[House Hearing, 113 Congress]
[From the U.S. Government Publishing Office]
GUILTY UNTIL PROVEN INNOCENT?
A STUDY OF THE PROPRIETY AND LEGAL
AUTHORITY FOR THE JUSTICE DEPARTMENT'S
OPERATION CHOKE POINT
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON
REGULATORY REFORM,
COMMERCIAL AND ANTITRUST LAW
OF THE
COMMITTEE ON THE JUDICIARY
HOUSE OF REPRESENTATIVES
ONE HUNDRED THIRTEENTH CONGRESS
SECOND SESSION
__________
JULY 17, 2014
__________
Serial No. 113-114
__________
Printed for the use of the Committee on the Judiciary
Available via the World Wide Web: http://judiciary.house.gov
______
U.S. GOVERNMENT PRINTING OFFICE
88-724 PDF WASHINGTON : 2014
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COMMITTEE ON THE JUDICIARY
BOB GOODLATTE, Virginia, Chairman
F. JAMES SENSENBRENNER, Jr., JOHN CONYERS, Jr., Michigan
Wisconsin JERROLD NADLER, New York
HOWARD COBLE, North Carolina ROBERT C. ``BOBBY'' SCOTT,
LAMAR SMITH, Texas Virginia
STEVE CHABOT, Ohio ZOE LOFGREN, California
SPENCER BACHUS, Alabama SHEILA JACKSON LEE, Texas
DARRELL E. ISSA, California STEVE COHEN, Tennessee
J. RANDY FORBES, Virginia HENRY C. ``HANK'' JOHNSON, Jr.,
STEVE KING, Iowa Georgia
TRENT FRANKS, Arizona PEDRO R. PIERLUISI, Puerto Rico
LOUIE GOHMERT, Texas JUDY CHU, California
JIM JORDAN, Ohio TED DEUTCH, Florida
TED POE, Texas LUIS V. GUTIERREZ, Illinois
JASON CHAFFETZ, Utah KAREN BASS, California
TOM MARINO, Pennsylvania CEDRIC RICHMOND, Louisiana
TREY GOWDY, South Carolina SUZAN DelBENE, Washington
RAUL LABRADOR, Idaho JOE GARCIA, Florida
BLAKE FARENTHOLD, Texas HAKEEM JEFFRIES, New York
GEORGE HOLDING, North Carolina DAVID N. CICILLINE, Rhode Island
DOUG COLLINS, Georgia
RON DeSANTIS, Florida
JASON T. SMITH, Missouri
[Vacant]
Shelley Husband, Chief of Staff & General Counsel
Perry Apelbaum, Minority Staff Director & Chief Counsel
------
Subcommittee on Regulatory Reform, Commercial and Antitrust Law
SPENCER BACHUS, Alabama, Chairman
BLAKE FARENTHOLD, Texas, Vice-Chairman
DARRELL E. ISSA, California HENRY C. ``HANK'' JOHNSON, Jr.,
TOM MARINO, Pennsylvania Georgia
GEORGE HOLDING, North Carolina SUZAN DelBENE, Washington
DOUG COLLINS, Georgia JOE GARCIA, Florida
JASON T. SMITH, Missouri HAKEEM JEFFRIES, New York
DAVID N. CICILLINE, Rhode Island
Daniel Flores, Chief Counsel
C O N T E N T S
----------
JULY 17, 2014
Page
OPENING STATEMENTS
The Honorable Spencer Bachus, a Representative in Congress from
the State of Alabama, and Chairman, Subcommittee on Regulatory
Reform, Commercial and Antitrust Law........................... 1
The Honorable Henry C. ``Hank'' Johnson, Jr., a Representative in
Congress from the State of Georgia, and Ranking Member,
Subcommittee on Regulatory Reform, Commercial and Antitrust Law 2
The Honorable Bob Goodlatte, a Representative in Congress from
the State of Virginia, and Chairman, Committee on the Judiciary 4
WITNESSES
The Honorable Stuart F. Delery, Assistant Attorney General, Civil
Division, U.S. Department of Justice
Oral Testimony................................................. 17
Prepared Statement............................................. 20
Adam J. Levitin, Professor of Law, Georgetown University Law
Center
Oral Testimony................................................. 122
Prepared Statement............................................. 125
Scott Talbott, Senior Vice President of Government Affairs, The
Electronic Transaction Association
Oral Testimony................................................. 138
Prepared Statement............................................. 140
David H. Thompson, Managing Partner, Cooper & Kirk, PLLC
Oral Testimony................................................. 151
Prepared Statement............................................. 153
Peter Weinstock, Partner, Hunton & Williams LLP
Oral Testimony................................................. 168
Prepared Statement............................................. 171
LETTERS, STATEMENTS, ETC., SUBMITTED FOR THE HEARING
Material submitted by the Honorable Spencer Bachus, a
Representative in Congress from the State of Alabama, and
Chairman, Subcommittee on Regulatory Reform, Commercial and
Antitrust Law.................................................. 8
Material submitted by the Honorable Doug Collins, a
Representative in Congress from the State of Georgia, and
Member, Subcommittee on Regulatory Reform, Commercial and
Antitrust Law.................................................. 27
Material submitted by the Honorable Henry C. ``Hank'' Johnson,
Jr., a Representative in Congress from the State of Georgia,
and Ranking Member, Subcommittee on Regulatory Reform,
Commercial and Antitrust Law................................... 30
Material submitted by the Honorable Darrell E. Issa, a
Representative in Congress from the State of California, and
Member, Subcommittee on Regulatory Reform, Commercial and
Antitrust Law.................................................. 80
APPENDIX
Material Submitted for the Hearing Record
Prepared Statement on behalf of the Virginia Bankers Association. 187
Prepared Statement of the Community Financial Services
Association of America......................................... 191
Prepared Statement of the Independent Community Bankers of
America (ICBA)................................................. 196
Prepared Statement of Marsha Jones, President, Third Party
Payment Processors Association (TPPPA)......................... 198
Questions for the Record submitted to Honorable Stuart F. Delery,
Assistant Attorney General, Civil Division, U.S. Department of
Justice........................................................ 207
Questions for the Record submitted to Adam J. Levitin, Professor
of Law, Georgetown University Law Center....................... 209
Response to Questions for the Record from Scott Talbott, Senior
Vice President of Government Affairs, The Electronic
Transaction Association........................................ 210
Questions for the Record submitted to David H. Thompson, Managing
Partner, Cooper & Kirk, PLLC................................... 213
GUILTY UNTIL PROVEN INNOCENT?
A STUDY OF THE PROPRIETY AND
LEGAL AUTHORITY FOR THE JUSTICE
DEPARTMENT'S OPERATION CHOKE POINT
----------
THURSDAY, JULY 17, 2014
House of Representatives,
Subcommittee on Regulatory Reform,
Commercial and Antitrust Law
Committee on the Judiciary,
Washington, DC.
The Subcommittee met, pursuant to call, at 9:34 a.m., in
room 2141, Rayburn House Office Building, the Honorable Spencer
Bachus (Chairman of the Subcommittee) presiding.
Present: Representatives Bachus, Goodlatte, Issa, Marino,
Holding, Collins, Smith of Missouri, Johnson, Garcia, and
Jeffries.
Staff Present: (Majority) Daniel Huff, Majority Counsel;
Ashley Lewis, Clerk; Justin Sok, Legislative Assistant to Rep.
Smith of Missouri; Philip Swartzfager, Legislative Director to
Rep. Bachus; Jaclyn Louis, Legislative Director to Rep. Marino;
Ellen Dargie, Legislative Assistant to Rep. Issa; Jon Nabavi,
Legislative Director to Rep. Holding; (Minority) Slade Bond,
Counsel; and Veronica Eligan, Professional Staff Member.
Mr. Bachus. Good morning. The Subcommittee on Regulatory
Reform, Commercial and Antitrust Law hearing will come to
order.
Without objection, the Chair is authorized to declare
recesses of the Committee at any time.
I am going to recognize myself for an opening statement.
Let me welcome everyone to today's oversight hearing on the
Justice Department's Operation Choke Point program.
This Subcommittee has the duty of overseeing the Civil
Division of the Justice Department, and today's hearing is part
of fulfilling that important function.
By way of introduction, I approach this issue as not just a
Subcommittee Chair on the Judiciary Committee, but as Chairman
emeritus and former Chairman of the Financial Services
Committee.
So this is a matter I have been following closely across
both Committees for some time, as have Members on both sides of
the aisle, including Congress Blaine Luetkemeyer from Missouri,
who has done a lot of work and study on this program.
The intent of Operation Choke Point may have carried a
purpose that we would all agree with, and that is to prevent
financial fraud. However, my continued concern is that the
program threatens to dry up legitimate sources of credit and
financing.
Those left on the short end can often be the people who
have the greatest difficulty in getting any credit at all. The
program also can deny legitimate merchants access to financial
networks they need to survive.
In this economy, the last thing we need is to make it
harder for businesses to operate and employ workers, and by
that I mean legitimate businesses.
Merchants that have been targeted by Operation Choke Point
have not uniformly been called predatory lenders, as one might
have presumed, but are a wide range of businesses, including
coin dealers, firearms merchants, home-based charities,
fireworks sellers, and even online dating services. That is a
wide--very wide net. And one thing it immediately suggests is
agency overreach.
To date, the Justice Department has served more than 50
administrative and investigative subpoenas on banks. Subpoenas
are very expensive to comply with and can bring unwanted
scrutiny.
So the natural reaction of a financial institution might be
simply to sever a connection with a particular merchant and be
done with it.
By forcing that kind of decision, a government agency is
able to achieve a particular policy goal without touching the
ball, to use a sports term. It strikes me that someone's due
process rights are likely being violated.
We have heard the Department of Justice and the relevant
bank regulators say that the goal of Operation Choke Point is
not to eliminate businesses that might--that some might deem
politically problematic.
However, after reviewing this issue, I am concerned that
internal DoJ documents have revealed that, at a minimum, there
have been an indifference to the risks that this policy poses
to legitimate and lawful commerce.
Our witness today--in fact, we have a memo from Assistant
Attorney General Delery that acknowledges--and let me quote
from that--``the possibility that banks may stop doing business
with legitimate lenders,'' but concluded--and I will quote
again--``that solving that problem, if it exists, should be
left to legitimate lenders themselves who can present
sufficient information to banks to convince them that they are
wholly legitimate.''
That sounds like guilty until proven innocent.
Again, this is a program that I have followed with
increasing concern. Last August I wrote Attorney General Eric
Holder and FDIC Marty Gruenberg, asking both agencies to
immediately stop any actions designed to pressure banks and
payment processors to terminate business relationships with
lawful lenders.
The fact that we are holding this hearing shows that there
are many serious concerns that have yet to be satisfactorily
addressed.
With that, let me again thank our witness for appearing
today.
And let me yield to the Ranking Member for his opening
statement.
Mr. Johnson. Thank you, Mr. Chairman.
Ordinary people, mostly minorities, mostly African-
Americans, are being squeezed every day by the justice system.
They are sometimes prosecuted on shoddy evidence. They are
coerced to accept unfair and unjustified plea bargains offered
by prosecutors with unchecked and unbridled discretion.
And they are punished if they don't accept the plea and go
to trial and get found guilty. They are threatened by these
vindictive mandatory minimums, additional charges, and enhanced
consecutive counts. So they plead guilty and still get a steep
sentence.
They are serving these steep sentences in overcrowded
prisons in a country with the largest known prison population
in the world. And, for many, an incarceration practically
becomes a life sentence due to the shortage of second chances
for criminal offenders.
This is the state of our criminal justice system as it
applies to ordinary folks, usually those from communities of
color and without means. It is a system known as the new Jim
Crow.
In the 4 years since Dodd-Frank, not one single person who
facilitated or contributed to the greatest financial crisis
since the Great Depression has been prosecuted. Not one person
has been held accountable for this immeasurable hardship
through a public trial in the criminal justice system.
Not one person has served as an example to those who would
prey upon vulnerable members of society, including low-income
minorities and the elderly, targeted with predatory loans which
were then packaged and sold on Wall Street. And when they
became nonperforming loans, these securities became worthless.
Thus, the crash back in 2007.
And all of this taking place at a time when the United
States Supreme Court, our activist Supreme Court, is bestowing
corporations, rewarding corporations, with the rights that
people have. Citizens United. The First Amendment right to
freedom of speech has been conferred upon corporations.
And now with the Hobby Lobby decision, we have corporations
with a religious right, a First Amendment right to freedom of
religion to practice their religion.
But I know of no corporation that has gone to church and
paid tithes, listened to the sermon, and went out and acted
like a Christian.
I know of no corporation that has ever been to jail for
operations on Wall Street or for--or Main Street. No
corporation has ever been placed in jail. But, yet, they have
the same rights that we have.
Earlier this week the Department of Justice announced a
settlement with Citigroup based on its misrepresentations about
the inherent risks of sub-prime mortgages and other egregious
behavior.
This settlement includes a $4-billion penalty under the
Financial Institutions Reform, Recovery and Enforcement Act,
also known as FIRREA, F-I-R-R-E-A. Passed in the wake of the
savings and loan crisis in the 1980's, FIRREA is a critical
tool in uncovering and prosecuting illegal conduct.
In today's oversight hearing, this Subcommittee will
consider the propriety and legality, the propriety and
legality, of Operation Choke Point, which is the formal name
for a series of investigations by the Justice Department's
Civil Division under FIRREA of banks that knowingly facilitate
fraud that, in turn, affects the banks through unauthorized
debits of consumers' accounts and other illegal activity.
Some of my Republican colleagues have disparaged these
investigations under the theory that they enable the party in
power to destroy businesses it favors without proof of
wrongdoing.
But let's review the facts. The Justice Department has
filed just one complaint against a financial institution as a
result of Operation Choke Point. One.
In this lawsuit, the Justice Department alleged that Four
Oaks Bank knowingly provided direct access to the financial
system to parties engaged in defrauding consumers and illegal
activities, such as a Ponzi scheme, illegal online gaming, and
unlawful lending.
