[House Hearing, 113 Congress]
[From the U.S. Government Publishing Office]
THE DEPARTMENT OF JUSTICE'S
``OPERATION CHOKE POINT''
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON OVERSIGHT
AND INVESTIGATIONS
OF THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED THIRTEENTH CONGRESS
SECOND SESSION
__________
JULY 15, 2014
__________
Printed for the use of the Committee on Financial Services
Serial No. 113-90
______
U.S. GOVERNMENT PUBLISHING OFFICE
91-154 PDF WASHINGTON : 2015
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HOUSE COMMITTEE ON FINANCIAL SERVICES
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
SHELLEY MOORE CAPITO, West Virginia RUBEEN HINOJOSA, Texas
SCOTT GARRETT, New Jersey WM. LACY CLAY, Missouri
RANDY NEUGEBAUER, Texas CAROLYN McCARTHY, New York
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
MICHAEL G. FITZPATRICK, ED PERLMUTTER, Colorado
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
ROBERT PITTENGER, North Carolina
ANN WAGNER, Missouri
ANDY BARR, Kentucky
TOM COTTON, Arkansas
KEITH J. ROTHFUS, Pennsylvania
LUKE MESSER, Indiana
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
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Page
Hearing held on:
July 15, 2014................................................ 1
Appendix:
July 15, 2014................................................ 37
WITNESSES
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
APPENDIX
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
investigations.
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
regulators.
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
operation.
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
trillion.
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
process.
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
regulation.
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
over-zealous.
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
1981.
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.
STATEMENT OF THE HONORABLE STUART F. DELERY, ASSISTANT ATTORNEY
GENERAL, CIVIL DIVISION, U.S. DEPARTMENT OF JUSTICE
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
uncover.
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
minutes.
STATEMENT OF SCOTT G. ALVAREZ, GENERAL COUNSEL, BOARD OF
GOVERNORS OF THE FEDERAL RESERVE SYSTEM
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
relationships.
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
investigations.
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
customers.
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
services.
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
activity.
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
actions.
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
minutes.
STATEMENT OF RICHARD J. OSTERMAN, JR., ACTING GENERAL COUNSEL,
FEDERAL DEPOSIT INSURANCE CORPORATION
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
law.
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.
STATEMENT OF DANIEL P. STIPANO, DEPUTY CHIEF COUNSEL, OFFICE OF
THE COMPTROLLER OF THE CURRENCY
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''
investigation.
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
customers.
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
missing.
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
information.
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
questions.
[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
why.
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
coincidence?
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
activity.
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,
certainly.
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
area.
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
processors?
Mr. Stipano. Yes, sir. They go back to at least the mid-
1990s.
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
time.
Chairman McHenry. We will now recognize Mr. Fincher for 5
minutes.
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
money.
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
right?
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
practices.
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
minutes.
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
flag.
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
banks--
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
Member.
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
fraud.
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
effect.
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
wrong?
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
concern.
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
businesses?
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,
perhaps.
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
policies.
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
policy.
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
business.''
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
that.
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
with--
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
it.
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
applied.
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
that.
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,
yes.
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
evidence.
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
industry.
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
correct?
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
permission.''
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
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