
it wants to have a customer or business relationship. Financial 
institutions that properly manage customer relationships, and 
effectively mitigate risks, are neither prohibited nor 
discouraged from providing payment-processor services to 
customers, regardless of the customers' business models, 
provided they are operating in compliance with applicable laws.
    Thank you, and I am happy to respond to the subcommittee's 
questions. Thank you.
    [The prepared statement of Mr. Osterman can be found on 
page 51 of the appendix.]
    Chairman McHenry. And finally, Mr. Stipano.


    Mr. Stipano. Chairman McHenry, Ranking Member Green, and 
members of the subcommittee, thank you for the opportunity to 
appear before you today as the subcommittee reviews the 
Department of Justice's ``Operation Choke Point'' 
    I have spent over 20 years working on Bank Secrecy Act and 
anti-money-laundering issues, and have witnessed many cases 
where banks have been used, wittingly or unwittingly, as 
vehicles for fraud, money laundering, terrorist financing, and 
other illicit activities.
    Ensuring that banks have strong systems and controls in 
place to deter these abuses is an important objective of the 
Office of the Comptroller of the Currency's (OCC's) 
supervision. The OCC is not part of ``Operation Choke Point,'' 
so my testimony today will focus on the OCC's supervisory 
policies and actions.
    However, it is our policy to cooperate with law enforcement 
investigations. And the OCC routinely receives and processes 
requests for information from law enforcement agencies. Some of 
the official requests for information we received from DOJ 
during 2013 were related to ``Operation Choke Point.''
    As the subcommittee is aware, the OCC's primary mission is 
to charter, regulate, and supervise national banks, Federal 
savings associations, and the Federal branches and agencies of 
foreign banks. In carrying out this mission, the OCC requires 
banks to appropriately manage their risks, meet the needs of 
their communities, comply with laws and regulations, and 
provide fair access to financial services and fair treatment to 
    The safety and soundness of an institution, indeed its very 
viability, can be threatened when a bank lacks appropriate risk 
management systems and controls. I have seen firsthand the 
serious consequences for a bank when these controls are 
    A 2008 OCC enforcement action against Wachovia Bank 
illustrates this point. Wachovia failed to properly oversee 
activity in its third-party payment-processor accounts, and 
ignored significant red flags indicating consumer harm.
    Telemarketing customers of the payment processors 
deliberately targeted vulnerable populations, such as the 
elderly, for the sale of products of dubious or no value. The 
telemarketers used high-pressure sales calls to convince these 
consumers to provide their personal checking-account 
    Payment processors then used consumers' account information 
to create checks that were deposited into the payment 
processors' accounts at the bank. The bank received hundreds of 
complaints, and hundreds of thousands of the checks created by 
the payment processors were returned.
    Despite these red flags and clear knowledge that consumers 
were being harmed, the bank failed to properly address the 
situation. As a result of these failures, the OCC cited the 
bank for unsafe or unsound practices, and unfair practices in 
violation of the Federal Trade Commission (FTC) Act, and 
required it to pay approximately $144 million in fines, 
restitution to consumers, and other relief.
    The OCC did not, however, require the bank to cease doing 
business with any third-party payment processors or 
telemarketers. Rather, the OCC's action was focused on 
requiring the bank to remediate specific consumer harm, and to 
establish enhanced risk-management policies in order to 
mitigate the risk of future harm to consumers.
    Currently, there is great concern that banks are 
terminating the accounts of entire categories of customers. And 
some have suggested that regulators are dictating these 
actions. As a general matter, the OCC does not direct banks to 
open, close, or maintain individual accounts, or recommend or 
encourage banks to engage in the wholesale termination of 
categories of customer accounts.
    In rare cases where the bank cannot properly manage the 
risk presented by a customer, or a customer has engaged in 
suspected criminal or other illegal activity, we may order the 
bank, through an enforcement action, to terminate the 
customer's account. We expect banks to assess the risks posed 
by individual customers on a case-by-case basis, and to 
implement appropriate controls to manage their relationships.
    We recognize that the controls banks put in place to manage 
their risks are matters of banker and supervisory judgment. If 
the bar is set too high, it can cause banks to terminate 
accounts of legitimate businesses. However, if the bar is set 
too low, the consequences can be dire, allowing the bank to be 
used to facilitate criminal and other forms of misconduct.
    At the OCC, we strive to take a supervisory approach that 
is reasonable, balanced, and fair, and results in systems and 
controls that are effective in deterring the use of our 
Nation's financial institutions for illicit purposes.
    Thank you, again, for the opportunity to appear before the 
subcommittee today, and I will be happy to answer your 
    [The prepared statement of Mr. Stipano can be found on page 
60 of the appendix.]
    Chairman McHenry. I thank the panel, and I will begin with 
a slide on the screen, if you will all take a look at it as I 
give you some context. This PowerPoint slide was presented at a 
September 2013 conference by financial regulators in the 
Department of Justice for third-party payment processors.
    As you can see, this list includes: ``High Risk Merchants/
Activities.'' Included on that are: ``Firearm Sales, Ammunition 
Sales, and other lines of business.''
    In essence, this is a government hit list of industries 
telling banks to sever ties with these merchants from these 
industries. So, who created this list? That is what I would 
like to ask the panel.
    Mr. Delery, did the Department of Justice create this list?
    Mr. Delery. Mr. Chairman, no. This is not a DOJ list.
    Chairman McHenry. Okay. Mr. Osterman, did the FDIC create 
this list?
    Mr. Osterman. Chairman McHenry, the list was--actually, it 
first came up in the context of a Supervisory Insights Journal 
article that was written, I believe, back in 2011.
    Chairman McHenry. Did the FDIC create this slide for the 
2013 Third-Party Payment Processors Relationships Conference?
    Mr. Osterman. I think that slide would have been on the--I 
believe it was a slide that was used during the conference by 
an FDIC individual.
    Chairman McHenry. Okay. By the FDIC, okay. So to that end, 
why did the FDIC pick out these particular industries for banks 
to consider as high risk?
    Mr. Osterman. It is interesting, because as I said--
    Chairman McHenry. It is interesting, but please tell me 
    Mr. Osterman. Sure. So actually, it is drawn from the 
industry itself. We were asked to provide examples of high-risk 
activities, merchant categories associated with high-risk 
activities, so banks and institutions could know where they 
needed to heighten due diligence.
    And it is really drawing from situations where you are 
dealing with highly regulated entities where certain things may 
be legal in some States and not legal in others. Or where some 
things are prohibited, you have higher incidence of--
    Chairman McHenry. I understand.
    Mr. Osterman. --chargebacks.
    Chairman McHenry. Yes.
    Mr. Osterman. So it is basically--
    Chairman McHenry. Mr. Stipano, to ask--
    Mr. Osterman. --the industry.
    Chairman McHenry. Mr. Stipano, you, as well, are a 
prudential regulator. Do you have a similar list? Does the OCC 
use a similar list for targeting industries?
    Mr. Stipano. No. We do not tell banks with whom to do 
business. Our issue is making sure that banks have systems and 
controls in place to manage the risks that are posed--
    Chairman McHenry. So that is a case-by-case basis?
    Mr. Stipano. Well, no. We would expect all banks to have 
systems and controls to manage their risks.
    Chairman McHenry. No, no, what I am saying is, you will 
target fraudsters on a case-by-case basis, not based on a full 
industry, locking them out from financial services?
    Mr. Stipano. Yes, I think that is--
    Chairman McHenry. Okay. Thank you.
    And so, to continue this questioning, I would go back to 
Mr. Osterman. Do you see the divide here? You can see you have 
put out this list and it says, ``Don't do business.'' That is 
what the banks have heard. ``Don't do business with these full 
lines of industry.''
    Isn't that problematic?
    Mr. Osterman. It has certainly been misinterpreted. And 
that is why we put out guidance in September saying we are not 
saying to banks you can't do business with any entity. It is up 
to you to do business with whomever you want. These industries, 
these merchants have been identified by the payments industry 
as entities that have been--
    Chairman McHenry. Okay, to that end, I will--Mr. Delery, 
you can flip through the binder in front of you, tab 15, just 
so you have context for your e-mail. Two months after this 
presentation, you were told that some banks are exiting high-
risk lines of business, and I am quoting from that e-mail of 
talking points given to you.