This bank not only permitted unlawful actors to directly
access the financial system, it is alleged, it is also alleged
that this bank allowed these parties to remove funds directly
from consumers' accounts even after receiving thousands of
complaints from consumers that these debits were unauthorized.
In fact, at one point, the bank stopped keeping track of
consumer complaints altogether, illustrating its willingness to
overlook fraudulent activity. In return for knowingly
facilitating fraud, this bank received $850,000 in gross fees
from a third-party processor.
Again, this is the only civil complaint filed by the
Justice Department, and it was settled within days without
going to trial and without any prosecution--criminal
prosecution for actual fraud.
Instead of thanking the Justice Department for protecting
untold consumers and the broader financial system from fraud,
my Republican colleagues have hurled unfounded accusations,
accusing public servants of abusing their power to destroy
businesses that they simply dislike.
Although I am dumbfounded by this argument, one thing
remains clear to me. For House Republicans, banks are still too
big for regulations, too big for trial, too big to fail, to big
for jail, too big to even investigate for fraud and money
laundering, and too big to be held accountable for defrauding
Americans.
I thank the Justice Department for fighting on behalf of
consumers, and I encourage you to continue its investigations.
And I yield back.
Mr. Bachus. Thank you, Mr. Johnson.
At this time I recognize the Chairman of the full
Committee, Mr. Goodlatte, for his opening statement.
Mr. Goodlatte. Mr. Chairman, thank you very much, and thank
you for holding this hearing.
There is no dispute that consumer fraud is a real
phenomenon. Approximately 10.8 percent of American adults fell
victim to it in 2011. The Department of Justice should enforce
the law vigorously on the villains who prey on our most
vulnerable.
There is also no dispute that Operation Choke Point is
cutting off some fraudster access to the banking system. The
bipartisan concern is that there is an unacceptable level of
collateral damage.
On this point, there appears to be a disconnect between
statements from top officials and what is happening in
practice. The official line is that Operation Choke Point is
targeting fraudsters, not the whole industry.
But the Committee has received numerous reports of banks
severing relationships with law-abiding customers from
legitimate industries that the Administration has designated
``high risk.''
For example, the Committee obtained a jarring account of a
meeting between a senior FDIC regulator and a banker
contemplating serving a payday lending client.
The official told the banker, ``I don't like this product
and I don't believe it has anyplace in our financial system.
Your decision to move forward will result in an immediate
unplanned audit of your entire bank.''
This sounds more like strong-arming than law enforcement.
It is naive to answer that the government is merely requiring
banks to pay heightened attention to these clients, not
disallowing them. That is not how the system works in practice.
Banks are highly regulated entities. They are at the mercy
of their regulators, and that makes them risk-averse. To banks,
high-risk merchants often are simply not worth the heightened
scrutiny.
This thinking is so prevalent in the industry that it has
been given a name: De-risking. The chairman of the Office of
the Comptroller of the Currency lamented in a recent speech,
``And whether or not DoJ intended it, it now seems clear that
de-risking is occurring and wiping out legitimate business.''
The Department of Justice can no longer claim this
consequence is unintended. It allows Choke Point to continue
without changes.
I also question the Justice Department's legal authority to
pursue this dangerously overbroad program. The Financial
Institutions Reform, Recovery and Enforcement Act is one of the
few statutes that gives the Department authority to issue
administrative, investigative subpoenas in the civil context.
Congress granted this authority in the wake of the savings
and loan scandal to prevent fraud against banks. It applies to
fraud affecting a Federally insured financial institution.
Consumer fraud was not the focus.
Nevertheless, the Department of Justice relies on a recent
district court case interpreting ``affecting'' broadly. In that
case, though, the bank was perpetrating the fraud.
The district court, moreover, was careful to mention that
the effects must be sufficiently direct and that there might
come a point at which the effects on the bank are too
attenuated.
Such is the case with Operation Choke Point. It targets
banks neither as victims nor as perpetrators. Instead, it is
manipulating banks whose payment processor clients have
merchant clients who may or may not defraud their customers.
Accepting DoJ's legal authority requires one to believe
that by ``affecting'' Congress meant to include fraud that was
perpetrated not on banks and not even on their customers, but
on the customers of their customers' customers.
Similarly, the reputational risk is not analogous. In the
Department of Justice's precedent, the bank was accused of
cheating its own customers, which obviously drives away
customers who do not want to be their own bank's next victim.
By contrast, direct customers of banks targeted by Choke
Point have no such concerns. Their bank is not defrauding them.
The alleged problem is far removed from them and lies with the
customers of their bank's clients' clients. In this setting,
the prospect for reputational risk is highly attenuated, and
DoJ's interpretation again appears highly strained.
Many of the concerns I have shared are bipartisan. A
Democratic colleague told the Administration he wants to be
sure we do not throw out the baby with the bathwater by
shuttering lawful businesses. On March 27, 2013, 11 Democrats
and 12 Republicans wrote banking regulators expressing a
similar concern.
Good law enforcement is hard work and time-consuming. There
are no shortcuts. Officers have to do the difficult work of
identifying bad actors individually. They simply cannot profile
entire industries.
I welcome Assistant Attorney General Delery, and I want to
know what he makes of the devastating collateral damage to
which some of our other participants will bear witness.
I also welcome all of our other witnesses and look forward
to the discussion.
Thank you, Mr. Chairman.
Mr. Bachus. Thank you.
Before I introduce Assistant Attorney General Delery--it is
``Delery?''
Mr. Delery. ``Delery,'' Mr. Chairman.
Mr. Bachus. ``Delery.'' ``Delery.'' Okay. There are some
different pronunciations. They did a phonetic thing which I
don't think is quite on it.
But before I make a formal introduction, I want to make two
submissions for the record.
First, I ask unanimous consent to place in the record
written testimony from Dr. Douglas Merrill, a Princeton Ph.D.
and former Chief Information Officer for Google.
Mr. Bachus. Google is a singing corporation, aren't they?
Isn't that what they are? Maybe that is iTunes. They are not a
singing corporation, are they? I guess not.
Mr. Johnson. Singing corporation?
Mr. Bachus. You mentioned singing corporations. But anyway.
He specializes in applying radical innovation to solve hard
problems, including the problem of credit access for the under
bank.
He founded ZestFinance to use Google-style big-data math to
provide credit to make smarter loans to under-served
populations at lower rates.
His algorithm has enabled ZestFinance to slash default
rates by half and offer up to 50 percent savings for borrowers.
Then Operation Choke Point nearly destroyed his business.
He concludes that--and I quote--``More than 100,000 under-
banked Americans overpaid tens of millions of dollars in fees
because both ZestFinance and its partner, Spotloan, were
limited by Choke Point.''
Also like to submit for the record former FDIC Chairman
Bill Isaac's letter. I ask unanimous consent to place in the
record a letter from Bill Isaac, former Chairman of the FDIC,
to the youngest member of the FDIC's board of directors in
history--no. He is the youngest member of the FDIC's board of
directors in history, appointed by President Carter.
He explains that the Bank Secrecy Act and anti-money
laundering provisions are--and again I quote--``are not
intended to impose a duty on banks to ensure that their
business customers are complying with every law in every State
or that the businesses are treating customers fairly and
delivering good value.''
He also writes that, ``Operation Choke Point is one of the
most dangerous programs I have experienced in my 45 years of
service as a bank regulator, bank attorney, consultant, and
bank board member.''
Is there any objection to this submission? Hearing none.
[The information referred to follows:]
__________
Mr. Bachus. At this time I would like to introduce our
first witness, Honorable Stuart Delery. Is that right? Good.
He was sworn in as Assistant Attorney General for the Civil
Division on August 5, 2013, following confirmation by the U.S.
Senate. He has led the division since March 2012.
As an Assistant Attorney General, he oversees the largest
litigating division in the Department of Justice. Each year the
Civil Division represents some 200 client agencies in
approximately 50,000 different matters.
The Civil Division represents the United States in legal
challenges to Congressional statutes, administrative policies,
and Federal agency actions.
He joined the United States Department of Justice in
January 2009 as chief of staff and counsel to the Deputy
Attorney General and later served as Associate Deputy Attorney
General. From August 2010 until March 2012, he served as senior
counsel to the Attorney General.
Before joining the Department of Justice, Mr. Delery was a
partner in the Washington, D.C., law firm of WilmerHale, where
he was a member of the litigation department and the appellate
and Supreme Court litigation practice group and a vice chair of
the firm's securities department.
He graduated from Yale Law School and the University of
Virginia. He clerked for Justice Sandra Day O'Connor and
Justice Byron R. White of the U.S. Supreme Court and for Chief
Judge Gerald--and how do you pronounce--``Tjoflat''?----
Mr. Delery. ``Tjoflat,'' Mr. Chairman.
Mr. Bachus [continuing]. Of the U.S. Court of Appeals for
the Eleventh Circuit.
So we welcome your testimony. And you are recognized for
that purpose.
TESTIMONY OF THE HONORABLE STUART F. DELERY, ASSISTANT ATTORNEY
GENERAL, CIVIL DIVISION, U.S. DEPARTMENT OF JUSTICE
Mr. Delery. Thank you very much, Chairman Bachus, Ranking
Member Johnson, and Members of the Subcommittee. Thank you for
inviting me here today and for providing the Department of
Justice the opportunity to describe our work designed to
protect consumers from fraud perpetrated by certain merchants,
third-party payment processors, and banks.
The Justice Department has made it a priority to fight
consumer fraud of all kinds. Fraud against consumers comes in
many forms, from telemarketing fraud to mortgage fraud, from
lottery scams to predatory and deceptive online lending, and
often strips our most vulnerable citizens of their savings and
even their homes.
The Civil Division's consumer protection branch, along with
the Criminal Division and the U.S. attorney's offices across
the country, has worked for decades to protect the health,
safety, and economic security of the American consumer.
Based on its years of experience in combatting fraudulent
merchants and by following the flow of money from fraudulent
transactions, the Department has learned that some banks and
third-party payment processors, which are intermediaries
between banks and merchants, know that merchants are engaged in
fraud and, yet, continue to process their transactions, in
violation of Federal law.
As a result, in November 2012, our attorneys proposed a
concentrated effort to pursue fraud committed by banks and
payment processors as a complement to other consumer protection
work.
This strategy aims both to hold accountable those banks and
processors that violate the law and to prevent access to the
banking system by fraudulent merchants, and this--this effort
is sometimes referred to as Operation Choke Point.
One of our investigations now has been resolved, as was
mentioned earlier, and provides a useful example of our efforts
in this area.
In April, a Federal District Court in North Carolina
entered a consent order and approved a settlement agreed to by
the Department and Four Oaks Bank.
According to our complaint, Four Oaks allowed a third-party
payment processor to facilitate payments for fraudulent
merchants despite active and specific notice of fraud.
For example, Four Oaks received hundreds of notices from
consumers' banks, including statements by account holders
submitted under penalty of perjury, that the people whose
accounts were being charged had not authorized debits from
their accounts.
Four Oaks had evidence of efforts by merchants to conceal
their true identities. Four Oaks also had evidence that more
than a dozen merchants served by the payment processor had a
return rate over 30 percent, a strong sign that the bank was
facilitating repeated fraudulent withdrawals. And, indeed, one
merchant had a return rate of over 70 percent.
According to our complaint, despite these and other signals
of fraud, Four Oaks permitted the third-party payment processor
to originate approximately $2.4 billion in debit transactions
against consumers' bank accounts.
So as the Four Oaks case demonstrates, the Department's
policy is to base its investigations on specific evidence of
unlawful conduct.
Nevertheless, in recent months, we have become aware of
reports suggesting that these efforts instead represented an
attack on businesses engaged in lawful activity. And I thank
you for the opportunity to clear up this misconception.
Our policy is to investigate specific unlawful conduct
based on evidence that consumers are being defrauded, not to
target whole industries or businesses acting lawfully, and to
follow the facts wherever they lead us in accordance with the
law, regardless of the type of business involved.
As with virtually all of our law enforcement work that
touches on regulated industries, our work in this area includes
communication with relevant regulatory agencies. Such
communication is designed to ensure that we understand the
industry at issue and that we have all the information we need
to evaluate enforcement options in light of the evidence we
uncover. That is nothing new.
So, for example, for many years, banking regulators have
warned banks about the heightened risks to consumers associated
with third-party payment processors.
In some of that guidance, FDIC has explained that, although
many clients of payment processors are reputable merchants, an
increasing number are not and should be considered high risk.
And the FDIC has provided examples of high-risk merchants for
purposes relevant to its regulatory mission.
The Department's mission, however, is to fight fraud. And
we recognize that an entity simply doing business with a
merchant considered high risk is not fraud.
So, in summary, our efforts to protect consumers by
pursuing fraudulent banking activity are not focused on
financial institutions that merely fail to live up to their
regulatory obligations or that unwittingly process a
transaction for a fraudulent merchant.
But when a bank either knows or is willfully ignorant to
the fact that law-breaking merchants are taking money out of
consumers' bank accounts without valid authorization and the
bank continues to allow that to happen, the Department will not
hesitate to enforce the law.
So thank you once again for the opportunity to appear
before you today. And at this time, Mr. Chairman, I would be
happy to answer any questions that you or the other Members of
the Subcommittee may have.
[The prepared statement of Mr. Delery follows:]
__________
Mr. Bachus. Thank you very much.
First question will be Mr. Holding.
Mr. Holding. Thank you, Mr. Chairman.
You testified on Tuesday and, at that hearing, the FD--
well, the--on Tuesday, the FDIC testified that they had
authored a somewhat notorious high-risk activity list that
predicates Operation Choke Point scrutiny.
You know, this is a somewhat dangerous list because it
essentially tells banks that they shouldn't do business with
certain industries, irrespective of the fact than an industry
is operating entirely within the law, and most of these
industries are legal under Federal, State, and local law. Some
even have significant First Amendment protections.
So did the Department, the DoJ, conduct a review of whether
any of these restrictions would violate the First Amendment
rights of Americans? And, if they did not, why not?
