How Might This Affect Your Bank?

If you have no clue what Operation Choke Point even entails, chances are you will probably become familiar with it at some point this year. Banks have the potential to encounter a reputation risk thanks to this initiative launched in 2013 by the U.S. Justice Department. The FDIC is notifying banks which businesses in certain types of industries that might be at “high risk” for such activities as fraud, money laundering, and terrorist financing.

In order to avoid possible inquiry from regulators and possible audits and investigations, many banks are closing their accounts with these customers who have been identified as high risk. Even though the discontinuation does not come as a demand from the FDIC, many banks do not want to take a chance. Banks simply do not want to be viewed as an accomplice to any law-breaking activities that businesses may be involved in.

National Public Radio reported on a situation where banks are being forced to close the accounts of many customers who have been with them decades long due to anti-money-laundering regulations. Paul Hickman, president and CEO of the Arizona Bankers Association, explains that if banks do not properly maintain their accounts then, “[The banks] put society at risk by continuing to potentially facilitate this kind of trade.” While this article deals with issues along the border, it is a sign on the direction things are headed.

Take Away Oxygen, Take Away Business
The initiative was given its unruly name because the goal is to literally choke off the oxygen – or in this case, access to basic banking and financial services – that business need in order to carry forth their services or products. Many companies are heading towards facilitating business activities online and they will find that to be very difficult without e-commerce. No bank account means virtually no way for these businesses to operate because they cannot not take payment via credit card without the bank supported processing services.

Careful Where You Operate
There is some confusion amongst the industry after the FDIC encouraged banks to reexamine their relationships with businesses operating in said high-risk areas. While banks may enter treacherous territory with these businesses, most are by no means illegal. This can make it challenging for some banks to justify dropping a client cold.

The following list was once published on the FDIC website; it included risky businesses that were both lawful and legitimate:

  • Ammunition and Firearm Sales
  • Coin Dealers
  • Credit Repair & Debt Consolidation Services
  • Home-Based Charities
  • Online Gambling and Adult Entertainment
  • Surveillance Equipment Sales
  • Tobacco Sales
  • Travel Clubs

This list was removed due to the mass confusion it was causing. It was unclear to banks whether the FDIC was barring, discouraging, or urging them to use more caution when providing banking services within these particular industries.

Choked to the Point of Investigation
After 30 members of congress raised issue on Operation Choke Point, the U.S. Justice Department and the FDIC agreed to launch investigations on the initiative. At this point, it is unclear whether these investigations and the objections of some lawmakers and business owners will lead to the initiative being shelved.

Until the case is closed, it is highly recommended that community banks weigh the benefits and risks of doing business with companies dinged in the high-risk category. If your bank decides to continue or start providing services to these particular businesses then be advised that you may have some explaining to do to regulators as to why you believe your actions are appropriate.