    Does the Department of Justice use this list in ``Operation 
Choke Point?''
    Mr. Delery. Congressman, as I indicated before, our 
investigations are focused on specific instances, specific 
evidence of unlawful conduct based on evidence that consumers 
are being defrauded, not participation.
    Chairman McHenry. I hear you, but I am asking you a 
question about the e-mail before you that you received on 
talking points related to ``Operation Choke Point.''
    It uses the same terminology here, high-risk merchants, to 
describe banks exiting that full industry. Is that the 
Department of Justice's stance?
    Mr. Delery. So--
    Chairman McHenry. If the answer is no, it would be helpful 
if you just say no, that is not the Department of Justice's 
stance. I think that will be a satisfactory answer, if it is in 
fact true.
    Mr. Delery. Congressman, no, that is not the Department's 
stance. And we have taken steps in response to concerns that 
have been raised to make clear to the public and to industry 
that we are focused on evidence of particular fraud by 
financial institutions, not participation--
    Chairman McHenry. So the fact that you are given talking 
points that use the exact same terminology from this PowerPoint 
presentation targeting these industries is merely a 
    Mr. Delery. Congressman, I would need to go back and look 
at the context for this. But what I can say is that our policy 
is to, again, focus on fraud where banks and financial 
institutions are knowingly facilitating fraudulent transactions 
or deliberately looking the other way. We are not interested in 
the participation of any particular industry. And participation 
in a lawful business has not been a factor in deciding on any 
of the subpoenas, for example, that I have authorized.
    Chairman McHenry. We will now go the ranking member of the 
full Financial Services Committee, Ms. Waters, for 5 minutes.
    Ms. Waters. Thank you very much, Mr. Chairman. But I am not 
thanking you for holding this hearing. In my estimation, this 
is a little bit ridiculous and a waste of time.
    Let me thank our witnesses here today for doing your job. 
This is exactly what some of us expect you to do. I want you to 
know that many of us are aware of activities that are 
fraudulent that are being perpetrated on the most vulnerable in 
our society. Oftentimes, you have the poorest of communities 
who are the victims of many of these schemes and fraudulent 
    So I am very, very pleased about ``Operation Choke Point.'' 
I want you to be as aggressive as you can possibly be.
    A point of contention is how the Operation is being 
conducted and what methods the Justice Department is using to 
gather information related to fraud. Can you just once and for 
all repeat the legal authority that Justice uses in the 
Financial Institutions Reform, Recovery and Enforcement Act 
(FIRREA) to help protect vulnerable consumers?
    Is there anything new or unique about the investigative or 
procedural methods being used in ``Operation Choke Point?'' 
Where does your authority come from under FIRREA? What would 
the effect be of amending FIRREA to restrict the Department's 
authority to bring these kinds of cases?
    How else do you use FIRREA? What other examples or cases 
can you give where FIRREA has been used?
    We just don't understand why anybody would think that you 
would target legal, lawful businesses? That would be a waste of 
time. It would prove nothing. So could you just please relate 
to some of the points that I am asking, Mr. Delery?
    Mr. Delery. Yes, thank you, Congresswoman. I would be happy 
to respond to some of those points.
    On the question of legal authority, FIRREA is a statute 
that prohibits fraud affecting federally-insured financial 
institutions. It is a powerful tool that the Department uses in 
a wide variety of contexts to prevent fraud in the financial 
system and to maintain the integrity of the financial system.
    So just yesterday, for example, the resolution that was 
announced with respect to Citibank, the $7 billion resolution, 
was based on FIRREA. It is a powerful tool that we use in a 
variety of contexts.
    This set of investigations flows from our longstanding work 
targeting fraud against consumers of all kinds. There is an 
endless variety of scams that affect consumers, and probably 
all of us know a family member or neighbor or coworker who has 
been victimized by consumer fraud.
    One thing that many scams have in common, though, is the 
need for access to the banking system in order to get the money 
out of consumers' accounts. And so, by following the money from 
the investigations of fraudulent merchants, including the 
Wachovia case that Mr. Stipano mentioned earlier, our lawyers 
and our investigative partners realized the roles that some 
payment processors and some banks were playing in knowingly 
facilitating fraud.
    Seeing red flags of fraud, hundreds of complaints, return 
rates of 30, 50, 70 percent demonstrating repeated fraudulent 
transaction, and so as a complement to the work that we do to 
target lottery scams and telemarketing scams of all kinds, we 
have focused these cases on banks and financial institutions 
that are knowingly participating or deliberately turning the 
other way when they see red flags of fraud.
    We believe that is illegal and the Department is committed 
to pursuing that, just as we are committed to pursuing other 
types of fraud.
    Ms. Waters. And I thank you for your work. I was just 
reading about the $7 billion settlement with Citibank.
    Whether we are talking about Citibank or any of the other 
banks, HSBC, et cetera, et cetera, OCC--I have a bill on money 
laundering. And we know that it is, if I have any criticism at 
all, it is that yes, the fines are bigger, but it is not 
enough. Somebody needs to go to jail.
    Somebody needs to go to jail on some of these schemes on 
money laundering and some of the other kinds of high-risk 
activities that you have listed here.
    So, I don't want you to be intimidated by this hearing 
today. I want you to work at this. I want you to go harder at 
it. And Justice Department, let's put somebody in jail for the 
pain and the suffering that some of our consumers experience 
based on some of these schemes and this fraudulent activity.
    I yield back the balance of my time.
    Chairman McHenry. We will now go the vice chairman of the 
subcommittee, Mr. Fitzpatrick of Pennsylvania.
    Mr. Fitzpatrick. I thank the chairman for calling the 
hearing. And I want to associate myself with some of the 
remarks of my colleagues who are also concerned with changing 
Constitutional standards, such as a presumption of innocence, 
which is a bedrock of our rule of law, sometimes using a 
Federal regulator or perhaps pressuring Federal regulators to 
achieve ideological objectives of the Administration. Mr. 
Delery, I am looking at a memo, and I think it is tab number 2 
in the documents before you, dated September 9, 2013. The 
subject or reference line is, ``Operation Choke Point Six-
Months' Status Report.''
    In that memo, the Department of Justice stated that in the 
event that a legitimate business was innocently harmed by 
``Operation Choke Point,'' it should be left to the legitimate 
lenders themselves to prove that they are innocent. Does this 
mean that you are guilty until proven innocent?
    Mr. Delery. No, Congressman. That is not--
    Mr. Fitzpatrick. Let me rephrase it, then. Is it common 
practice at the Department of Justice, generally, and in your 
division that you oversee, in particular, to take the approach 
that if the entities that we are investigating are legitimate, 
that it is up to them, those entities, to prove it?
    Mr. Delery. I think no, and that is not what is happening 
in this context either. If I could explain a little bit about 
how we came to identify the institutions that we are 
investigating, I think that would be helpful.
    This really involved the use of standard law enforcement 
techniques. So we got information from confidential informants. 
We got information from complaints that banks had made or 
customers who had been defrauded had made.
    Mr. Fitzpatrick. Mr. Delery, you are discussing entities 
that you are investigating.
    Mr. Delery. Yes.
    Mr. Fitzpatrick. But is it possible that when you create or 
somebody creates a list of whole industries and then you 
pressure regulators to eliminate or terminate processing 
relationships, payment relationships with those entities, that 
legitimate, law-abiding businesses in this country which employ 
Americans can be hurt, will lose those relationships and 
perhaps can lose their business?
    Is that possible when you use a broad brush?
    Mr. Delery. Congressman, again, I think that this is not a 
situation that involves the use of a broad brush.
    But I do think that we take seriously the concerns that 
have been raised by Members of Congress, and that we have heard 
from industry, and that is why we have committed to taking 
steps to make clear to the public and to industry groups what 
our policy is, that we are investigating specific unlawful 
conduct based on evidence of fraud against consumers and not 
entire industries.
    So, we have written to industry groups. We have met with 
industry groups to make clear what we are not doing. And that 
is something that we will continue to do because I agree, 
Congressman, that it is important that people understand the 
scope of our law enforcement activities and why I am happy--
    Mr. Fitzpatrick. Mr. Delery, you just responded a moment 
ago to the ranking member that this really is about following 
the money. That is what ``Operation Choke Point'' is about. So, 
let's follow the money here. Mr. Delery, what is the Department 
of Justice 3 percent fund?