Mr. Delery. So, Congressman, the list that you are
referring to, I believe, that was discussed by the FDIC on--at
the hearing on Tuesday is a list that the FDIC prepared for its
purposes.
As I said then, that was not something that the Department
of Justice was involved in preparing. And whether a financial
institution does business with a merchant that is in an
industry on that list or any other list is not, under our
policy, a basis for the investigations that we are talking
about here.
Mr. Holding. Does the Department have its own definition of
high-risk activity that would create liability under Operation
Choke Point?
Mr. Delery. Right. So that is not the basis for the policy
or the actions that we are taking here.
Mr. Holding. But does the Department have their own
definition, you know, of what seems to be somewhat of a term of
art that is developing here?
Mr. Delery. No. I don't believe so, Congressman.
The investigations that we are conducting are based on
evidence of fraudulent conduct by particular institutions that
are based on traditional law enforcement activities or
investigative techniques.
So we are investigating institutions based on evidence----
Mr. Holding. So you don't pay any attention to that
definition? So you don't use the FDIC's definition or list?
That doesn't go into your calculus in making a decision--
prosecutorial decision, Fourth Amendment decision?
Mr. Delery. We are basing our investigations on evidence
that we receive from various sources of actual fraudulent
activity in a particular context. We are not looking at whole
industries.
So the information may come from a referral from a bank
whose customers have been victimized or complaints from the
customers themselves or from investigations that we are
conducting into fraudulent merchants.
Mr. Holding. Okay.
Mr. Delery. So it is a standard series of investigative
techniques.
Mr. Holding. Let's go to the funding.
The Department has a working capital fund used to support
operations, and one part of that fund is known as the 3 percent
fund that allows the Department to, you know, retain 3 percent
of affirmative civil recoveries.
You know, as this is a non-appropriated fund, there are no
strings attached from Congress on how it is used and it
inhibits oversight. You know, aside from an occasional question
from Congress, the Department can use the money however it sees
fit.
So, you know, these funds are utilized to hire attorneys,
file additional enforcement actions. So I am concerned this is
unaccountable and non-transparent and somewhat of a slush fund.
So I know you have been asked about this at another
hearing. So, hopefully, you have had a chance to reflect and
can answer it now.
How much money is currently held in the working capital
fund? And how much money is utilized to hire attorneys? How
many FTE does this support? And can you provide to the
Committee an accounting for the last 5 years including the
unobligated funds held?
Mr. Delery. So, Congressman, that was a subject that came
up at the hearing on Tuesday. We are looking into responding to
similar questions, and we would be happy to take those back as
well. I don't have the specific answers on that here today. We
could certainly get back to the Committee on that.
You know--and, obviously, the Civil Division is not the
only part of the Department that the 3 percent fund supports,
and it only supports small and specified parts of--of the work
that we do typically related to our affirmative--affirmative
enforcement efforts.
Mr. Holding. Thank you.
Mr. Chairman, I yield back.
Mr. Bachus. Thank you.
I am going to recognize Mr. Collins for a unanimous consent
request and then the Ranking Member.
Mr. Collins. Thank you, Mr. Chairman.
And especially in light of the vote series and other things
and with other schedules.
I have a letter here from TSYS, from Mr. Troy Woods, that I
would like to enter into the record detailing concerns about
Operation Choke Point, which highlight many of my concerns with
this amazingly misguided program.
Mr. Bachus. Hearing no objections, it is introduced.
[The information referred to follows:]
__________
Mr. Bachus. And the Ranking Member is now recognized.
Mr. Johnson. Mr. Chairman, I would like to be recognized
for the--only for the purpose of introducing by unanimous
consent for the record a letter from Howard Langer, a professor
at the law school of the University of Pennsylvania and a
founding Partner of Langer, Grogan & Diver, PC, which describes
his work against Wachovia Bank, which paid full damages to
750,000 victims of approximately 130 mass market frauds.
And I would also like to tender for the record a letter
from the Americans for Financial Reform, a coalition of several
dozen consumer and civil rights groups, urging this
Subcommittee to suppress efforts to ensure that banks and
payment processors avoid facilitating illegal activity by
complying with long-standing due diligence requirements to know
their customers, monitor return rates, and be alert for
suspicious activity; and, also, a--the written testimony of
Lauren Saunders, who testified on behalf of the National
Consumers Law Center in Tuesday's hearing on the Operation
Choke Point in the Committee on Financial Services; and last,
but not least, several guidance documents issued under the Bush
Administration on high-risk merchants and payment processors.
I will tender these for the record.
Mr. Bachus. Without objection, those materials are entered
into the record.
[The information referred to follows:]
__________
Mr. Bachus. And at this time the Ranking Member is
recognized for 5 minutes.
Mr. Johnson. If I might, Mr. Chairman, I would like to--
since I am the only--since I am the only Democrat here, I would
like to wait until the other Republicans have asked their
questions before I ask my questions.
Mr. Bachus. Mr. Marino, would you like to be recognized?
Mr. Marino. Thank you. Thank you, Chairman.
Thank you, Ranking Member.
Assistant Attorney General, welcome. I am sure you did a
little reading on us beforehand and know that my background and
my colleague to the right, Mr. Holding--we were U.S. attorneys
and district attorney. I was a district attorney as well.
And there is no one here in D.C. that is more of a law
enforcement guy than I am. I have the utmost respect for U.S.
attorneys and prosecutors. I have--had a great deal of pride
and still do to work at Justice and to be nominated.
I do have a concern with what is taking place--what appears
to be taking place.
You have been the one to be chosen to be here and explain.
I give you courage for stepping up to the plate and doing that.
It should reflect in your review when that comes up, and I
think you are warranted a raise.
But, given that, ``fraud'' is a very vague term. And we, as
prosecutors, you, as a prosecutor--we have a great deal of
power. You probably have more power than anybody on Earth when
it comes to investigations, whether it is civil or criminal,
and we know that civil cases do turn into criminal cases.
And I had the same philosophy as you do. Follow the money.
I did it with drug dealers. I did it with organized crime. I
did it with money laundering.
My concern is--I want you to, if you would, please,
convince me that this is not a witch hunt, that this is not the
Department of Justice--let's forget about the White House and
the Administration.
Because I always felt the Department of Justice--although I
worked for the President, we were and are an independent agency
that enforces the rule of law, not politics.
And if memory serves me right--and I looked things up and
memory does serve me right--that there is no definition in
``fraud.''
We talk about wire fraud or security fraud. There is really
no definition in the Federal statute. Courts have made the
determination as what the definition is.
And just--I taught constitutional law a little bit, and I
want to refer back to jury instructions that courts--that I
have had courts use on describing to a jury what fraud is.
And there is a lot more to this. But it is a general term
which embraces an ingenious effort, all ingenious efforts, and
means that individuals devise to take advantage of others. We,
as prosecutors, can interpret that in numerous ways.
Please tell me that that is not being used for political
reasons.
Mr. Delery. Well, Congressman, I can certainly tell you
that it is not in the matters that I supervise and more
broadly.
And I am happy to address the issues that you have raised
because I do agree with your general approach and I think that
it is important for us to respond.
And so I guess what I would do is point to the origin of
these cases and how we came to pursue them and, as the best
evidence of what these cases are about, the one that I
mentioned earlier, Four Oaks, which was actually done in
partnership with Mr. Holding's former district in North
Carolina.
And, you know, our policy in these cases is to investigate
specific evidence of fraud based on evidence that consumers are
being harmed, are being defrauded, not whole industries or
businesses acting lawfully.
We are holding financial institutions accountable for their
own misconduct, for their own fraudulent conduct, not for the
misconduct of anybody else.
And so, if you look at Four Oaks, Four Oaks was a bank that
facilitated transactions by a payment processor, even though it
had hundreds of sworn complaints about unauthorized
transactions, it had received warnings from NACHA, which is the
electronic payments association, it received a warning by the
Arkansas Attorney General's Office----
Mr. Marino. I am familiar with that, and I have followed
the facts on it.
But you did make a statement that--you said, ``We at
Justice decided to pursue these fraud cases.''
Was it you that decided to pursue? Was it someone above
you? Was it the attorney general or the DAG? Or did it come
from the White House?
Mr. Delery. So it came--it originated as a proposal from
career lawyers in the Justice Department who had spent many
years working on cases involving fraudulent merchants. And,
based on that work, following the money, they noted the
involvement of--knowing involvement of some payment processors
and banks. And that was the genesis of these cases. And it was
under my authority in the Civil Division that it was done.
Mr. Marino. I think I am well over my time. We have to go
and vote.
But just as a prosecutor, promise me this, that we are
following the law, that you are following the law, that these
are genuine fraud cases that are not manipulated to look like
fraud cases, and that we, as prosecutors, have a responsibility
to focus on the rule of law and nothing else.
Mr. Delery. I agree, Congressman. That has been the policy
of these cases from the beginning and will continue to be.
Mr. Marino. Thank you. I yield back.
Mr. Bachus. Thank you.
We have votes on the floor. So we will be recess--how many
votes are there? Three votes. So we will----
Mr. Smith, you could go ahead, but I think it is--there is
only 3 minutes left on the floor.
Would you prefer to ask a question or two?
Mr. Smith. Could I ask quickly?
Mr. Bachus. Okay. Go ahead. I am going to recognize Mr.
Smith.
Mr. Smith. Thank you, Mr. Chairman.
My question--I have two. Has anyone at DoJ voiced concerns
that Operation Choke Point could go too far and harm entire
industries?
Mr. Delery. Well, certainly, we have heard some of the
reports that--you know, there have been reports in the press.
We have had letters from Members of Congress. And we always
take seriously the question about whether our efforts to combat
fraud are affecting institutions that we are not, in fact,
investigating.
So that is something that we always are mindful of and take
into account and review what we are doing to avoid those--those
effects, and we are doing that in connection with these cases.
Mr. Smith. So has anyone voiced concern at DoJ?
Mr. Delery. I think what I would say is that we have
responded--we have--we have heard the concerns that people have
been expressed--that people have expressed and have responded
by not only looking at what we are doing, but, also, taking
affirmative steps to make clear to the public and to industry
what our policy is about these cases, what we are and are not
doing, so that we can avoid any unintended effects that go
beyond what we are trying to do, which is to hold institutions
accountable for fraud that they are committing.
Mr. Smith. How many institutions have you all prosecuted
from Operation Choke Point?
Mr. Delery. So this set of cases grew out of some prior
work, including the Wachovia case that was mentioned earlier.
But of the ones--of the investigations that began, you know, in
late 2012, early 2013, we have one resolution, the Four Oaks
Bank case. There are other investigations that are still in
process.
Mr. Smith. So only one from Operation Choke Point?
Mr. Delery. As I indicated, there are other investigations
still in process, but only one res--one of them has been
resolved at this point.
Mr. Smith. Okay. You were in private practice at a private
law firm. What is your estimate of the costs to comply with the
average subpoenas that DOJ sent out under Operation Choke
Point?
Mr. Delery. Congressman, I don't know what the estimate
would be. I think that, in this context, we have sent subpoenas
where we had reason to believe that the recipient either--the
recipient had information about fraudulent conduct, either its
own or on behalf of somebody else.
Because sometimes subpoenas seek information, you know,
related to third parties. And, as is usually the case, we have
a dialogue with the recipients to discuss the scope and how the
best attempts--what the best process would be for responding.
Mr. Smith. I think it is very important that any government
agency, any Federal agency, let alone DOJ--that if they are
asking or requesting something out of any industry or any
individual or any taxpayer, they better know the ramifications
of their ask and how much it is going to cost them. And the
fact that you don't have any idea is very disheartening to me.
Mr. Delery. And I think that that is something that our
lawyers keep in mind as they are framing the--framing the
subpoenas, to target them to the information that we need, and
that is something that we are--we are mindful of in this and
all of the other areas that we pursue.
Mr. Smith. You need to be more diligent to make sure you
can understand how much of a financial impact your asks are
going to have on private industry and private citizens before
you start asking.
Thank you, Mr. Chairman.
Mr. Bachus. Thank you.
And at this time we will recess for votes on the floor and
then we will return at the termination of those votes. Thank
you.
Mr. Delery. Thank you, Mr. Chairman.
Mr. Issa [presiding]. The Committee will come back to
order.
The gentleman from Georgia is recognized.
Mr. Johnson. Thank you, Mr. Chairman.
This hearing appears to be in keeping with a couple of
hearings that I have been associated with this week having to
do with allegations of Presidential overreach, abuse of
authority, even murmurs of impeachment. And this is a hearing
that is in keeping with the spirit of those hearings.
One hearing yesterday, in Armed Services, the Committee
approved a subpoena for emails from Lois Lerner of the IRS. And
then the Justice Department had a similar hearing. And so we
are Benghazi, we are IRS, and now we are into the subject of
the big Wall Street banking industry being singled out by this
Administration, and being singled out for persecution and
criminal prosecution because of allegations, unfounded
allegations of consumer fraud and other alleged offenses.
So far, I mean, a hearing, ``Guilty Until Proven Innocent?
A Study of the Propriety and Legal Authority for the Justice
Department's Operation Choke Point.'' Well, I have not heard
any questions about the improper use of authority, legal
authority, for the Justice Department's Operation Choke Point.
And I have heard nothing about any financial service
corporation being singled out for prosecution in the Justice
Department's Operation Choke Point.
Mr. Issa. Would the gentleman yield?
Mr. Johnson. Yes.
Mr. Issa. My staff has informed us that, from the 50
subpoenas that were issued, only one was to a large bank and it
wasn't a Wall Street bank. The 50 subpoenas that we know of
were issued to credit unions and small community banks. I just
wanted make sure the gentleman from Georgia knew that.
Mr. Johnson. And that is a point well taken. But I think
this hearing has devolved into a semi-spectacle with
allegations of industry profiling, and I think we have kind of
blown up some legitimate investigations and one civil action by
the Justice Department into a misuse of authority by the
President, oppressing banks. And this is not the case. And I am
glad that my friend on the other side recognizes that.
