A historical shift in how some federal financial law-enforcement agencies view the payments industry is underway, and unfortunately, it is not one that bodes well for the industry. Named Operation Choke Point, the effort is designed to hold banks and payment processors responsible for any illegal acts by a merchant or independent sales organization. While this seems like a good idea, it is very possible that legitimate merchants could be wrapped up in the process.
Already, Cash America International, one of several publicly traded payday lenders, has been ordered to pay $8 million to allegedly abused consumers, plus $5 million in fines, and agree to cap interest rates. In addition, Wells Fargo, which bankrolls Cash America, has suddenly curbed its own short-term credit operations. Other banks are expected to hike charges on payday lenders targeted by the feds. Subpoenas are flying against even small banks that handle transactions for online payday lenders. Earlier this month, Justice fined Four Oaks Bank in North Carolina and ordered it to assist prosecutors in possible criminal probes of its executives over payday loan fees. The administration argues payday lenders “prey” on the urban poor with “usurious” interest rates and “trap” them in debt. Shutting them down, so the theory goes, will protect consumers and save those billions.
Back in January, the hammer dropped hard on a small bank in North Carolina. Four Oaks Bank had processed ACH transactions for payday lenders through an arrangement with an unidentified third-party payment processor. Based on allegations of inadequate diligence and control over the payment processor and its customers, the DOJ obtained $1.2 million in monetary relief and injunctive relief addressing the bank’s dealings with third-party payment processors and with Internet short-term (payday) lenders, credit repair organizations, mortgage assistance relief companies, telemarketers and Internet-based businesses. Just as this happened to Four Oaks Bank, it could easily happen to any business owner who is not careful with who they do business with.
While Operation Choke Point seems like a good idea, many small businesses are liable to be wrapped up in its hold. The idea itself is great – holding banks and processors responsible to filtering illegal money and committing illegal acts – but sooner rather than later a company that unknowingly dealt with these funds is going to be shut down. The best thing business owners can do is to be careful and report any transactions that seem fishy.