    Mr. Delery. The 3 percent fund is a fund that is, as I 
understand it, established by statute, and that a certain 3 
percent of recoveries from certain types of cases are put into 
the fund and can be used for other law enforcement activities.
    Mr. Fitzpatrick. In other words, the Department of Justice 
gets a portion of the settlements obtained from initiatives 
like ``Operation Choke Point.'' Is that correct?
    Mr. Delery. I would have to--I am not sure of exactly which 
types of cases lead to recoveries that contribute to the 3 
percent fund. It is not everything that we do. But certainly a 
portion of our affirmative work--
    Mr. Fitzpatrick. Can you respond back to this committee in 
writing within a reasonable period of time as to whether or not 
cases settled through ``Operation Choke Point'' contribute to 
the 3 percent fund?
    Mr. Delery. We can certainly get back to you on that.
    Mr. Fitzpatrick. The American people need to know more 
about how the Department of Justice financially benefits from 
these settlements. So you will commit that you will provide us 
with full financial disclosure. Is that correct?
    Mr. Delery. Certainly, we will answer the question about 
the--to the extent that the Department gets--or the Treasury 
gets a penalty in connection with these cases, whether any part 
of that goes into the 3 percent fund. I just don't know--
    Mr. Fitzpatrick. And you will provide that disclosure back 
to the genesis, to the point where ``Operation Choke Point'' 
was created, all the way back to the beginning?
    Mr. Delery. Certainly, we can; you are asking about 
particular amounts. We can see if we can--we can do that, 
    Mr. Fitzpatrick. I yield back.
    Chairman McHenry. I recognize Mr. Cleaver for 5 minutes.
    Mr. Cleaver. Thank you, Mr. Chairman. Are any of you 
familiar with the Electronic Transactions Association (ETA)?
    Mr. Osterman. Congressman, I am actually--I recall when we 
were here the last time, I think it was Chairman McHenry who 
had indicated that the ETA had put out some guidance in this 
    Mr. Cleaver. Yes. They put out guidance because they were 
concerned about rooting out fraud in the system. Is that your 
understanding of--
    Mr. Osterman. Yes, sir.
    Mr. Cleaver. Okay. So now this high-risk merchant activity 
list that we have seen, this is what I am assuming the American 
bankers used when they wrote the story about this new--or what 
is perceived to be this new operation that is now under way. Is 
this your understanding of how that story got started?
    Mr. Osterman. I think there has certainly been a lot of 
discussion about that list of examples and the concern that 
entities are being targeted, which is simply not true, which is 
why we put out a guidance which says that.
    Mr. Cleaver. But now if the ETA, the Electronic 
Transactions Association, did the same thing except they are 
inside trying to suggest to the banking world some cautions, it 
is essentially the same thing, right?
    Mr. Osterman. As we have said, that list is not a list that 
we made up. It is actually drawn from the industry itself. It 
is examples of situations where there have been high 
chargebacks and consumer complaints and illegal activity.
    Mr. Cleaver. So Mr. Stipano, do you have any idea how long 
this--how long the OCC principles regarding risk management 
have been in place in terms of dealing with bank payment 
    Mr. Stipano. Yes, sir. They go back to at least the mid-
    Mr. Cleaver. Yes. I guess I am trying to figure out why all 
of a sudden something that began back in the 1990s without 
question is now worthy of congressional hearings. I think the 
Lone Ranger and Rin Tin Tin are involved now. What has happened 
to cause this to surface? Was it that this was printed 
someplace, or what has happened?
    Mr. Osterman. I would suggest that partially what has 
happened is an evolution of the financial system. We have seen 
the growth of the Internet. We have seen telemarketing. And so, 
we have seen this just mushrooming of various entities that are 
trying to get access to the financial system. And as a result, 
we are seeing more fraud.
    Mr. Cleaver. Yes, but the point I am making, perhaps 
poorly, is that this has been going on since the--I think the 
early 1990s. The same things we have been talking about on this 
committee, they have been going on since the 1990s. There has 
been an acceleration because of what you just mentioned with 
the advent of the Internet.
    So I don't understand. If anything, we ought to have a 
greater understanding about Treasury and Justice and other 
agencies trying to make sure that consumers don't get hurt any 
further. Is that--am I way out there? Am I wrong, anybody? No, 
I didn't think so.
    The U.S. Consumer Coalition, a new organization, has just 
pledged $5 million to fight this whole process here. And I am 
not sure who they are. I wish we had somebody here from their 
organization to explain why they are spending $5 million to 
fight Federal agencies which are trying to protect consumers.
    That is just a question that floats out there. I don't 
expect anybody to answer that. I yield back the balance of my 
    Chairman McHenry. We will now recognize Mr. Fincher for 5 
    Mr. Fincher. Thank you, Mr. Chairman. I was curious as we 
were getting ready for the hearing today--and I appreciate all 
of the witnesses being here--where the term ``choke point'' 
came from. And the first thing is I looked up the definition. 
It is a term used for military strategy where a geographical 
feature such as a valley, a bridge, or a strait through which 
an armed force is forced to pass is used to greatly decrease 
its combat power.
    Mr. Delery, why did you use--where did ``Choke Point'' come 
from? Why not call it ``Operation Sunshine'' instead of 
``Operation Choke Point?''
    Mr. Delery. Congressman, the name was the name that the 
lawyers who--the career lawyers who proposed this set of cases 
gave to the operation. And I think it refers to the fact that 
in order to obtain money from consumers' banks accounts, 
fraudulent merchants need access to the payment system.
    Mr. Fincher. I have a memorandum here, dated November 5, 
2012, from Joel M. Sweet to you talking about ``Operation Choke 
Point.'' And I guess before I start, the point I am trying to 
make is that this isn't rocket science, but it seems like this 
was political from day one with a term like ``choke point.''
    You may claim to be choking off the payday lenders and 
their business, but really you are choking off constituents and 
folks in my district. The payday lending industry supports 
3,015 jobs in my State. As you may know, I am from Tennessee, 
and the payday loan industry started in Tennessee. In 2011, the 
Tennessee legislature passed legislation that created one of 
the best payday lending regulatory systems in the country. 
Tennessee law prevents rollovers, caps the maximum loan rate at 
$500, and sets a maximum term of loan at 31 days.
    The Deferred Presentment Services Act codified in the 
Tennessee code requires that all payday lenders be licensed 
regardless of the manner of service delivery, including the 
Internet. In 2012, the Tennessee State legislature passed 
reforms that required all online lenders to be licensed with 
the statement.
    Additionally, ``payment instrument'' was defined to mean a 
check, draft, warrant, money order, traveler's check or other 
instrument for payment of money whether or not negotiable, and 
also includes any authorization for electronic payment of 
    Mr. Delery, what is the State of Tennessee--what are they 
doing wrong, that the Justice Department felt the need to step 
in and protect the consumers of Tennessee, when it is clear the 
State has gone to great lengths to do so and is getting it 
    Mr. Delery. Congressman, as we have said publicly on a 
number of occasions, we are not investigating businesses that 
are acting in compliance with State law. And I think that the 
Four Oaks case that I mentioned earlier is maybe the best 
example of what we are looking at. In that case, there were 
particular fraudulent merchants who were engaged in deceptive 
    Mr. Fincher. Do you have any other cases beside that one 
that you always refer to? Give me another example.
    Mr. Delery. I think two others would be the First Bank of 
Delaware case from 2012, which I think--at this point--
    Mr. Fincher. So, three? You have more than three, right?
    Mr. Delery. And Wachovia. We have other ongoing 
investigations, but those are the ones--
    Mr. Fincher. Do you know there have been more complaints in 
Tennessee--consumer complaints against the financial industry, 
there have been more complaints against the banks than there 
have been against the payday loan industry?
    Mr. Delery. I was not aware of that, Congressman.
    Mr. Fincher. I guess my question is, I am from a district 
where the median income is about, I guess--I have it right 
here, I better make sure I get it right--$45,000, something 
like that. And the payday loan industry fills a gap. The 
average loan was about $229, which banks can't make anymore 
because they have been regulated to the point because of 
Washington that they can't make these small-dollar loans and 
make any money off of them.