But I do want to ask you, sir, about the complaint filed
against Four Oaks Bank. The Justice Department's complaint
against Four Oaks Bank is the only civil action against any
party as a result of Operation Choke Point. Isn't that correct?
Mr. Delery. Yes, Congressman, it is one that has been
filed.
Mr. Johnson. And this is a community bank, or a regional
bank, or a large commercial bank.
Mr. Delery. Well, Four Oaks, I would say, I am not sure how
to define it, it is probably regional, is how you would explain
it. But I think one of the things that the evidence that we
found, as reflected in the complaint, demonstrates is that an
institution like that can process a very large number of
transactions, more than 9 million for a single payment
processor at $2.4 billion. So the numbers that we are talking
about can be very large.
Mr. Johnson. And in the complaint filed against Four Oaks
Bank under FIRREA by the Department of Justice, the United
States of America alleged that the bank ``knew or was
deliberately ignorant of the use of its accounts and its access
to the national banking system in furtherance of a scheme to
defraud consumers,'' end quote. Although this complaint was
settled, how would a court construe this actual fraud under
FIRREA?
Mr. Delery. I think if you look at the detailed allegations
in the complaint, there was clear evidence of widespread
information that the bank had about fraudulent transactions
that it was processing. That information came from a number of
categories, including complaints, sworn complaints by customers
who had been victimized, by warnings from a State attorney
general and from another organization, had evidence that one of
the merchants was attempting to hide its identity, and it had
very high return rates for more than a dozen merchants that
were more than 30 percent--one was more than 70 percent--which,
again, is a strong indication of fraud. Bank officials knew
this information and, according to the complaint, continued to
process it anyway. And that was the basis for the FIRREA action
in that case.
Mr. Bachus [presiding]. Thank you.
Mr. Johnson. Well, now you didn't sue Four Oaks Bank
because it provided services to high risk merchants, did you?
Mr. Delery. The basis for the action was that the bank
knew, knowingly facilitated, and in certain circumstances
turned a blind eye to evidence that it had of fraud. So I do
think that this case is a good example of the work that we are
doing, which is to hold banks accountable for their own
unlawful conduct under existing law.
Mr. Bachus. Thank you.
Mr. Johnson. Well, as a taxpayer I want to thank you for
doing that.
And I will yield back.
Mr. Bachus. Thank you, Mr. Johnson.
At this time, I recognize Mr. Issa.
Mr. Issa. Thank you, Mr. Chairman.
Thank you for being here today. I have got a number of
questions.
First of all, I would ask unanimous consent that the
subpoena dated May 20, 2013, from the Department of Justice
Consumer Protection Branch be placed in the record at this
time.
Mr. Bachus. Without objection.
[The information referred to follows:]
__________
Mr. Issa. Thank you.
In this document, which I am----
Mr. Bachus. Now we will start your time.
Mr. Issa. Thank you. Thank you. That would be great.
Mr. Bachus. Or are you still introducing your----
Mr. Issa. I am done introducing.
Mr. Bachus. Okay.
Mr. Issa. But in this document it, which I am told there is
at least 50 subpoenas identical to this other than the name,
are you familiar with this document?
Mr. Delery. I believe so. I certainly am familiar with ones
like that. I am not sure about that one.
Mr. Issa. We know that 50 subpoenas were served that were
substantially similar or identical except for name. How many
subpoenas did you serve similar to the one that you believe I
have got here?
Mr. Delery. Well, again, I do think some of the documents
have indicated in the neighborhood of 50, which again, were not
all necessarily identical.
Mr. Issa. Well, let's go through them. You named one
company in which you had, prior to the serving of the subpoena,
allegations of wrongdoing and complaints by customers. Is that
correct? I mean, that is a standard to go looking, is that you
have allegations of a bank doing things wrong, and that would
be a reasonable reason.
Mr. Delery. Yes.
Mr. Issa. You had that in the case of Four Oaks, right?
Mr. Delery. Again, that certainly was the basis for the
case. And as to all of the subpoenas----
Mr. Issa. Well, you are not allowed to go on fishing
expeditions just generally and harass banks, are you?
Mr. Delery. In each of the----
Mr. Issa. No, no, no, that is a question. You are not
allowed to go and just harass for the sake of--you can't send
subpoenas to every single bank. Let me rephrase that. The
statute allows to you do it, but that is not your practice. Is
that correct?
Mr. Delery. That is correct. And in this case there was a
reasonable suspicion, a reasonable basis for each of the
subpoenas that were issued.
Mr. Issa. Then since these cases have come to a close
without prosecution, would you provide to us the reasonable
suspicion in the case of the--or at least an outline of them--
in the case of these 50 subpoenas served?
Mr. Delery. I think, Congressman, many of them relate to
ongoing investigations.
Mr. Issa. Obviously, only the closed cases.
Mr. Delery. And so we can certainly look at the request. As
I indicated earlier, we have a number of open----
Mr. Issa. Okay. Well, let's go through this. It has earlier
been testified that in fact these were just subpoenas and they
were not intended to intimidate or cause people to change their
behavior. Is that right?
Mr. Delery. Right, they were intended to get information
from institutions that we believed had evidence of fraud.
Mr. Issa. So now listed in those evidence of fraud, in
addition to Ponzi schemes, which are criminal, period, and if
somebody knew about a Ponzi scheme, it is inherently a crime,
right?
Mr. Delery. That is my understanding, yes.
Mr. Issa. There is credit card repair services, debt
consolidation, online gaming, government grants, or will-
writing kits, payday and subprime. Threw in pornography, I
thought that was good, that pornography is inherently something
that you should tell people about. Online tobacco, is that
unlawful?
Mr. Delery. I am not sure what document you are looking at.
Mr. Issa. I am looking at the examples that are in your
subpoena. Your subpoena includes an attachment of a financial
institution letter. Your subpoena, all 50 of your subpoenas
included an intimidating list of firearm sales, pharmaceutical
sales, sweepstakes, magazine subscriptions, online tobacco. You
included FDIC high-risk list in there that includes a series of
lawful businesses. Are you aware of that?
Mr. Delery. So the guidance was attached----
Mr. Issa. Sir, were you aware of that?
Mr. Delery. I am aware that the guidance was attached to,
my understanding, is not all of the subpoenas.
Mr. Issa. Oh, okay. Well, we would love to have all of
them.
In testimony before the House Financial Services Committee
on Tuesday you repeatedly disclaimed any involvement in the
FDIC high-risk merchant guidance. Now, isn't is true that--
assuming that this is a correct document, we would like you to
authenticate it here today, and we will provide it to you--this
in fact shows that what you said in Financial Services just
isn't so? You included the guidance. You said in Financial
Services you didn't, and I quote, you repeatedly disclaimed any
involvement with the FDIC high-risk merchant guidance, and then
you include it in your subpoena.
How is somebody supposed to think that you didn't
participate in promoting this and you put it into a subpoena
that threatens the hell out of a small community bank or credit
union? How do you reconcile that?
Mr. Delery. So I would be happy to answer that question,
Congressman.
Mr. Issa. I would be happy to get an answer to that one.
Mr. Delery. The guidance that was attached is guidance that
the FDIC provided. It discusses in general terms the risks that
third-party payment processors can present----
Mr. Issa. That is fine. But didn't by inclusion of that
guidance, didn't you in fact by inclusion associate yourself
with the position of the FDIC? And didn't you on Tuesday say
just the opposite in the Financial Services Committee? So are
you going to correct the record at Financial Services to
disclose that in fact you had associated yourself, you had
included the guidance, and you did in fact essentially team
yourself with the FDIC for guidance that would say, credit card
repair, payday subprime, online tobacco sales, firearm sales,
ammunition sales, pharmaceutical sales, these are high risk, in
a document you attached and then said that you are not
associating yourself with the FDIC? Which is true?
Mr. Delery. Congressman, I don't think that that is a
complete description of what I said on Tuesday. Our policy in
this area----
Mr. Issa. Did you sign the subpoenas?
Mr. Delery. Yes.
Mr. Issa. I find your signature on the subpoena.
Mr. Delery. Yes.
Mr. Issa. You signed the subpoena. It had----
Mr. Johnson. Mr. Chairman?
Mr. Issa. I just want to make one point and I will close.
Mr. Johnson. I just don't want you to badger the witness.
Mr. Issa. I don't want to badger, I just want to make a
point in closing, because I believe the Financial Services
Committee has a real reason to relook at this gentleman's
testimony. He signed the subpoenas, he attached the subpoenas,
specific allegations of high risk, and then before the
Financial Services Committee he testified that in fact he was
not associated, and yet it was stapled to it.
It is not common for subpoenas to have other documents and
fliers stapled to them. Generally, a subpoena isn't owned by
the issuing party.
So I appreciate the gentleman yielding me the additional
time. I thank the Chairman for his indulgence. And I will have
a copy of this brought to the gentleman to refresh his memory
of what he signed.
Mr. Bachus. Thank you.
Mr. Johnson. Well, I think it is only fair that he see the
document that you are seeking to----
Mr. Issa. And we are going to give a copy to him right now.
But he signed it. I figure he saw it once.
Mr. Bachus. He signed it.
Mr. Johnson. He still deserves to see it.
Mr. Bachus. Well, but he signed it. I mean, he signed it.
Mr. Johnson. You mischaracterized what he signed, if he
signed it, and you are drawing conclusions from it that are
probably----
Mr. Issa. Mr. Chairman, the gentleman may be right. I would
like unanimous consent for the Attorney General to have the
opportunity to see it.
Mr. Bachus. Let me ask, is that it right there?
Do you want to see it?
I guess we could ask him if in fact is familiar with that.
Mr. Johnson. Because he has not been able to explain one
answer in response to the questions.
Mr. Bachus. Do you have a motion? I mean, we will give our
witness the opportunity.
Are you familiar with that document?
Mr. Delery. Yes, Mr. Chairman. I think it is one of the
subpoenas, as I indicated.
Mr. Bachus. Well, just by way of giving you an opportunity
to explain, did you sign that subpoena?
Mr. Delery. Yes.
Mr. Bachus. Okay. And is that list of high-risk categories,
is that attached to the subpoena?
Mr. Delery. There is a footnote in one of the attachments
to the subpoena that makes reference to certain industries or
businesses that the FDIC may consider to be high risk. And I
think that goes to the point of the discussion on Tuesday. I
think if you look at the overall discussion on Tuesday, what I
explained was that our basis for issuing the subpoenas was to
pursue specific evidence of unlawful conduct, based on fraud
against consumers, that we were not seeking to target any
industry or business acting lawfully.
And in fact I also said that the participation of a
financial institution with any particular industry, whether on
a high-risk list or otherwise, was not a basis for an action
that we were pursuing. So I think that is what I was saying the
other day, on Tuesday.
Mr. Bachus. Actually, if you look on page 1 of that
attachment, it not only refers to it, it lists different payday
loans, tobacco sales, firearm sales, pharmaceutical sales,
magazine subscriptions, sweepstakes. It actually narrows it to
those categories. So it actually is a more concise list than
the FDIC's list.
Mr. Delery. I am not sure, Mr. Chairman, which page you are
looking at on this point.
Mr. Bachus. The revised guidance on payment processor
relationships, dated January 31st, 2012.
Mr. Delery. Yeah. I think I am looking at that. That is
part of the FDIC----
Mr. Bachus. It does say payday or subprime loans,
pornography. You are not equating the two, are you?
Mr. Delery. No.
Mr. Bachus. Online tobacco or firearm sales, pharmaceutical
sales.
Mr. Delery. No, Congressman. No, Mr. Chairman. I think what
we have said is that participating in any particular line of
business is not evidence of fraud. That is not how we are----
Mr. Bachus. Do you think it was appropriate to attach a
list to your subpoena?
Mr. Delery. I think that, as I understand it, the purpose
of the attachment was to respond to questions about the issues
and the potential for fraud that third-party payment party
processors provide.
I will come back.
Mr. Johnson. We will have a second round.
Mr. Bachus. Yeah, absolutely. And we will give everybody
plenty of time. But firearm sales, I mean, that is----
Mr. Issa. Mr. Chairman, one might say beauty is in the eye
of the beholder. And this Administration considers firearm
sales, ammunition, as somewhat less beautiful than others. But
that is the reason that this whole high-risk list under
Operation Choke Point is so problematic, it makes ideological
decisions of what is high risk, rather than economic.
Mr. Johnson. I would like to ask this witness whether or
not it is true that this list that we are talking about of
potentially illicit activities that banking institutions should
be aware of----
Mr. Bachus. Yeah, yeah, that is right. Illicit activities,
that is a good word. Payday lending is illicit.
Mr. Johnson [continuing]. Whether or not that list is
something that predates the Obama administration. Isn't it a
fact that the FDIC list of activities that is the subject of
this discussion is a product of a prior Administration?
Mr. Bachus. I can answer that. It was 2011, which was 3
years into the Obama administration.
Mr. Issa. Mr. Chairman, for the record, in 2008 there was a
warning on high risk, but there was no specificity. They didn't
name any entity. So it is very different to say beware of high
risk.
Mr. Bachus. And they didn't subpoena.
Mr. Issa. They didn't subpoena. And if you a 50 percent
return rate, that is high risk.
Mr. Bachus. Let me say this, we are going to have a second
round. So we will go to Mr. Jeffries.
Mr. Johnson. Well, for the record, the OCC on September the
1st of 2006 stated specifically listed industries associated
with high volumes of unauthorized returns in a guidance
document.
Mr. Bachus. The Justice Department?
Mr. Johnson. The OCC. And so these are not Justice
Department guidelines, even though they were referred to in the
subpoena.
Mr. Bachus. But what we are talking about here is a
subpoena that cost hundreds of thousands of dollars to comply
with on occasions. And you are all familiar with the term, in
fact anyone that has ever served on Financial Services knows
the term de-risking. That is a term that is used by the Justice
Department. De-risking names that companies like to avoid risk.
If you send them a subpoena and you list companies that are
``risky'' firearm sales----
Mr. Johnson. Not companies, but industries.
Mr. Bachus. Industries. They are going to avoid risk by
jettisoning those customers. We all know that. You know that.
Mr. Johnson. If there is any indicia of illegal activity
that would derive from their actions.
Mr. Bachus. Well, getting a subpoena and saying you are
investigating fraud is a pretty, pretty strong method.
Mr. Johnson. If you have a reasonable suspicion that a
fraud has been committed, Mr. Chairman, I think that that is
what our----
Mr. Bachus. And one thing, Mr. Delery, one reason that we
are so concerned about this, normally you go to a court and you
get a subpoena, a court approves it. This is one of the few
cases under FIRREA, as you know, where you don't have to get
the court's approval. You can launch these things and the
burden of proof is very low.
Mr. Issa. Mr. Chairman, you are exactly right, and I think
Mr. Johnson made the point very well, in that if there is
evidence of fraud, which apparently there may have been in one
case, then the subpoena would follow, if you will, almost the
ordinary course, even though it doesn't need a judge.
In the case of issuing 50, if there is not a specific
allegation but rather a laundry list of industries that they
should, if you will, de-risk themselves from, the chilling
effect on those industries is undeniable.
Mr. Bachus. Thank you.
Mr. Jeffries, we are going to recognize you for 5 minutes
now.
Mr. Jeffries. Mr. Chairman, I appreciate the----
Mr. Bachus. Five or 6 minutes, as everybody else has had.
Mr. Issa. I ask unanimous consent the gentleman have 7 or 8
minutes.
Mr. Jeffries. After that colloquy, I was going to suggest
10 or 15.
And I would just suggest that I find it ironic, there is a
lot of concern about lawlessness in this town and in this
institution. I would just think that regular order should
prevail on this Subcommittee, particularly a Subcommittee where
we have got a topic so inflammatory in terms of the subject
matter, guilty until proven innocent.
And I guess I am struggling with that topic and reconciling
its sort of explosive rhetoric with the notion that it seems
that some Members have come into this Committee already
presuming the guilt of the Justice Department and its activity
connected with Operation Choke Point.
And I guess hypocrisy is not a constraint in this
institution. I have figured that out over my 18 months. But
nonetheless, hopefully we can have an exchange where I get some
understanding as to the facts related to this program and not
simply political rhetoric directed at the Department of
Justice.
Now, it is my understanding that three separate decisions
by courts in the Southern District of New York have upheld the
Department of Justice's authority under FIRREA. Is that
correct?
Mr. Delery. Congressman, yes, those are referring to
decisions that recognize the scope of the conduct that FIRREA
prohibited in order to protect the integrity of the financial
system.
Mr. Jeffries. And would it be fair to say that some
District of New York courts are amongst the most commercially
sophisticated district courts in the Nation, just given the
nature of the subject matter that they often find before them?
Mr. Delery. Yes, I think that that is fair. And I would
also point out that these are the only three cases that I am
aware of addressing the question. So all three courts to have
addressed it have answered the question the same way.
Mr. Jeffries. Right. And these courts I believe also
concluded that the phrase affecting a Federally insured
financial institution includes financial institution that
engages in fraudulent activity that harms itself. Is that
correct?
Mr. Delery. Yes.
Mr. Jeffries. Okay. And in United States v. Countrywide, I
believe the court dismissed the defendant's argument that
Congress did not intend FIRREA to include financial
institutions that are parties to fraud and in fact
characterized that position that seems to be supported by some
members of this panel as utterly unconvincing. Is that correct?
Mr. Delery. I don't remember the phrase specifically, but I
do think all three decisions, looking at the text, structure,
and legislative history of the statute, concluded that it
provides broad antifraud protection where fraud affects a
federally insured financial institution.
Mr. Jeffries. Okay. And I would just note for the record
that we are preparing to sue the President based on alleged
lawlessness, and some within the House of Representatives have
concluded that the Article III court system should be the
arbiter as to whether this President has engaged in
``lawlessness.'' And that is fine. That is the prerogative of
the majority in the House of Representatives.
But as it relates to this particular subject matter before
us, as you have pointed out, every single court to look at the
legality and the Justice Department's legitimacy to move
forward as it has, has concluded that you are well within the
boundaries of the law. And in fact, at least in one instance,
has basically characterized the arguments being made by
defendants and or their sympathizers as baseless in law.
And so there are a lot of things that we as a Committee and
we as a Congress could be focused on. Certainly, I think the
effort to hold financial institutions accountable for their
actions and to make sure that consumers in the United States of
America and those that we represent aren't harmed by reckless
behavior, seems to be an appropriate thing for the Department
of Justice to be engaging in, particularly given the fact that
reckless behavior by financial institutions writ large caused
the collapse of the economy in 2008, plunging us into the
greatest economic crisis since the Great Depression.
And so I support the effort and applaud you, the Justice
Department, for continuing to do what is necessary in the best
interest of the American people. And I expect that as
additional cases wind their way through the court system, they
will equally be determined to be frivolous.
And I yield back.
Mr. Bachus. I am sorry, you yield back?
Mr. Jeffries. Yield back, with 5 minutes to spare.
Mr. Bachus. Okay, thank you. That was a shock to me. I
wasn't expecting that. Thank you, Mr. Jeffries.
Mr. Holding?
Mr. Holding. Mr. Chairman, I have had my turn.
Mr. Bachus. All right, thank you. I guess it is my turn.
Mr. Delery, in testimony on Tuesday you repeatedly stated
that this is normal law enforcement initiative, and we are only
interested in actual fraud. So you have issued 50 subpoenas. Is
that correct?
Mr. Delery. That is the ballpark for the number.
Mr. Bachus. Okay. How many settlements have you procured?
Mr. Delery. Again, as I indicated, so far there is one case
that has been resolved; others are ongoing. And obviously some
of those subpoenas----
Mr. Bachus. When did you start issuing these subpoenas?
Mr. Delery. It was in early 2013, so a little more than a
year ago.
Mr. Bachus. Eighteen months ago, 17 months ago, 16?
Mr. Delery. Right.
Mr. Bachus. And Four Oaks Bank is the only one that--so
zero lawsuits or prosecutions, right?
Mr. Delery. Again, there are ongoing both civil and
criminal investigations.
Mr. Bachus. Investigations, but no prosecutions.
Mr. Delery. Not so far.
Mr. Bachus. Okay. So you have issued 50 subpoenas.
Mr. Delery. And again, some of the subpoenas related to the
same matter.
Mr. Bachus. To the same bank?
Mr. Delery. Or to seeking information about the same--not
necessarily to the same bank, but to related organizations or
institutions that might have information----
Mr. Bachus. But 50 different financial institutions
received subpoenas?
Mr. Delery. I am not sure that that is right. I think it is
in the ballpark of 50 total.
Mr. Bachus. The cases you cite, you talk about a 30 to 50
percent return rate or chargeback. That is pretty doggone high.
I mean, that would alert anyone to something unusual going on.
How did you come up with that 30 to 50 percent?
Mr. Delery. So I referred to the merchants that are
identified in the Four Oaks complaint. So there were more than
a dozen merchants that Four Oaks knew about that had a return
rate of over 30 percent. One was 70 percent?
Mr. Bachus. Yeah, Wachovia, First Bank of Delaware, Four
Oaks, I mean they all had return rates of 30 to 50 percent.
Mr. Delery. Exactly, and Wachovia and First Bank of
Delaware I think are also good examples, and the payment
processor that was charged in connection with Wachovia, those
are the prior cases that are----
Mr. Bachus. Right. And you have highlighted that. I mean,
Wachovia, First Bank of Delaware, all had these high return
rates and chargebacks. And I am acknowledging that ought to be
a red flag. But I notice your document request has a different
return rate. It is 3 percent. It says that any customers'
accounts that experience a return rate of 3 percent or greater
in any 1-month period. So suppose you had someone that sold
ammunition, magazine subscriptions, tobacco, firearms, coin
shops, and they have had one check returned out of 25. That
would put them under this category.
Why did you go from 30 to 50 percent to 3 percent? Three
percent not over a year, but 3 percent in any 1-month period,
which actually could be 3 checks within 1 month for somebody
that did 100 checks. They could have three returned checks in a
year fall under that.
Mr. Delery. The 3 percent number comes from some of the
information requests. That is not something that we viewed as a
threshold for fraud and is not the basis for a charge.
Mr. Bachus. But in your document request it says, number 6,
on page 6.
Mr. Delery. Right. In some of them we asked for information
about returns over that number which was more than twice the
average according to the industry groups. That was not intended
to reflect----
Mr. Bachus. And some industries are going to have a higher
return rate. I mean, magazine subscriptions, there is nothing
necessarily fraudulent about that.
I guess what I am saying, you are asking financial
institutions to go through and find out any customer they had
that had 3 percent of their checks return in 1 month that did
any of these ``high-risk'' businesses.
Mr. Delery. I think that in connection with requests that
we make, we often have a discussion about the scope and what
information they can provide in the way that a recipient----
Mr. Bachus. Well, but you asked all of them that. Then they
have to hire lawyers. Then they have to have these discussions
with you? And a small payday lender or ammunition seller or
somebody selling tobacco, I mean, they have got to hire a
lawyer, they have got to come to you, they have got to come to
you and say, hey, can we? Do you ever modify that 3 percent?
Mr. Delery. My understanding is that there were discussions
with some of the recipients about the scope and, again, what
information they had that could be provided and what would be
appropriate. So, again, that is a standard approach in----
Mr. Bachus. But in fact in 4 it says, documents sufficient
to identify payment processors or merchants or clients that
experienced a return rate of 3 percent or greater in any 1-
month period. Don't you think that is pretty low? That is a
pretty wide net. I mean, that is a pretty wide net, isn't it?
Mr. Delery. Again, that was a request for information that
was set at a level that was double the industry average, as I
understand it.
Mr. Bachus. But in all your testimony you have highlighted
companies that had--3 percent is not evidence of fraud, is it?
Mr. Delery. I agree with that.
Mr. Bachus. Okay.
Mr. Delery. And we have not viewed it as that.
Mr. Bachus. Right.
Mr. Delery. I thinkit was an effort to find information.
Mr. Bachus. But you are going down to 3 percent, but you
admit that 3 percent in 1 month is not evidence of fraud.
Mr. Delery. Not that amount per se. We don't have a
absolute threshold for that.
Mr. Bachus. Okay. Thank you. Well, it is an absolute--I
mean, it is in your subpoenas, it is 3 percent.
Mr. Delery. As a request for information, that is correct.
Mr. Bachus. Well, it is a subpoena, it is a subpoena, it is
a legal document that the bank has to go out and find all these
people. You agree that banks like to avoid risk, right?
Mr. Delery. I mean, that would be my understanding.
Mr. Bachus. And they avoid it by de-risking. And in this
case I am not saying you purposefully, personally wanted to
have these banks jettison these clients, but they are going to
avoid risk. You send them something, you attach a list of
different businesses.
And it is also interesting that this list from the--I
apologize. That is Rachel at Card Services. I would love for
you all to go after them.
The ones that you highlighted actually in this thing you
attached, and this was a document I guess you all prepared
because you refer to the FDIC, you just talk about examples.
And you use tobacco sales, pharmaceutical sales, payday and
subprime loans, pornography, magazine subscriptions.
But, General, some that you didn't include were escort
services or drug paraphernalia, which was on the original list.
So kind of interesting that Ponzi schemes, pornography, you
didn't include those, you included firearm sales, ammunition
sales. Kind of interesting. How did you highlight that over
pyramid schemes, pornography, or escort services?
Mr. Delery. So, Congressman, these materials were prepared
by the FDIC for their own regulatory purposes. And to my
knowledge, the Department of Justice did not participate in
choosing the examples.
Mr. Bachus. When you attach this to your subpoena don't you
realize that sends a message?
Mr. Delery. Well, I think that it is important, if I could,
to clarify again, that doing business with any particular
industry, whether on a high-risk list of a regulator or not,
was not the basis for receiving any of the subpoenas. We
selected the recipients of the subpoenas because we had reason
to believe that the recipients had evidence of fraud that was
being conducted by either a financial institution or somebody
else against a consumer. And the sources of information were
prior investigations into fraudulent merchants or cooperating
witnesses.
Mr. Bachus. Yeah, I think when you issue a subpoena to a
bank and you say, we are looking for fraud, and you say,
ammunition sales, firearm sales, payday lending, you have to
acknowledge that many banks said they have cut these folks
loose. Tobacco sales.
Mr. Delery. Congressman, I think it is also important to
note that we have, in response to questions, taken a number of
steps to make clear to the industry and to the public what we
are and are not doing. And so, going back to last year, we have
met with industry groups, we have communicated with them, we
have written to Members of Congress to make clear that doing
business with any particular industry we don't view as evidence
of fraud.
And so I do think we take seriously the questions of
effects on other institutions and have therefore been working
publicly and with industry to explain what we are and are not
doing To avoid that kind of result.
Mr. Bachus. My Democratic colleagues have said they want to
wrap this up. So let me just simply say to you that this is
having the effect of shutting down these companies, whether
that was intended or not. So thank you.
Mr. Johnson. Mr. Chairman?
Mr. Bachus. Oh, you have another question. Sure.
Mr. Johnson. I would ask you to yield to me for a couple of
questions.
Mr. Bachus. Sure. I am sorry, two questions, or however
many questions.
Mr. Johnson. The National Automated Clearing House Network
Association, which governs the ACH Network through its self-
regulatory operating rules, has repeatedly referred to banks as
the gatekeepers of the ACH Network. Do you agree with that
characterization of banks? Yes or no?
Mr. Delery. I certainly agree that merchants need access to
the banking system through a financial institution, if that is
what that means. I am not familiar with that.
Mr. Johnson. And the ACH Network connects more than 12,000
financial institutions while over $40 trillion in value is
supported annually through the ACH Network representing more
than 22 billion transactions. And the average rate of returns
or chargebacks is less than 1.5 percent on the ACH Network.