    So this industry has filled a gap for people, for single 
moms, for people who are struggling to make it from week to 
week. And it seems like from day one, ``Choke Point''--just 
think about it, folks, ``Choke Point''--has been an assault not 
on the payday loan industry, because the trickle-down, as we 
all know, doesn't touch the payday lenders. It ends up hurting 
my folks at home, my constituents.
    So, as we go forward here--my time is up--let's be very 
clear what the intent is. And one day, you may just be trying 
to regulate soft drinks as well, that we can't have too big of 
a soft drink. A government that is big enough to give it to you 
is big enough to take it away from you.
    I yield back, Mr. Chairman.
    Chairman McHenry. We will now recognize Mrs. Maloney for 5 
    Mrs. Maloney. Thank you, Mr. Chairman, and Ranking Member 
Green. And thank you to all of the panelists today. I 
particularly am glad to see Mr. Alvarez. It is rare that you 
appear before this committee. So I want to take the opportunity 
to clarify an issue that is important to the constituency that 
I represent.
    And I refer to the Fed's interpretation of the Collins 
Amendment on insurance. That interpretation, which I understand 
was yours, referred to the Federal Government, was that it did 
not give the Federal Reserve the discretion to tailor capital 
standards for the large insurance companies that it regulates.
    I would like to ask you about a bill that recently passed 
the Senate that addresses this portion of the so-called Collins 
Amendment. Do you think that the language in Senate bill 2270 
solves this problem? In your opinion, do you think that it 
gives the Federal Reserve discretion to tailor capital 
standards for insurance companies?
    Mr. Alvarez. Thank you, Congresswoman. It is good to see 
you again. As you stated, the Collins Amendment puts a floor on 
the Federal Reserve and the other banking agencies' ability to 
tailor capital requirements. It requires that the minimum 
capital requirements for all bank holding companies, including 
insurance companies that own banks or insurance companies that 
own savings--thrifts, as well as anybody designated by the FSOC 
as a significant--as an SIFI, all those institutions have to 
have capital at least at the level that would be the minimum 
level for a bank.
    The bill that has passed the Senate does specifically allow 
the Federal Reserve to adjust that capital requirement for a 
company engaged in the business of insurance. And the Federal 
Reserve will follow whatever the directive is of Congress. If 
Congress chooses to have a floor that is the bank floor, that 
is what we will follow. If Congress chooses to have more 
flexibility for insurance companies, that will be what the 
Federal Reserve will do.
    Mrs. Maloney. Thank you for that clarification. And I have 
a series of other questions that I would like to present in 
writing, for you to get back to the committee on, because I 
have other questions for other witnesses here today.
    I would like to ask Mr. Delery, as the prior speaker 
indicated, there seems to be a lot of confusion about the scope 
of ``Operation Choke Point.'' Can you comment on this? Is 
``Operation Choke Point'' a DOJ task force? Or is it a novel 
enforcement method that the Justice Department is using? How 
would you describe it? What is it? Is it a special project? 
What is ``Operation Choke Point?''
    Mr. Delery. Thank you, Congresswoman, for that question.
    I think the short answer is ``Operation Choke Point'' is a 
set of investigations that were designed to investigate 
evidence of fraud in the banking system that facilitates fraud 
against consumers. That is what it is. It is using established 
legal authorities. Fraud has been illegal for a long time. It 
uses ordinary law enforcement techniques to identify the 
institutions that need to be investigated, like complaints from 
banks, and complaints from consumers who have been victimized, 
information that comes to light in investigations of fraudulent 
merchants which suggests that banks and payment processors were 
knowingly participating.
    So we have taken evidence that we received through standard 
law enforcement practices and have--
    Mrs. Maloney. And this has been going on since the 1990s, 
the prior speaker said?
    Mr. Delery. I think that was a reference to guidance about 
the risks and the payment system that the regulators have 
provided. But--
    Mrs. Maloney. Thank you.
    Mr. Delery. --this particular set of cases arose out of 
cases several years ago.
    Mrs. Maloney. Thank you.
    And I would like to ask Dan Stipano, you said in your 
testimony that in the Wachovia case, the bank had ignored 
significant red flags indicating that consumers were harmed. 
Besides a high number of chargebacks rate, can you describe 
what some of these red flags were?
    Mr. Stipano. Yes, Congresswoman Maloney, I would be happy 
to do that.
    I would like to start with the chargeback rate because they 
were excessively high in the Wachovia case. They were in excess 
of 50 percent. But besides that, other red flags would include 
customer complaints, for example, law enforcement inquiries, 
and also where the money is going. If there are large volumes 
of payments that are heading offshore, that is sometimes a red 
    Mrs. Maloney. Are there different red flags for different 
types of bank customers?
    Mr. Stipano. They can vary depending upon the nature of the 
business involved, yes.
    Chairman McHenry. The gentlelady's time has expired.
    Mrs. Maloney. Thank you.
    Chairman McHenry. We will now go to Mrs. Wagner of Missouri 
for 5 minutes.
    Mrs. Wagner. Thank you, Mr. Chairman.
    And I thank the witnesses for being here.
    Mr. Delery, a major concern with ``Operation Choke Point'' 
is that it harms legitimate businesses. Mr. Fincher just talked 
about the thousands of jobs that have been lost in Tennessee. I 
have also heard from business owners from across Missouri and 
Kansas, the entire region, who say they have had to cut 
thousands of jobs because of ``Choke Point.''
    How would you respond to those concerns, sir?
    Mr. Delery. Thank you for the question. I appreciate the 
opportunity to respond directly. I think I would respond, as we 
have been responding when these concerns have been raised, 
which is to make clear that our investigations are about 
particular evidence of fraud by particular organizations, not 
industries or businesses acting lawfully. And we have attempted 
to communicate that to the public and to businesses in a number 
of ways.
    But I think it is important not to lose sight of what is at 
stake here for consumers. Because consumers, when they are the 
victim of a fraud, face devastating situations when their 
    Mrs. Wagner. Mr. Delery, excuse me, just so that I 
understand things, are you saying that DOJ is dedicated to 
ensuring that ``Operation Choke Point'' does not harm 
legitimate businesses?
    Mr. Delery. Absolutely, certainly, in the exercise of--
    Mrs. Wagner. Mr. Delery, did you receive a memo from your 
consumer protection branch addressed to you entitled, 
``Operation Choke Point, Six-Month Status Report,'' dated 
September 9, 2013?
    Mr. Delery. I believe that I did.
    Mrs. Wagner. You did?
    Mr. Delery. Yes.
    Mrs. Wagner. The report, which I have here, says, and I 
quote: ``Although we recognize the possibility that banks may 
have decided to stop doing business with legitimate lenders, we 
do not believe that such decisions should alter our 
investigative plan.'' Is this DOJ policy, sir?
    Mr. Delery. As I indicated before, our policy is to make 
clear that we are not targeting lawful businesses, and that is 
what we have done so that--
    Mrs. Wagner. Wait a second here. But then, in your 
testimony here today, you said, sir, that DOJ is dedicated to 
ensuring that its efforts to combat fraud do not discourage or 
inhibit the lawful conduct of honest merchants. Yet, at the 
peak of ``Operation Choke Point,'' in a memo sent to you, your 
lawyers recognize that legitimate businesses were in fact being 
harmed, but decided that the ends justified the means.
    Are you saying, sir, that DOJ's policy has changed?
    Mr. Delery. No, Congresswoman. I think if you look at the 
overall context of that document, it makes it clear that the 
goal of--
    Mrs. Wagner. So DOJ policy has not changed? You are still 
targeting legitimate businesses?
    Mr. Delery. No, Congresswoman. Our policy from the 
beginning of the framing of these cases and to today, which we 
have restated publicly, is that we are pursuing evidence of--
    Mrs. Wagner. But your own lawyers have said something 
completely opposite to that in terms of collateral damages and 
going after legitimate businesses, in a sense. And I guess you 
have to break a few eggs in order to make an omelet.
    What is your response to that, sir? There seems to be great 
disparity here.
    Mr. Delery. I think that if you look at the materials that 
have been provided, you will see that the policy and the 
framing of the cases was clear from the beginning. If you look 
at even that one as a whole, that document makes clear that the 
cases were about fighting fraud.