Please discuss whether higher return rates trigger certain
diligence requirements for banks and payment processors.
Mr. Delery. Well, certainly, Congressman, I think that
among the evidence that we look to in evaluating fraud,
particularly high return rates would be in that category as
reflected in the Four Oaks case. Again, our cases are based on
situations not just where a financial institution unwittingly
processes a fraudulent transaction, but where they knowingly
allow fraudulent merchants to access the payment system through
their institution or deliberately look the other way against
evidence of fraud, for example, by having a control in place
and then turning it off to avoid seeing the answer. And a high
return rate could be and has been, for example, in the Four
Oaks case, evidence of repeated fraudulent withdrawals by
consumers.
And I do think it is important to remember that at bottom
these cases are about fraud against consumers. They started by
noting the endless variety of fraud, different types of scams
that consumers face all across the country, and by following
where the money went from those scams to particular banks and
payment processors that are not following the rules.
Mr. Johnson. And an indication that the rules are not being
following is a high rate of return. And the industry standard
is about 1.5 percent. Isn't that correct?
Mr. Delery. Yes, that is my understanding.
Mr. Johnson. And the subpoena that my friends from the
other side keep referring to puts the institution to which the
subpoena was directed on notice that a 3 percent return rate is
something that they should pay attention to.
Mr. Delery. I guess the way I would say it, Congressman, is
that some of the subpoenas asked for return rates over 3
percent, that that would be twice the ordinary average. Again,
we did not view and do not view that level as evidence of
fraud. The type of return rates we are talking about in Four
Oaks, 30-plus, up to 70 percent, would be evidence of fraud.
Mr. Johnson. A 70 percent return rate would certainly
authorize a civil action against that particular institution.
And with that I will----
Mr. Bachus. And you have no debate for anyone on that.
And let me close by saying, the Democratic Senator from
Hawaii, 11 members of Financial Services, Democrats, have
written expressing their concerns over legitimate businesses
being shut down.
And I will close by just, I want to read this to you, just
to say go back, consider this. Powder Horn Outfitters sells
shooting, archery, and fishing equipment in Hyannis,
Massachusetts. It was recently turned down for a loan by its
longtime bank. Powder Horn's owner says this. He cites
Operation Choke Point. ``Our loan was turned down not because
of our credit. We had perfect financials and had been working
with the same manager for 20 years. It was just because
question sell guns, and they said that to us specifically, you
sell guns.'' So it is having that effect.
Mr. Delery. And, Mr. Chairman, hopefully this hearing,
among other things, helps to explain our position that that is
not the basis of the actions that we are bringing. We will
continue our efforts to make clear what our policy is, which is
to pursue fraud.
Mr. Bachus. Hopefully you will take some of our concerns,
like this 3 percent and others, into consideration, because I
know that a lot of companies that are losing their bankers.
Three percent in 1 month. And you said and I have said that in
certain industries 3 percent is not that unusual. There are
industries that deal with certain demographics, the average is
1.5, there are going to be stores in certain areas that are
going to have 3, 4 percent, particularly in 1 month.
Consumer fraud is real. Go after that, not after an archery
store. Thank you.
Mr. Delery. Thank you.
Mr. Bachus. And you are dismissed. And we appreciate your
testimony and your candor.
Mr. Bachus. Good morning. So this is our second panel, and
we have an esteemed group of witnesses, starting out with
Professor Levitin, Adam J. Levitin, Georgetown University Law
Center.
Professor Levitin is a professor at Georgetown University.
That pretty much goes without saying, doesn't it? But he
specializes in bankruptcy, commercial law, and financial
regulation. His research focuses on consumer and housing
finance payments and debt restructuring.
He currently serves on the Consumer Financial Protection
Bureau's Consumer Advisory Board, and he has previously served
as the Bruce W. Nichols Visiting Professor of Law at Harvard
Law School, and the Robert Zinman Scholar in Residence at the
American Bankruptcy Institute, and the Special Counsel to the
Congressional Oversight Panel for the Troubled Asset Relief
Program.
Prior to joining the Georgetown faculty, Professor Levitin
practiced in the Business Finance and Restructuring Department
of Weil--is that Gotshal?
Mr. Levitin. Weil, Gotshal. But if you would like to
curtail the biography. There is no reason everyone here needs
to hear it.
Mr. Bachus. Okay. And Weil, Gotshal & Manges?
Mr. Levitin. That is right.
Mr. Bachus. LLP. And served as law clerk to the Honorable
Jane R. Roth on the United States Court of Appeals for the
Third District.
Professor Levitin received his JD from Harvard Law School,
a masters in--is that philosophy?
Mr. Levitin. It is actually an M.Phil in history.
Mr. Bachus. Okay.
Mr. Levitin. You are going to make my mom very proud.
Mr. Bachus. And an AM from Columbia University, and an AB
from Harvard College. His scholarship had won several awards,
including the American Law Institute's Young Scholar's Medal.
We welcome you.
Mr. Scott Talbott, senior vice president of government
affairs at the Electronic Transactions Association. He is
responsible for developing and executing ETA's Federal and
State legislative and regulatory strategies on behalf of ETA's
more than 500 member companies.
Prior to joining ETA, Mr. Talbott served senior vice
president for public policy at the Financial Services
Roundtable where he directed the overall policy strategy,
managed the daily legislative and regulatory advocacy efforts,
and directed communications. Mr. Talbott also served as counsel
to the organization and managed the
Roundtable's political action committee.
He has received numerous accolades in his tenure, including
being named the top lobbyist by the Hill in both 2009 and 2011,
as well as a winner for his work during the economic collapse
of 2008 by the Washingtonian magazine.
In 2010 he appeared in the Oscar winning film ``Inside
Job.'' So you are a movie star, right? How about that. I didn't
know that, Scott. Once named NPR's favorite bank lobbyist. He
is a frequent contributor to both national and international
media.
He joined the Roundtable in 1994 after working in the tax
department's of Arthur Anderson and Ernst & Young. He received
his BA from Georgetown University cum laude and his JD from
George Mason University School of Law. So we have two
Georgetown professors and a student.
Mr. David H. Thompson, managing partner, Cooper & Kirk. Mr.
Thompson is a managing partner at that firm and joined the firm
at its founding. Mr. Thompson has extensive trial and appellate
experience in a wide range of matters. In commercial matters
Mr. Thompson has had significant trial experience in litigating
large claims for plaintiffs and defendants.
Serving as the de facto general counsel to several private
companies, Mr. Thompson has developed significant practical
business experience. Mr. Thompson has taken hundreds of
depositions of senior executives, expert witnesses, high-
ranking government and university officials, employees, and
union leaders.
So you know how much subpoenas can cost, right?
Mr. Thompson. Yes, sir.
Mr. Bachus. Thank you.
Mr. Thompson also has extensive experience in
constitutional litigation. Mr. Thompson has litigated numerous
cases involving freedom of speech, civil rights, voting rights,
taking of property, Second Amendment and separation of powers
issues.
Ah, Mr. Thompson also served as an adjunct faculty member
at Georgetown University Law Center and a visiting professor at
the University of Georgetown Law School, D.C. campus.
Mr. Thompson received his AB degree magna cum laude from
Harvard University and received his JD degree cum laude from
Harvard Law School.
All right, we finally have a witness that doesn't have a
Georgetown, Harvard background here.
Our last witness is Mr. Peter G. Weinstock?
Mr. Weinstock. Weinstock, yes, sir.
Mr. Bachus. Weinstock. A partner at Hunton & Williams LLP.
His practice focuses on corporate and regulatory representation
of small to large regional and national financial institution
franchises.
During the past several years Peter has devoted substantial
time to regulatory law enforcement and internal investigations
of financial institutions. He is co-practice group leader of
the Financial Institutions Section. He has counseled
institutions on more than 150 M&A transactions, as well as
provided representation on security offerings and capital
planning.
Mr. Weinstock has authored numerous articles in bank
publications. His article ``Acquisitions of Failed Banks
Present Risk and Opportunity'' was honored by the RMA Journal
in 2011. He has spoken at over 150 banking conferences and
seminars and is recognized at a top speaker and writer in his
field.
He received his BA from State University of New York and
his J.D. From Duke University School of Law. He is a member of
the Texas Bar.
Mr. Weinstock. Better basketball, Mr. Chairman, than
Georgetown University.
Mr. Bachus. You did what?
Mr. Levitin. Object.
Mr. Weinstock. Better basketball than Georgetown
University.
Mr. Bachus. At Duke. That is right. Georgetown is kind of a
whipping boy for Duke. Recently. All right.
Each of our witnesses' written statements will be entered
into the record in its entirety.
And I am not going to ask you to restrict it just to 5
minutes. So if you want to take a little longer, don't feel
rushed. But, anyway, you will see a light will turn red and
kind of begin to wrap it up then.
All right. At this time Mr.--Professor Levitin, we will
start with you.
TESTIMONY OF ADAM J. LEVITIN, PROFESSOR OF LAW, GEORGETOWN
UNIVERSITY LAW CENTER
Mr. Levitin. Good morning, Mr. Chairman Bachus, Ranking
Member Johnson, and Members of the Subcommittee. Thank you for
inviting me to testify today.
Criticism of Operation Choke Point reflect a lack of
understanding of payment systems, in general, and the Automated
Clearing House, or ACH, payment system in particular.
Critics of Operation Choke Point claim that the Department
of Justice has overstepped its legal authority under FIRREA,
which is predicated on crimes that affect Federally insured
financial institutions.
Operation Choke Point's critics claim that consumer frauds
do not affect financial institutions. They are wrong. When a
bank transmits a payment request in the ACH system, the bank
warrants that the request was authorized by the consumer and
that the requester complies with the laws of the United States.
This means that banks are vouching for the legitimacy of
the payments in the ACH system. When payments turn out to be
unauthorized or illegal, banks have liability. A similar
situation exists for credit and debit card payments where banks
are on the hook for chargebacks that merchants are unable or
unwilling to pay.
Consumer fraud very much affects Federally insured
financial institutions. Accordingly, Operation Choke Point is
squarely within the Department of Justice's statutory authority
under FIRREA.
Now, you may hear that the Department of Justice is abusing
the concept of reputational risk. But I would note that there
is a single mention of reputational risk in the only complaint
filed in Operation Choke Point, that--the complaint against
Four Oaks Bank.
Whatever issues there are with the concept of reputational
risk, they do not at this point appear to be part of Operation
Choke Point, and I think we should be very careful not to
conflate the Department of Justice's civil investigation of
specific fraud with other regulatory activity by prudential
regulators. I think it is important that we keep them separate.
Critics of Operation Choke Point have also argued that the
Department of Justice is trying to shut down legitimate, but
disfavored, industries. This concern is unfounded.
Operation Choke Point focuses on banks that choose to
process transactions that they know are fraudulent or that
willfully ignore clear evidence of fraud. Operation Choke Point
is about ensuring the banks comply with their anti-money
laundering operations.
The basis for the Department of Justice's suit against Four
Oaks Bank was that Four Oaks did not have reasonable controls
in place and ignored the presence of really glaring red flags
indicating illegal activity.
That said, there are objective measures of industries with
higher consumer fraud rates, namely, the rate of ACH
transactions that are returned as unauthorized. When dealing
with these industries, banks cannot be lax in anti-money
laundering compliance, and they may need to conduct further
diligence.
Now, this does not mean that banks need to look through
every image on a customer's porn Web site to see if there is
child pornography or examine every payday loan for a Military
Lending Act violation or ensure that every firearm sold by a
customer is not sold to a convicted felon.
But banks do need to take reasonable steps to determine
that their customer is doing a legitimate business and these
are legitimate industries, but banks have to verify what the
business actually is and not to ignore red flags like high
unauthorized transaction return rates, high volumes of consumer
complaints, or false representations of U.S. domiciles, was the
case in Four Oaks Bank.
This is not making the banks cops. Instead, it is just
emphasizing that banks cannot willfully turn a blind eye to
illegal activity.
Concerns about spillover effects are also overstated. There
are anecdotes, but no verified evidence of Operation Choke
Point affecting legitimate businesses. There are no verified
cases of banks terminating customer accounts because of
Operation Choke Point.
Payday lenders have been having problems with bank account
terminations for over a decade. In 2006, payday lenders
testified about this to Congress. This is a problem that
predates Operation Choke Point.
But even if Operation Choke Point were resulting in account
terminations, it is not clear why this would be a problem, per
se. Compliance with anti-money laundering regulations has
costs, and that is especially true in dealing with high-risk
businesses. Some banks may very well rationally decide that it
isn't worthwhile to serve these businesses.
For other banks, however, Operation Choke Point is a
business opportunity. Some of our nearly 7,000 banks will serve
these high-risk businesses, but they will do so at a higher
price, and this is just the free market at work.
In other words, Operation Choke Point might result in
higher costs of banking services for higher risk merchants.
There is nothing wrong with that. Banks should be pricing for
risk, and high-risk merchants should have to pay their own
freight.
The thing is high-risk merchants don't want to pay higher
costs. They would rather be subsidized by getting a pass from
anti-money laundering laws. And that is what they are here
asking you for.
There is no reason that we should be subsidizing high-risk
businesses like escort services, payday lenders, pornographers,
or purveyors of racist material. Yet, pressuring the Department
of Justice to back off Operation Choke Point is an attempt to
subsidize these high-risk businesses, and it is an attempt to
do so that comes at the expense of homeland security. Congress
shouldn't be doing that.
Operation Choke Point is a legitimate exercise of the
Department of Justice's authority under FIRREA to investigate
and prosecute frauds affecting Federally insured financial
institutions. Banks need to take their anti-money laundering
responsibilities seriously. Operation Choke Point should be
applauded, not criticized.
Thank you.
[The prepared statement of Mr. Levitin follows:]
__________
Mr. Bachus. Thank you.
Mr. Talbott.
TESTIMONY OF SCOTT TALBOTT, SENIOR VICE PRESIDENT OF GOVERNMENT
AFFAIRS, THE ELECTRONIC TRANSACTION ASSOCIATION
Mr. Talbott. Chairman Bachus, Ranking Member Johnson,
Members of the Subcommittee, my name is Scott Talbott. I head
up government affairs for the Electronic Transactions
Association. ETA appreciates the opportunity to participate in
the Subcommittee's hearing on the Operation Choke Point.
ETA is an international trade association representing
companies primarily involved in all aspects of electronic
payments. We focus on credit cards, debit cards, and prepaid
cards. In 2013, we processed over 100 billion transactions for
about $5 billion worth of goods and services. We are the choke
in Choke Point.
In summary, the ETA strongly supports vigorous enforcement
of existing laws and regulations to prevent fraud, but we
believe that Operation Choke Point is the wrong execution of
the right idea.
The payments industry has always been committed to fraud.
It is part of what we do. And I am not here to defend
fraudulent actors.
Consumers in the United States choose electronic payments
over cash and checks because they have zero liability for
fraud. And the cost of that fraud is generally borne by ETA
members. So ETA members commit massive amounts of resources in
time and money into detecting and eliminating fraud.
Every participant in the payment system has developed
effective due diligence programs to both prevent fraudulent
actors from accessing the payment system and to terminate
access from fraud is determined. For example, last year, 5
percent of merchant applications were denied and ETA members
terminated more than 10,000 fraudulent merchants.
As you know, fraud never stops. It never sleeps. And so the
industry can--must continuously develop new techniques to fight
it. With the expansion and ubiquitousness of the Internet, that
creates new challenges. As we build a 10-foot wall, the crooks
build an 11-foot ladder.
So, in response, ETA developed new guidelines that we have
put out for the entire industry, not just ETA members, that
represent 100 pages of due diligence designed to increase the
underwriting methods and enhance the ability of the industry in
this new day and age to detect and eliminate fraud.
These guidelines are drawn based on existing rules that
exist both at individual companies and across the payments
ecosystem, and they also draw from Operation Choke Point. It is
part of the regulatory environment that we operate in. And so
we have included many references and similar concepts in the
guidelines.
Our concerns with Operation Choke Point are that it
neglects the payments industry's efforts in this area to detect
and eliminate fraud. It creates a confrontational approach that
has a chilling effect on the payments industry's ability and
willingness to report fraudulent merchants to law enforcement
mainly because the payments industry believes that they may be
subject to enforcement action if they do report.
And this harms three categories of merchants. One, we have
seen evidence of companies dropping whole classes of merchants.
We see increased costs for merchants, not just those in high-
risk categories, but across the system. And we see--we could
see a restriction of access to the payment system in the future
for new merchants trying to gain it.
What our main particular focus is with Choke Point, what
our main concern is, is that regulators and law enforcement
agencies seem to be changing the long-standing policy of only
focusing on those payment companies who have actively engaged
in fraud.
It appears that OCP is--Operation Choke Point is trying to
hold law-abiding payment companies liable for something as
simple as a high return rate or simply providing merchants
access to the payment system. If this is the case--and this is
our fear, that the consequences I just mentioned will come to
bear.
The Operation Choke Point is not just limited to--as
everyone knows, to Department of Justice. Other regulators and
law enforcement agencies appear to be getting into the game or
adopting similar approaches. For example, ETA members have
received communications from the FTC with Operation Choke
Point-like questions involved.
We believe there are more targeted and more efficient ways
to detect and eliminate fraud. The payments industry makes a
better partner than a target in this effort. A cooperative
approach, like combining self-regulatory efforts, like the
ETA's guideline, are more likely to strike the right balance
than the blunt law enforcement action contained in Operation
Choke Point.
Another idea is to create a reasonable safe harbor that
would allow law-abiding payment companies to report fraudulent
merchants to law enforcement without fear of triggering an
enforcement action.
ETA stands ready to work with regulators and law
enforcement toward our common goal of detecting and eliminating
fraud.
Thank you again for the opportunity to testify before the
Subcommittee, and I welcome any questions you may have.
[The prepared statement of Mr. Talbott follows:]
__________
Mr. Bachus. Mr. Thompson.
TESTIMONY OF DAVID H. THOMPSON,
MANAGING PARTNER, COOPER & KIRK, PLLC
Mr. Thompson. Mr. Chairman, Ranking Member Johnson, and
Members of the Subcommittee, thank you very much for including
me on this panel today.
The Department of Justice, working with the FDIC, the OCC,
and the Fed have conspired to choke off and strangle legitimate
businesses by depriving them of access to the financial system.
Many of the victims of Operation Choke Point are legitimate
businesses.
These agencies have undertaken this operation without any
Congressional authorization and, although they may disapprove
of these industries, neither the FDIC nor the OCC nor the Fed
have any power to shut down lawful businesses. They can ensure
the safety and soundness of banks, but they have no authority
to condemn wholesale lawful industries.
To make matters worse, the Department of Justice and the
banking agencies have failed to provide these law-abiding
companies with any opportunity to be heard and to defend
themselves. Instead, they have acted through back-room--a back-
room campaign of veiled threats and regulatory intimidation.
I come to you today on behalf of the Community Financial
Services Association of America, the leading trade association
for short-term credit providers, and its members have been
targets of Operation Choke Point.
It is important to understand the mechanism by which these
agencies have brought about their desired result. The banking
agencies have targeted disfavored industries by expanding the
definition of reputational risk. This is the club that they
yield and wield.
The agencies had previously and consistently defined the
concept of reputational risk to refer specifically to the risk
of a bank's reputation that arose from its own services and its
own products. A bank's reputation could suffer, in other words,
if it provided substandard products or services.
But the agencies had never before held--said that a bank
needed to assess the reputation of its customers as part of its
management. Banks ensured their good reputation by meeting the
needs of their customers, not by judging the popularity of
their customers.
This is, of course, not to say that a bank had no need to
evaluate its customers. A bank is required to have procedures
in place that ensure that it does not engage in illegal
activity or facilitate the commission of crimes by its
customers. This risk is encompassed under the rubric of
compliance risk, however, not that of reputation risk.
A bank was never required before to have procedures in
place to ensure that it did not have customers who, though
lawfully engaged in demonstrably lawful businesses, might
simply be unpopular with the public or with the current
Administration.
In imposing this new interpretation of reputation risk upon
the banking industry, the agencies have consistently chosen to
proceed without providing the public with notice and an
opportunity to comment, and this is a fatal flaw in this
regulatory regime.
It violates the Administrative Procedures Act. It violates
the due process clause. And these violations have real-world
consequences. Members of the association I represent have had
scores of banking relationships severed in the aftermath of
Operation Choke Point.
And the key point to understand is that these relationships
have been long-standing. They have harmoniously coexisted with
safety and soundness requirements and anti-money laundering
regimes. And now over 80 banks have severed these
relationships. Lightening might strike in the same place twice
on occasion, but it doesn't strike 80 times over and over and
over again by coincidence.
And something has changed. It is not the return rates of
the short-term lending industry. It is not their return--their
risk profile. There is nothing in the free market that has
changed. It is Operation Choke Point that has changed. That is
the driving force behind these decisions.
Thank you, Mr. Chairman.
[The prepared statement of Mr. Thompson follows:]
__________
Mr. Bachus. Thank you, Mr. Thompson.
Mr. Weinstock.
TESTIMONY OF PETER WEINSTOCK,
PARTNER, HUNTON & WILLIAMS LLP
Mr. Weinstock. Chairman Bachus, Ranking Member Johnson, and
Members of the Subcommittee, the U.S. Department of Justice
created Operation Choke Point ostensibly to combat consumer
fraud. However, it has become apparent that the program instead
seeks to irradiate disfavored business.
To do so, the program uses aspects of FIRREA to threaten
injunctions and civil penalties against banks that provide
access to the payment system for certain merchants and payment
processors to whom they provide services.
Without access to the banking and payment systems, these
entities are unlikely to continue operating. This was precisely
the DOJ's goal from the outset.
Banks are disassociating with customers engaged in lawful
behavior, not simply customers whose activities may be
fraudulent, as bankers try to define the next targets of the
DOJ's efforts.
The DOJ even acknowledged the prospects for such parties'
banking relationships to be collateral damage to its
initiative.
With Operation Choke Point, the DOJ is starting from the
premise that certain lines of business or industries are
anathema and then working backward to find legal violations.
Using FIRREA to implement Operation Choke Point, the
government can issue subpoenas, take depositions, and seek
civil damages against entities committing wire fraud or mail
fraud, affecting Federally insured depository institutions. In
doing so, the DOJ need only meet the lower evidentiary burden
of proof by a preponderance of the evidence to demonstrate
fraud.
The DOJ's objective, however, is not to bring any action
against those suspected of committing fraud, but to cause banks
to ``scrutinize their account relationships and, if warranted,
to terminate fraud-tainted processors and merchants.''
As a result of the DOJ's use of FIRREA, banks have been
forced to choose between, at a minimum, incurring significant
discovery and compliance costs and potentially accepting costly
penalties, on one hand, or terminating existing relationships
with processors and merchants, on the other hand, even if they
are operating lawfully.
The DOJ has calculated the bank's sensitivity to the costs
of responding to the DOJ's inquiries, let alone to civil and
criminal liability and regulatory action. Their goal is to
cause a bank to ``scrutinize immediately its relationships with
processors and fraudulent merchants and to take necessary
action,'' i.e., to cut them off.
In Operation Choke Point, the determination of whether a
merchant is fraudulent is determined by the DOJ based on a line
of business rather than by any adjudication where those who are
accused are afforded due process.
DOJ believes that legitimate banks will become aware of
perhaps unrecognized risks and corrupt banks will be exposed.
In other words, a bank that does not agree with the DOJ's
assessment, perhaps based only on return rates and violations
of State laws which the DOJ concedes is only a red flag of
potential fraud, will deem to be corrupt and subject to legal
action.
Operation Choke Point has had a chilling effect on banks'
willingness to transact business with processors and merchants
where the reward cannot compensate enormous costs and potential
exposure.
FIRREA was passed in response to the savings and loan
crisis. The goal of FIRREA was to make those who committed
outright fraud and insider abuse against depository
institutions pay the price for those actions. The DOJ is
clearly stretching the limits of FIRREA in the context of
Operation Choke Point.
With the current analysis by the DOJ, intent is turned on
its head. Instead of using FIRREA to protect banks from fraud,
the DOJ is prosecuting banks for conduct disfavored in
businesses that are disfavored using discovery and draconian
subpoena power. Entities shut out of one bank have little hope
of establishing a subsequent banking relationship and will
become defunct without an opportunity to defend themselves.
While I am not championing the efficacy of payday lending,
there are undoubtedly some organizations that operate lawfully
and provide un-bank customers with a service that such
customers believe is valuable, certainly one less dangerous
than engaging a loan shark.
Indeed, a review of the development of Operation Choke
Point reveals the DOJ's new technique. As noted by internal
memoranda on Operation Choke Point, the DOJ's primary target is
the short-term lending industry.
Brandishing FIRREA as a sword, DOJ chose to go after a
number of banks that were doing business with third-party
payment processors to get them to cease providing services to
those entities.
DOJ stunningly proposed identifying ten suspect banks for
analyzing return rate data, among other criteria. However, the
DOJ's standard for identifying fraud was arbitrary and relied
almost exclusively on NACHA average return rates and potential
violations of State law.
NACHA does not define a 3 percent level. NACHA does have a
1 percent level for unauthorized transactions as an indicator
of fraud. NACHA doesn't have a level for not sufficient funds.
The chilling effect of Operation Choke Point is not limited
to DOJ actions. Instead, it is partially predicated on the
notion that reputation risk arises when banks transact business
with processors and high-risk merchants. What constitutes
reputational risk, however, is not clearly defined.
The FDIC issued a financial institution letter that
explains reputation risk as a risk arising from negative public
comment and adds any negative publicity involving the third
party, whether or not the publicity is related to the
institution's use of the third party, could result in
reputation risk.
Sarah Raskin, Federal Reserve Board Governor, explained
reputation risk in a speech as the risk to enterprise value
from--to brand recognition and customer loyalty. Raskin further
added that supervision of banks is necessary in order to
prevent the accumulation of reputation risk to the extent it
constitutes a hidden exposure.
These comments illustrate the vague and subjective standard
now being wielded by the Federal Government against banks who
are doing business with disfavored industry. The guidance
plainly does not distinguish between lawful and fraudulent
activity.
Reputational risk is not legal risk. Regulatory authorities
proffer no standard of how to evaluate whether, as Raskin
states it, that reputation risk is accumulating and that any
exposure is material to safety and soundness.
The OCC and the Fed in the fourth quarter of last year
issued guidance on third-party risk that requires financial
institutions to risk-assess their customer base and to engage
in extensive review of the compliance management systems of
their customers. In effect, bankers now have to police their
customers' compliance management systems.
This goes well beyond the BSA's know-your-customer
requirements. This gets into the burden on banks to police
whether customer--disclosures to their customers are deceptive,
whether customers are engaging in improper activity.
Basically, they have to police all of their customers'
activities. What cost is that imposing on third parties? What
cost when the third parties have to have bank-like compliance
management systems? And what is that going to do to our
economy?
So, undoubtedly, there is a chilling effect going on.
Bankers are trying to evaluate high-risk customers and then
determine which of those will be next on the regulatory or
government list and then terminate them. Bankers are making the
business decision to de-risk their customer base accordingly.
Thank you.
[The prepared statement of Mr. Weinstock follows:]
__________
Mr. Bachus. Mr. Holding, recognized for questions.
Mr. Holding. Thank you, Mr. Chairman.
Mr. Thompson, thank you for your testimony.
There is a little bit of a discrepancy amongst the panel
here. In his testimony, Professor Levitin states that there are
no verified cases of banks terminating accounts in direct
reaction to Operation Choke Point.
I heard you testify differently than that. So, if you
could, please explain where that discrepancy comes from.
Mr. Thompson. Sure. And perhaps it is definitional in terms
of what we mean by Operation Choke Point. But what I mean by
that is the coordinated effort by the Department of Justice,
the FDIC, the OCC, and the Fed to target certain high-risk
industries.