    Mrs. Wagner. Mr. Delery, clearly the DOJ's public 
statements to Congress do not match with its internal 
communications. Now, what will you do to restore the integrity 
to your office and ensure that no more legitimate jobs or 
businesses become collateral damage, so to speak, of 
``Operation Choke Point?''
    Mr. Delery. I think what I will do is what I have done 
since these concerns have been raised, which is to re-
articulate the policy to the public and to the industry and 
internally to make clear that our investigations are focused on 
evidence of specific unlawful conduct that we are investigating 
based on evidence that consumers are being defrauded, not 
entire industries.
    Mrs. Wagner. Sir, are the thousands of jobs lost across the 
country from Missouri to Tennessee just collateral damage to 
the Department of Justice?
    Mr. Delery. I don't view any consequences as collateral 
damage. I think obviously, we take seriously the need to make 
clear what we are and are not doing.
    Mrs. Wagner. You haven't made it clear, sir, because your 
internal communications are completely different than your 
testimony here today. So I am asking you: Has DOJ policy 
changed regarding this?
    Mr. Delery. DOJ policy from the beginning--my policy, which 
I have articulated publicly and internally, is that these cases 
are about fighting evidence of fraud, not conduct of lawful 
businesses. And I will continue to maintain that policy and I 
expect that the managers and supervisors of these cases will 
make sure that it is implemented.
    Mrs. Wagner. Mr. Chairman, I believe my time has expired.
    Chairman McHenry. Mrs. Beatty is recognized for 5 minutes.
    Mrs. Beatty. Thank you, Mr. Chairman, and Mr. Ranking 
    We have heard a lot of questions posed in pretty much the 
same vein. Certainly, as we have been listening today and we 
know that ``Operation Choke Point,'' carried out by the DOJ's 
Civil Division, Consumer Protections Branch, is a series of 
investigations and enforcement acts which are designed, most 
importantly, to protect American consumers from mass market 
    Given that, and I will start with you, Mr. Delery, and the 
questions that you have been attempting to answer, let me try 
to put it in a different vein. What, if any, evidence is there 
that ``Operation Choke Point'' may be having a deterrent effect 
on consumer fraud in the United States?
    Mr. Delery. Certainly, I think that is the hope that we 
have for our law enforcement work in this area and otherwise. 
We, when investigating evidence of fraud, as reflected, for 
example, in the Four Oaks case, when we announce a resolution 
of a case like that and detail the allegations and the evidence 
that we have related to fraud facilitated by a financial 
institution, our expectation is that will have a deterrent 
    We hope that the Citibank resolution that was announced 
yesterday has a deterrent effect on fraud against investors. We 
hope that our cases involving tainted food and medicine have a 
deterrent effect so that other sellers don't make people sick. 
And in this context, we hope that there is a deterrent effect 
for consumer fraud. As these cases continue, we will be looking 
for that.
    Mrs. Beatty. Let me follow up with--because we have heard a 
lot about the third-party payment processors in that process. 
Does the DOJ bring claims against third-party payment 
processors or financial institutions that--let's say, 
unwillingly or accidentally facilitate fraudulent or unlawful 
activities? And if not, kind of outline or describe for us how 
you can be sure of that?
    Mr. Delery. Okay. Thank you, Congresswoman. I appreciate 
the opportunity to address that because I do think it is an 
important issue. Our cases are focused on knowing participation 
in fraudulent activity by a merchant.
    So the bank or the payment processor has information, like 
exorbitant chargeback rates that were discussed earlier, or 
sworn complaints from hundreds of customers or evidence, as was 
the case in the Four Oaks case, evidence that the merchants 
were hiding their identities. We are not disclosing their true 
identities. Or again, in Four Oaks complaints from a State 
attorney general about the conduct.
    So we are dealing with knowing information, not a technical 
violation of regulatory guidance or the unwitting processing of 
a particular transaction. Our subpoenas and our investigations 
are targeted at that kind of evidence we move forward with 
investigations and with actions where we can establish that was 
the case.
    Mrs. Beatty. And lastly, we have been hearing a lot of 
questions by some of my colleagues that, from where I am 
sitting, sounds like that you are willingly going after people 
who are lawfully doing what they are supposed to do. So I am 
sitting here, trying to figure out what would you gain by 
having the DOJ go after people who are lawfully operating to 
put them out of business? So with that in the back of my mind, 
are there any statements you would like to make to respond to 
those allegations that the DOJ's investigatory practices are 
designed to put good companies out of business?
    Mr. Delery. I think the best way for me to respond is to 
say that is not what we are doing. And the best indicator of 
that, I think, are the cases that we have actually brought. So 
the Wachovia case that has been discussed in great detail, 
extensive evidence of actual fraud by the financial 
institution, and that is true for the Four Oaks Bank case that 
I have discussed, and another case called First Bank of 
Delaware from 2012.
    So I think if you look at the track record of the cases 
that we have brought, they demonstrate that we are 
investigating fraud against consumers, which is the goal of 
this work. The goal of this work is to make sure that the hard-
earned earning money in the bank accounts of consumers is not 
drained by fraudulent merchants with the cooperation of a 
financial institution. That is what these cases are about.
    Mrs. Beatty. Thank you very much. Thank you, Mr. Chairman.
    Chairman McHenry. We will now go to the gentleman from 
Wisconsin, Mr. Duffy.
    Mr. Duffy. Mr. Delery, would you just walk me through the 
process and how you decide when to issue subpoenas for 
fraudulent activity? And if you could do it quickly, that would 
be wonderful.
    Mr. Delery. I'm sorry, how we decide--
    Mr. Duffy. Yes.
    Mr. Delery. On the--certainly, I think it is based on 
standard law enforcement approaches. So looking at information 
that we have obtained in one investigation that suggests that 
another party is involved in law enforcement activity.
    Mr. Duffy. You investigate, you get complaints, and you 
make a determination that there is potentially fraudulent 
activity, right?
    Mr. Delery. And then continue to seek more information if 
that makes sense.
    Mr. Duffy. And then when you have enough information, you 
send a subpoena to the banks, correct?
    Mr. Delery. Yes. When we have reason to believe that there 
is fraudulent activity, we--
    Mr. Duffy. So when you have reason to believe, you send a 
subpoena out?
    Mr. Delery. Right.
    Mr. Duffy. And is it pretty fair to say, Mr. Osterman, that 
when these banks receive a subpoena from DOJ, they cease to do 
business with the third-party payers or with the payday 
lenders? Is that fair to say?
    Mr. Osterman. I don't know if that is fair to say. I can't 
speak for the banks, but the subpoena is asking you for 
documents. If the bank is operating lawfully and the third-
party payment processor is acting lawfully there, you have 
nothing to be concerned about.
    Mr. Duffy. Okay. Great. So--
    Mr. Osterman. The reason why they wouldn't--
    Mr. Duffy. So, subpoenas are brought. You continue in your 
investigation. You have referenced, what, three cases in which 
you have brought a suit against banks, right? Four Oaks being 
one of them?
    Mr. Delery. Four Oaks, yes, is one of them.
    Mr. Duffy. So I am interested not in--because you keep 
talking about fraud in the banking system, fraudulent 
merchants. Are you bringing cases at the DOJ against the 
fraudsters? Are you bringing cases against the third-party 
payer, as you are bringing cases against the payday lenders?
    Mr. Delery. I think--
    Mr. Duffy. No, no. Are you bringing cases? Answer my 
question. Are you bringing cases against the third-party payers 
and the payday lenders?
    Mr. Delery. We are investigating--
    Mr. Duffy. No. So you haven't brought cases against them. 
That is my point.
    Mr. Delery. I have--
    Mr. Duffy. So who does--you have come in here and you have 
said, ``Listen, we have fraudsters. They have committed 
fraud.'' Who has determined fraud? You are an attorney at the 
DOJ. Has there been due process? Has there been a hearing? Has 
there been an adjudication of fraud? No. You have come in here 
and said, ``We have fraudsters across the country from whom we 
are protecting America.''
    There is no judicial determination of fraud. It is that we 
have a bureaucrat in the DOJ who says, ``I think it is fraud. 
And so, I am going to shut down a legitimate business.'' Am I 
    Mr. Delery. Yes, Congressman. I disagree with that summary 
of what we are doing and I think--
    Mr. Duffy. Then the question is, how many dispositions have 
you had from a court that these third-party payers or a payday 
lender has committed fraud, how many?
    Mr. Delery. So a number--
    Mr. Duffy. How many?
    Mr. Delery. So a number--I believe that they are--
    Mr. Duffy. The answer is zero, isn't it?
    Mr. Delery. I think, no. In connection with the Wachovia 
case, the third-party processor was also reviewed--
    Mr. Duffy. You don't even know. You prepared how long for 
this hearing and you can't tell me how many have been 
adjudicated fraudulent. And you have come in and you have told 
us, with a straight face, and a straight eye, that there is 
fraud and that you are protecting the American people. I am 
going to put up the list of high-risk merchants, so you can go 
after payday lenders, which--listen, there is no love for 
payday lenders, but the system that you are using is of 
    You can go after payday lenders. You might say, ``Well, 
listen, high-risk merchants--they include firearms dealers, 
they include ammo manufacturers, right? You can go after all of 
them to protect banks. And so can Mr. Osterman at the FDIC.
    I think I was listening, and we heard that highly regulated 
industries that do business across State lines or have 
different regulations in different States. Another one that 
could be on this list if the Administration changes--could 
Planned Parenthood and could the abortion issue be on that 
list? I am not saying it should be, but who is to say that they 
couldn't get into a bureaucratic scheme to shut down legitimate 
    I look at Colorado. You have the DOJ bending over backwards 
to make rules work so drug dealers selling marijuana can 
actually bank. But here on the list, you have tobacco sales as 
high-risk merchants.
    Our concern is, we have a Federal Government that is out of 
control. And we have bureaucrats who think they can get a swift 
idea and impose the heavy hand of government on legitimate 
businesses that have had no adjudication of fraud. But you come 
in here and you say, ``Fraudulent, fraudulent, fraudulent,'' 
and you haven't proved it at all.
    I yield back.
    Chairman McHenry. All right.
    The gentleman from Washington, Mr. Heck, is recognized for 
5 minutes.
    Mr. Heck. Thank you, Mr. Chairman. I want to also thank the 
gentleman from Wisconsin for the seamless segue to my line of 
inquiry. Mr. Osterman, I had intended to ask you about 
``Operation Choke Point.'' But then last night, with my 12-
hour-old edition of USA Today, I opened it up, and there on 
page one was an article that was entitled, ``Pots of Marijuana 
Cash Cause Security Concerns.'' Among other things indicated in 
this article is a security expert saying about marijuana 
businesses in States where it has been legalized, either for 
medical use or for adult recreational use, ``Some people walk 
in with shoeboxes full of cash. Some people walk in with locked 
briefcases. We have had people bring it in buckets. The vast, 
vast cash flows are a clear come-on for criminals.''
    And, finally, you are effectively creating a magnet for 
crime. I have been very concerned about this public safety 
issue for some time. That is why I was pleased last August when 
the Department of Justice did, in fact, in the now-famous Cole 
Memorandum, set forth its conditions for standing down a 
prosecutorial action--remind you that the two top criteria are 
preventing marijuana from getting into the hands of children, 
and preventing cash from getting into the hands of gangs. And 
that was followed in February of this year--a wonderful 
Valentine's Day--by guidance from the Financial Crimes 
Enforcement Network, in which they indicated the basis on which 
they would not seek follow-up action.
    Both of these effectively create, I guess, kind of a safe 
harbor, if the terms and conditions are followed. And the 
spirit of those terms and conditions, I think--although there 
are many--with the Department of Justice, it is those eight 
terms and conditions. And with FinCEN, it gets into the 
suspicious activity reports and what recording requirements are 
required. But the essence of them, really, is public safety. 
The essence of them--and I am going to repeat myself, because I 
think it is so very important--is to keep marijuana out of the 
hands of children, and keep cash out of the hands of the gangs 
and cartels.
    Mr. Osterman, you stop short in your follow-up and 
implementation of this. And I guess my question really is, 
what, if anything, can you say today to give confidence to 
banks and credit unions that they can provide banking services 
to legally constituted legitimate marijuana businesses, without 
the threat that your agency will penalize them, threaten their 
deposit insurance, or whatever, or force them to close their 
accounts? Keeping in mind that this is first and foremost a 
public safety issue.
    Mr. Osterman. Congressman, the Cole Memorandum, which you 
referenced, as well as the FinCEN guidance, I think is very 
helpful. And we have actually told our examiners, when they are 
examining institutions, to ensure that those institutions are 
in compliance with those guidelines. And we have actually 
provided a letter to Washington State banking authorities to 
that effect. And I believe we may be in the process of doing 
that with Colorado, as well.
    Mr. Heck. It is the very letter that I am referring to, Mr. 
Osterman, that does not go as far as the Department of Justice, 
nor FinCEN's guidance in terms of basically saying, if you 
completely respect these terms and conditions, according to DOJ 
and according to FinCEN--and again, for the third or the fourth 
time--the essence of which is public safety--keeping marijuana 
out of the hands of children and cash out of the hands of gangs 
and criminals--then you will not pursue regulatory action. Your 
letter stops short of that.
    What can you say today, or what follow-up correspondence 
might you be willing to provide that is consistent with the 
Department of Justice's language and form of safe harbor, as 
well as FinCEN's?
    Mr. Osterman. Again, FinCEN--these are criminal activities. 
FinCEN sets the standard. And they have spoken. And I think we 
have gone as far as I am aware that we can go. If there were 
any kind of guidance that would be issued, it would have to be 
an inter-agency type activity through FFIEC. And, I don't 
understand why that doesn't provide--
    Mr. Heck. So, are you saying that if they follow FinCEN and 
DOJ, you will not make a regulatory sanction?
    Mr. Osterman. We are telling our examiners to ensure that 
they are doing that. If they are, we are not going to--
    Mr. Heck. I would appreciate it if you could have them 
communicate that more clearly.
    Thank you, Mr. Chairman, for your indulgence.
    Chairman McHenry. The gentleman's time has expired. And 
while it is bipartisanship, it is two sides of the same leaf, 
    We will now go to Mr. Barr, from Kentucky for 5 minutes.
    Mr. Barr. Thank you, Mr. Chairman.
    Gentlemen, I don't know of anyone who would find fault with 
financial regulators who, in good faith, are attempting to stop 
consumer fraud. I think what the American people are troubled 
by--and what Members of Congress are concerned about here 
today--is the prospect of powerful Federal agencies working 
with the Department of Justice to pressure banks to terminate 
relationships with legitimate businesses. Now, you can 
understand that. You can understand why there would be 
concerns, in particular for lawful and legitimate businesses 
that may be politically unpopular with this Administration's 
    Let me give you an example of where a Kentucky resident 
raised this concern with me. And in Kentucky, we have 
particular sensitivity with the Administration's, what we 
consider a very political attack, on a very legitimate 
business, the coal industry.
    We have lost 7,000 coal-mining jobs in Eastern Kentucky 
over the last several years because of this Administration's 
regulatory assault against this very legitimate business that 
is employing thousands of people in our communities. We have 
these communities littered with unemployed coal miners, and 
their families are suffering as a result of Administration 
    We got an e-mail from a Kentucky resident in our 
congressional office, and this is what it said: ``Our family 
company has been in the business of leasing our land to coal 
producers for decades. Today, I returned a call from Client 
Services at our bank in Lexington, Kentucky.
    ``They asked if we lease land to coal producers that 
operate surface mines. They said they are receiving pressure 
from bank regulators, and will no longer do business with us if 
we have surface mines on our property.
    ``After some thought, I called back again, and asked if we 
would be receiving a letter from the bank stating the situation 
in writing. I was told that yes, we would receive a letter, but 
it would not talk about pressure from regulators.
    ``Further, she said it would state to the effect that it is 
in the best interest of the bank not to do business with our 
company due to the perception of and its effect on their 
    So verbally, the bank is telling the customer, ``The 
regulators are pressuring us to not do business with your 
family any longer.''
    But in writing, they won't do that. So my question to all 
of you is, as regulators and as the Department of Justice, are 
you aware of any guidance, directives or efforts by your 
agencies to stop financial institutions from transacting 
business with coal operators or land holding companies that 
lease their land to coal producers?
    And I will just have you all go down the line.
    Mr. Delery. No, Congressman.
    Mr. Alvarez. No, Congressman.
    Mr. Osterman. No, Congressman.
    Mr. Stipano. No, sir.
    Mr. Barr. Have bank regulators at any time in the last 2 
years ever had a policy of pressuring banks to reevaluate their 
relationship with coal operators, coal-production companies, or 
a surface-mining operation, that you are aware of? Have you 
ever been in meetings where the topic of coal production has 
ever come up in the context of ``Operation Choke Point?''
    [Witnesses shake heads, ``no.'']
    Okay. I am glad to hear that, because I want to get a 
commitment from each of you that you will assure me that your 
agency will not, does not, and will not in the future 
discourage, either explicitly or implicitly, any financial 
institution from doing business with coal-mining activities, 
whether surface or deep mine? Can you give me that commitment?
    Mr. Delery. Yes, Congressman. As I have explained our 
policy, it would have nothing to do with the situation that you 
are describing.
    Mr. Alvarez. Congressman, I agree with the notion that you 
are trying to come across, bring across about dealing with an 
industry. I can't say that there isn't going to be some coal 
individual supplier that may not have financial difficulties 
where a bank may choose not to be involved with them because of 
    So putting aside the kind of credit quality, and other 
kinds of normal banking criteria, I agree with you.
    Mr. Osterman. I think Mr. Alvarez has stated it 
appropriately. We do have underwriting standards that the banks 
would be looking at, and safety-and-soundness standards. But 
given the context in which you are raising this, I can agree 
    Mr. Barr. And I only have 10 seconds left. I just want to 
make sure that when you are looking at fraudulent activity, you 
are not defining a risky business. So, you are not targeting 
risky businesses in a way that is in any way advancing the 
EPA's agenda?
    Mr. Delery. No, Congressman. We are looking at fraud 
against consumers.
    Mr. Barr. Thank you for your commitment that you will not 
further the war on coal. Thank you. I yield back.
    Chairman McHenry. And the record will note soft sighs of 
``no'' are still noted as ``no'' in the record. We have talked 
enough about the microphones, but they are quite lackluster.
    We will now go to Mr. Kildee, of Michigan.
    Mr. Kildee. Thank you, Mr. Chairman. And I want to thank 
the witnesses for not only your testimony, but for the work 
that you have been doing in protecting the American consumer, 
which after all, is sort of the point of the activities that we 
are designed to get at here.
    I want to make a couple of quick observations, and then ask 
for some commentary from the panel. Number one, I think we all 
understand political theater. And I have a sense that I am 
participating unwittingly in a bit of political theater today. 
It is certainly not my intention, but that seems to be what is 
happening here.
    From questions about how the name was selected for this 
operation, I think somebody suggested, ``Operation Sunshine.'' 
Next time you do this, maybe you should do, ``Operation Powder 
Puff,'' and it might not be so offensive to some. Frankly, it 
is a ridiculous question, and I regret that you had to answer 
    To a comment that, why are we worried about this, the 
average payday loan in one State is only $227. Well, this is 
something that we have been looking at. I think about the case 
of the soldier who borrowed $1,600, and after 2\1/2\ years, had 
repaid $17,000 to the lender.
    So that $1,600 might not seem like a lot to some people in 
this room. But $17,000 for a $1,600 loan raises a bit of 
suspicion, and I think would indicate that there are some 
commercial practices, some entities, some enterprises, some 
areas of business, that might be legitimately subject to 
scrutiny. And that is exactly what this is intended to do.
    So let me ask just quickly two things. One, there was much 
made of this slide, which indicates examples of commercial 
enterprises for which this sort of scrutiny might ultimately be 
    I would like whomever would like to, to offer a commentary 
on how a list such as this might be derived. Presumably, it is 
based on consumer complaints, return rates, real data, that 
would lead one to conclude that if you are going to be looking 
for fraudulent activity, it makes sense to look at it where 
there is a greater likelihood that it is taking place. If you 
could just comment on that?
    Mr. Osterman. I would be happy to respond. This group of 
examples actually was taken from actual experience that the 
industry has actually had over the course of years.
    The problem that we have had is that it has been turned 
into something that it is not, which is you can't do business 
with these people. And that is why last year we issued guidance 
making it very clear that banks can do business with whoever 
they want to. They just need to have appropriate risk 
mitigation factors in place.
    Mr. Kildee. I guess the other question that I would have is 
what your response is to this notion that there is an agenda 
behind that, which is intending to sort of steer commercial or 
lending activity, or banking activity, away from one industry 
to another.
    And the implication which is being suggested is that 
because certain financial institutions may, of their own 
volition, decide that there is an area of enterprise that they 
have found to be problematic, that they make by themselves, a 
market-based decision that they are going to move from that: 
first, is that something that you are seeing in large numbers; 
and second, is that an illogical conclusion for a financial 
institution to make to say, ``I think we are going to sort of 
get out of financing activities in this category of, let's say, 
payday loans, or gambling?''
    Does it make sense to you that might be a legitimate 
business decision that a for-profit enterprise might make, just 
as a matter of course?
    Mr. Osterman. I think that these are business decisions 
that businesses make in terms of their risk tolerance and their 
underwriting standards. Again, it is a decision for those 
businesses to make. It is not for the government to make, and 
it is not one the government is making.
    All we are saying is some types of activities are higher 
risk, and you need to have appropriate risk mitigation measures 
in place.
    Mr. Kildee. I would just encourage all of you to continue 
to do the work you are doing to protect consumers. And I know 
you won't, but I encourage you to not take sort of the threat 
of political speech accusing you of trying to shut down 
legitimate businesses, which I know you are not, as an excuse 
to not protect consumers who clearly need the protection of 
their government.
    So I want you to continue your work in that effort, and I 
appreciate it. Thank you.
    Mr. Fitzpatrick [presiding]. The Chair recognizes Mr. 
Luetkemeyer for 5 minutes.
    Mr. Luetkemeyer. Thank you, Mr. Chairman. Gentlemen, I 
appreciate the job that you do with regard to trying to root 
out fraud. Unfortunately, what we have done today, ``Operation 
Choke Point,'' is going well beyond fraud. It has gone beyond 
    As we have heard this morning multiple times, it is now 
going to an industry-based approach to try and get rid of 
everything and everybody in that entire industry, versus only 
the bad actors in industry, which is wrong. You know it is 
wrong, I know it is wrong.
    We discussed this, Mr. Delery and Mr. Osterman. And we 
discussed this individually. I thank you for the letters that 
we received as a result of you trying to clarify your position 
that as long as a business is doing a legal business, the legal 
entities are okay.
    Gentlemen, we have a problem. It is continuing. It has not 
gone away, has it? I can tell you, I can sit here this morning 
and give you case after case of what I have been talking about. 
I have here in the paper a document by the newspapers.
    Friday, May the 30th, there was a gun manufacturer in 
Hyannis Port, Massachusetts. Here is one from the 19th of May 
which talks about a firearms training supply company in 
Florida. Here is an armory in Nevada.
    So, gentlemen, it is not a rogue agent doing this. It is 
not a rogue examiner. It is still going on. It is still going 
on now. What are you going to do to stop it? Mr. Osterman?
    Mr. Osterman. Congressman Luetkemeyer, what we have done is 
we have tried to be very clear in putting out our guidance to 
say very publicly and clearly that as long as banks have 
appropriate risk mitigation measures in place, we are not going 
to prohibit or discourage them from doing business with anyone 
with whom they want to do business.
    And we have said that. We have actually had meetings with 
our examiners. Our division directors have met with our 
examiners, and sent that message to them. And we have even sent 
that notice to the banks themselves and said, ``If you are 
aware of this happening, let us know.''
    Mr. Luetkemeyer. Mr. Osterman, with all due respect, you 
know and I know, as a former examiner, and you know it, that 
the banks are scared to death when an examiner comes in there 
and threatens them. There is that problem.
    And I have talked to the bankers about this. And I said, 
okay, if they are telling you to do away with an entire book of 
business, which is going on, I said, have you asked them to put 
it in writing? And they said, yes. What would they say? And 
they say the examiner refused to do that.
    So the examiner is not giving them the documentation to 
give you the track to go back to that individual. As we see 
here, it is not going on in one State. It is going on across 
the country.
    This has to be something that has to be concerning to you 
if you are worried about this. If you are not--I discussed with 
Mr. Delery and you guys both about putting in place a safe 
harbor. Both of you have--both of your agencies have denied 
wanting to work with us on that.
    The other day, we had the CFPB in here, and we tried to ask 
them also if they would put together a safe harbor for the 
banks to be able to do business with legitimate customers that 
they have been doing business with for the last 25 years.
    I had a banker tell me he had to get rid of customers who 
had been with him for 25 years, for no reason other than the 
examiner said, ``Hey, you can't do business with these guys 
anymore because they are in an industry that is under 
heightened scrutiny.''
    So as a result of that, I offered a bill a couple of weeks 
ago that is going to put in place a safe harbor. Would you guys 
be willing to support that? Mr. Delery?
    Mr. Delery. Congressman, we certainly have seen the bill 
that you offered. We are reviewing it and we will obviously 
continue to do that and work with you and your office on it.
    I think that what is important, from our perspective, is 
that we maintain the tools that are necessary to fight fraud 
against consumers. We have attempted in--
    Mr. Luetkemeyer. To that effect, we want to work with you, 
but you haven't been able to work with us. You haven't been 
honest with me. Mr. Osterman, are you willing to work with us 
on a safe harbor? How come we haven't gotten together yet?
    Mr. Osterman. We would be willing to work with you.
    Mr. Luetkemeyer. Do you like my bill?
    Mr. Osterman. We have concerns. Frankly, there are 
difficulties in trying to create a safe harbor in terms of 
avoiding unintended consequences.
    Mr. Luetkemeyer. So you are telling me by going around the 
corners here, which you are doing this morning, it gives me 
great pause, the fact that we are still doing this. And now you 
won't go along with the safe harbor. You are saying, we can't 
do this, can't do that.
    It tells me you are not willing to give up ``Choke Point.'' 
You are willing to continue to go out here and do a broad-brush 
approach to get rid of the entire industry, and that is wrong.
    Mr. Delery, one more quick question. The gentleman who was 
in charge of putting ``Choke Point'' together, Mr. Joel Sweet, 
is that correct?
    Mr. Delery. He was the author of the original proposal, 
    Mr. Luetkemeyer. Why was he reassigned?
    Mr. Delery. He--now I--obviously, I need to be careful 
about talking about individuals in this setting, but it has 
been reflected in the documents that he was in Washington on 
detail from his home U.S. Attorney's Office. He is a career 
assistant U.S. attorney. He was here on a temporary detail that 
was 6 months. It was extended to a year, and when that ended, 
he went back to his home office, as was always the expectation 
he would do.
    Mr. Luetkemeyer. It is interesting that it happened just a 
few days after we got the letter.
    Thank you very much. I yield back.
    Mr. Fitzpatrick. I recognize the ranking member, Mr. Green, 
for 5 minutes.
    Mr. Green. Thank you, Mr. Chairman.
    Mr. Chairman, in court we had an objection known as 
``assuming facts that are not in evidence.'' Today, we have had 
a lot of anecdotal commentary given to witnesses, which would 
cause one to assume facts that have not been placed in 
    We have not had empirical evidence of the allegations that 
have been made, the anecdotal evidence, if you will. So let's 
for just a moment examine some facts. Let's go to the North 
Carolina case and let's talk for a moment about the number of 
complaints that were received against this bank.
    And I will start with our representative from the Justice 
Department, Mr. Delery.
    Mr. Delery. As reflected in our complaint that was filed in 
the case when the--then that led to the consent decree that the 
court approved, the bank had received hundreds of complaints 
from banks of customers who had been victimized, that included 
sworn statements.
    Mr. Green. Let me intercede for just a moment. You said 
from banks of customers. So you have banks complaining about 
the activity of another bank.
    Mr. Delery. Yes, exactly, Congressman.
    Mr. Green. And let's go on. From this material, this number 
of complaints, did the bank take some affirmative action 
without the Justice Department's intervention?
    Mr. Delery. Again, as alleged in the complaint, the bank 
was aware of these complaints, as well as complaints from 
NACHA, the Electronic Transactions Association, and the 
Attorney General of Arkansas, and yet continued to facilitate 
the transactions of the payment processor that was handling the 
transactions that were--
    Mr. Green. Let's put a face on this. These transactions 
were actually consumer purchases. Is that a fair statement? Or, 
there were consumers associated with each of these 
transactions? Is that a fair statement? Because these were 
payday loans.
    Mr. Delery. Many of them were related to payday lending, 
not all, but many. And they were transactions involving 
consumers. So the main complaint, again, as reflected in our 
allegations, was that the consumers had been misled into the 
terms and the number of debits that they understood would be 
coming out of their accounts.
    Mr. Green. And is it true, sir, that the bank received 
about $850,000 in fees associated with these transactions?
    Mr. Delery. Yes. Again, that is the number that we have in 
our complaint.
    Mr. Green. And is it true that there was a settlement for 
about $1.2 million, meaning that the bank agreed to pay some 
$1.2 million to settle this case?
    Mr. Delery. Yes, and also agreed, as reflected in the 
consent order, to a series of compliance measures that we 
insisted on to ensure that fraud couldn't occur--couldn't 
continue with respect to--
    Mr. Green. Was this a product of ``Operation Choke Point?''
    Mr. Delery. Yes, this was one of the cases, the 
investigations that arose out of that series of work.
    Mr. Green. If not for ``Operation Choke Point,'' would we 
have the $1.2 million settlement, would this bank have been put 
in a position such that it had to make a change such that this 
kind of behavior, this activity, is no longer continuing?
    Mr. Delery. Again, Congressman, I think that result is the 
direct result of our work in these investigations. And this 
case is the best example of the kind of work that we are doing. 
It is about real fraud, not just doing business with a lawful 
    Mr. Green. Thank you.
    Let me quickly go to the--I am going to call it the list of 
merchants. It is titled, ``High-Risk Merchants Activities.'' 
Now it has been indicated to us that this list was compiled 
with the assistance of industry. Is that correct?
    Mr. Osterman. It is actually taken from industry--
experienced industry examples. And in fact, it is very--
    Mr. Green. But this is about more than industry. This is 
about the people who are doing business with these industries. 
Is that correct?
    Mr. Osterman. Yes.
    Mr. Green. Is it about consumers who were being defrauded 
as a result of doing business with these industries? Is that 
    Mr. Osterman. Again, as we have said in our guidance, the 
fact that certain industries are high-risk doesn't mean--
    Mr. Green. Doesn't mean that they are--that all of the 
businesses within an industry, but the complaints that are 
generated are usually based on some consumers saying, ``You 
took too much money from my credit card,'' or ``You added too 
much to my credit card.'' ``You used my bank routing number and 
you collected money from my bank without my consent and 
    Is that a fair statement?
    Mr. Osterman. Yes.
    Mr. Green. So we are trying to, with this, the intent of 
this was to protect consumers. Is that a fair statement?
    Mr. Osterman. It is. But again, I just would caution, that 
list does not--
    Mr. Green. Not yours--
    Mr. Osterman. It is a list that came from a supervisory 
insights journal that FDIC published a long time ago. But the 
point of it was not to say you can't do business with these 
entities. A lot of those entities are legitimate.
    Mr. Green. I agree with you, but the purpose of it was to 
protect consumers, ultimately.
    Mr. Osterman. Yes.
    Mr. Green. That was my question.
    All right, Mr. Chairman, if I may, I would like to, for Mr. 
Heck, ask unanimous consent to make the article entitled, 
``Pots of Marijuana Cash Cause Security Concerns'' a part of 
the record.
    Mr. Fitzpatrick. Without objection, it is so ordered.
    Mr. Green. And with that, I will yield back the balance of 
time that I do not have.
    Mr. Fitzpatrick. I thank the ranking member.
    With that, I would like to thank our witnesses again for 
their testimony today.
    The Chair notes that some Members may have additional 
questions for this panel, which they may wish to submit in 
writing. Without objection, the hearing record will remain open 
for 5 legislative days for Members to submit written questions 
to these witnesses and to place their responses in the record. 
Also, without objection, Members will have 5 legislative days 
to submit extraneous materials to the Chair for inclusion in 
the record.
    And without objection, this hearing is adjourned.
    [Whereupon, at 11:58 a.m., the hearing was adjourned.]
                            A P P E N D I X

                             July 15, 2014