And this is what we saw in that subpoena and the attachment
to the subpoena. And if that is what we mean by it, we have
heard numerous instances of banks saying, ``We are getting out
of''--``We are exiting this relationship,'' relationships that
often extend over a decade, almost 2 decades.
And there has been no indication that there was a concern
about the risk profile, that anything had changed in the risk
profile of the short-term credit lender. Rather, it was
regulatory pressure. That is what we are hearing, regulatory
pressure, and it is clear that it is Operation Choke Point.
Mr. Holding. And you are in the business of representing
similarly situated entities on a daily basis. Correct?
Mr. Thompson. Yes. That is right.
Mr. Holding. The--you know, talking about these subpoenas,
again drawing on your experience as a practicing attorney in
this field, the--take a minute and walk through, you know, what
happens when a client gets a subpoena like this. You know, what
is the ripple effect? And, ultimately, at the end of day, you
know, what does it cost them to respond?
Mr. Thompson. Well, it is a very significant cost in any
number of respects. It starts with just answering the subpoena,
which means retaining lawyers, number one.
Number two, typically, then these subpoenas are looking for
emails. The cost of production can be hundreds of thousands of
dollars just in computer resources to do an email sweep and
then to produce, depending upon the volume of material that is
sought.
And often, of course, the subpoena is a prelude to further
investigation, which would cost--could cost millions of
dollars. And then you layer on top of that the bad publicity
that comes from receiving this, the investigation.
There is enormous pressure on the institution to make it--
the pain stop. And I suspect, although I don't know, that that
is one of the reasons we see 50 subpoenas being issued, but
only one case being--having to be filed, because there is huge
asymmetric pressure when the government issues a subpoena on a
recipient to try to make the pain stop.
Mr. Holding. So if you are a financial institution, I mean,
you are always looking at the bottom line, doing a cost-benefit
analysis. Whether you take on a client or retain a client, you
know, you certainly do a risk analysis as to whether they will
be able to repay their loans, whether they will be a profitable
customer.
But then you add into that--you know, if they fall into one
of these high-risk categories, as enumerated by the FDIC, the--
you look at that and say, ``You know, it could cost me a lot of
money to have this person as a client.'' Correct?
Mr. Thompson. You are absolutely right.
And it is not limited just to that. Because, as one of the
panelists--or Members of the Subcommittee indicated earlier,
regulators have a lot of different ways to apply pressure on a
financial institution.
So, yes, you are right. The dollars and cents are huge. The
negative publicity is very significant. But, also, you want to
try to stay on the right side of your regulators. And if you
defy them, they have innumerable ways to get even with you.
Mr. Holding. Thank you.
Mr. Chairman, I yield back, in light of the vote.
Mr. Bachus. Thank you. I appreciate that, Mr. Holding.
Do you want to go ahead and begin to ask one or two
questions and then we will break in maybe 2 minutes? We have 3
minutes left on the floor. Or do you want to come back?
We will wait.
We would like to come back. Are any of you all under a time
restraint?
All right. We will--there are two votes on the floor?
Mr. Johnson. That means everybody is on the clock?
Mr. Bachus. I think that may be probably 30 minutes. Why
don't we do this. Why don't we come back at 10 till. Is that
all right? Or 15 till? That will give you a chance to get
something to eat. We are going to come back at 15 till.
Probably won't come back. Let's say 20 minutes. 20 minutes.
Mr. Weinstock. How long do you think we will go from there,
Mr. Chairman?
Mr. Bachus. 20 minutes max. We will be out of here by 1:00,
1:15.
Mr. Weinstock. Thank you.
Mr. Bachus. Is that okay?
Mr. Weinstock. I am not on the clock.
Mr. Bachus. Oh, no. Okay. So you are not getting paid right
now.
Mr. Weinstock. I am here of my own volition.
Mr. Bachus. We will try to get you out of here pretty
quick.
Mr. Weinstock. Thank you, Mr. Chairman.
Mr. Bachus. Of course, a professor gets paid by teaching
classes. So he is a little better----
We will recess at this point.
[Recess.]
Mr. Bachus. The Subcommittee will come to order.
My first question will be for Mr. Weinstock.
Mr. Weinstock. Yes, sir.
Mr. Bachus. Well, actually, no. That question has been
asked. So George asked that question. I just saw where I marked
it off.
Mr. Talbott, people might be skeptical of the idea of an
industry policing itself. Are there any economic incentives
that explain why one could expect that the payment industry
would do a good job of fighting fraud?
Mr. Talbott. Sure. Thank you, Mr. Chairman. Appreciate the
question.
Because fraud, in case of credit card or debit card, that
is visited upon the consumer comes bank to not the consumer--
the network rules prohibit banks or processors from charging
the customer--because that fraud comes back to the payments
industry, we have to bear the cost of that fraud.
We have a direct pecuniary interest ensuring that fraud is
kept off the system. So in addition to it being good public
policy, it is--comes directly out of our bottom line. So we
have every incentive to ensure that fraud stays off the system.
Mr. Bachus. All right. Thank you.
Mr. Weinstock. Mr. Chairman, can I add a comment?
Mr. Bachus. Yes.
Mr. Weinstock. One thing people don't realize is NACHA
applies fines very quickly if there are unauthorized
transactions and the bank can't show proof that the customer
authorized the transaction.
After three, four instances, that equals a fine of over six
figures. So it is not like it is a toothless exercise. If they
don't pay the fines, they can get kicked out NACHA.
Mr. Bachus. Okay. Thank you.
Mr. Levitin. Mr. Chairman, if I may add, I agree with all
of that. But I think it is important to note that it is--only
part, not all, of fraud costs come back to industry.
Because what it--you don't have perfect enforcement going
on because a lot of consumers will just lump it on a small-
dollar fraud. It is not worth complaining about $10 or $20 that
are wrongfully debited.
So when consumers complain, yes, the industry is at risk,
but consumers often don't complain about small-dollar frauds.
Mr. Bachus. Professor, same point that we are discussing.
You did--I think in your testimony you were the one that
covered the fact that--you said a payday lender is out of
business if he--out of business or insolvent, the payday
lender's bank bears the loss, and that that is one reason--
justification, you know, for----
Mr. Levitin. That's correct.
Mr. Bachus. They can--but let me ask you this. You then
went on and said banks already charge those merchants much
higher fees for banking service precisely because of the risks
they pose, over on page 11.
So you--you know, you say that there is some risk, but then
in another paragraph, you acknowledge that a bank can just set
a higher fee. And you mention that there are a lot of
businesses that just have higher return rates, I mean, as a--as
a matter of just their business. So----
Mr. Levitin. Sure. Return rates do vary by industry. And it
is important that we distinguish between absolute return rates
and return rates because of unauthorized transactions. Not
every return--ACH return is because of an unauthorized
transaction.
Mr. Bachus. Yeah. And I agree with that. But, still, banks
have an ability to adjust.
Mr. Levitin. Oh, I agree completely, Mr. Chairman, and that
is actually, I think, the important point, which is that, if
Operation Choke Point is imposing higher costs on high-risk
merchants, there will be some banks--we have got almost 7,000
banks in the United States; it is far more than any other
country has--there will be some banks that see this as a
business opportunity and say, ``Hey, archery store that got
closed down, come to us. We are going to charge you more, but
we will take your business. We will do the diligence on you. We
can get comfortable with you. It is going to just cost you
more.''
And the market should correct this. You know, it may not be
a perfect correction, but we should see a market correction.
Mr. Bachus. Let me say this to you. You know, I know--I
notice that you--and you are the witness that was called by
the--by the Democratic party, you know--I mean, Democratic
colleague. You actually talked about two or three times that
justification for this is anti-money laundering.
Mr. Levitin. I am sorry, Mr. Chairman. I didn't understand.
Mr. Bachus. You said--you, you know, criticized our
attempts to hamper the Justice Department's enforcement of
anti-money laundering law and, you know, you actually say that
is what they are trying to do, prevent anti-money laundering.
Because that is the justification for this program. Right?
Mr. Levitin. I think that is correct, sir. Operation Choke
Point, if you look at the actual complaint, that is the--you
know, the--the--it--the problem that was alleged with Four Oaks
Bank was a failure to essentially know your customer. With the
Bank Secrecy Act anti-money laundering----
Mr. Bachus. And that has to do with money laundering.
Mr. Levitin. That is right. And it is important to
recognize that, when you have an anti-money laundering problem,
even if it is from, let's say, a payday lender, that can
actually implicate much broader things because, if a bank
doesn't know its customer, it doesn't actually know what that
transaction is.
Just because a business says it is a payday lender, it can
also be, you know, engaged in other business, allowing other
transactions to be routed and look like they are payday loans.
Mr. Bachus. Right. Yeah. And, you know--and I mention this
because that is an argument that we are hearing from some of
our colleagues.
You know, you say Operation Choke Point is ultimately an
anti-money laundering enforcement that requires the banks to
take their know-your-customer duties seriously.
And that is--the Justice Department, you know, on one hand,
has said it is for this reason, but then they said, well,
actually, it is to prevent money laundering.
But do--do payday lenders launder a lot of money? Is there
any evidence of that?
Mr. Levitin. As to actual money laundering, I don't know of
any evidence on that. We do know that there is high return
rates, however.
Mr. Bachus. Well, yeah. But I am talking about--you know, I
am talking about money----
Mr. Levitin. And--well, I think it is important that we
define what we are talking about with money laundering. Money
laundering is not limited to narcotics or terrorism. Money
laundering is just proceeds of any illegal transaction.
Mr. Bachus. Yeah. Right.
Mr. Levitin. And to the extent that you have illegal
transactions going on in any industry, payday loans or what
have you, then, yes, there can be a money laundering problem.
Mr. Bachus. Are these hundred-dollar loans? But you said
there is no evidence that the----
Mr. Levitin. I don't know of any evidence. I have never
investigated this.
Mr. Bachus. Yeah. Right. Okay.
Mr. Levitin. I would note, though----
Mr. Bachus. I am sure potential is there for any----
Mr. Levitin. Of--sure.
Mr. Bachus [continuing]. By any industry. I mean, you know,
in fact, people buy cars. One of the primary ways is they go to
a car dealership. They buy a very expensive car. Then they turn
around and they sell it. And they deposit the proceeds and they
launder it that way. But, you know, car dealerships are----
Mr. Levitin. There is a particular concern, though, in that
some payday lenders are also money services businesses and they
are sometimes engaged in doing international remittances. And
that raises particular money laundering concerns.
Mr. Bachus. I think the--you know, if you are talking about
a hundred dollars at a time, it is kind of hard to----
Mr. Levitin. Well, that--but that is the way to do money
laundering. It is called smurfing.
Mr. Bachus. No. No. Actually----
Mr. Levitin. You do it in small transactions so you don't
get----
Mr. Bachus. You know, cars are a $10,000 transaction, I
think. Money laundering, through--you know, when they do drugs
to money, they are converting--they are not doing it a hundred
dollars----
Mr. Levitin. Actually, I disagree with you on that, sir,
because banks have--have to file suspicious activity reports
for anything over $10,000.
The idea is you keep your--if you want to be a money
launderer, you keep your transactions small and you don't put
them at 9,999 because that is also suspicious. You make smaller
transactions, not necessarily a hundred.
Mr. Bachus. No. No. I----
Mr. Levitin. But you break it up into little pieces----
Mr. Bachus. Maybe 2,000, 3,000. Or you buy--you know, there
are--people buy appliances and they ship them back--out of the
country. You know, there is a lot of that.
But I have seen no--I mean--I have never seen any evidence
that people are cashing their paychecks--I mean, a paycheck is
a--that is a--that is not cash.
They are actually taking a check. And there is no need to
money-launder that. And they are turning it into cash. They are
not turning cash into a check.
So--but, anyway, I--we are--I have done 7 minutes. We
will--my colleague will do 7. And then we will turn--I just was
pointing out----
Mr. Johnson. Okay. Thank you.
Professor, you are a professor. And you three gentlemen,
Mr. Talbott, Mr. Thompson, and Mr. Weinstock, are practicing
lawyers. Is that correct?
Mr. Talbott. Yes.
Mr. Thompson. Yes.
Mr. Talbott. I am a lobbyist----
Mr. Johnson. You are a lobbyist.
Mr. Talbott [continuing]. With a law degree.
Mr. Bachus. He is government affairs.
Mr. Talbott. I am not apologetic.
Mr. Bachus. You are government affairs.
Mr. Johnson. The three of you also have clients; do you
not?
Mr. Thompson. Yes. Yes, sir.
Mr. Bachus. And, Mr. Thompson with Hunton & Williams--oh. I
am sorry.
Mr. Weinstock with Hunton & Williams, you have many clients
in the financial services industry; do you not?
Mr. Weinstock. Yes.
Mr. Bachus. And how about you, Mr. Thompson?
Mr. Thompson. I do not. In the past, I have represented,
but not at present. I have some.
Mr. Johnson. And Mr. Talbott?
Mr. Talbott. Members of the association of ETA are payment
companies. Some are financial institutions, per se. Others are
not.
Mr. Johnson. Okay. And--but, now, Mr. Thompson, you have
done over 50 depositions. Did I hear that earlier?
Mr. Thompson. I think it is several hundred, in fact. But
only two of Members of Congress, Senator Snowe and
Representative Meehan back in the McCain-Feingold case.
Mr. Johnson. Okay. And you did that work in connection with
your job responsibilities where?
Mr. Thompson. At Cooper & Kirk. I have been there since
1996.
Mr. Johnson. And so that law firm does represent clients in
the financial services industry?
Mr. Thompson. We have. Yes.
Mr. Johnson. And so--and I--and I suppose, in a perfect
world, a perfect corporate world, a perfect free market
corporate world, a perfect free market Ayn Rand-style world,
there be no regulations on banks at all.
Would you agree with me on that, Mr. Talbott?
Mr. Talbott. Theoretically, if you asked Ayn Rand, I think
she would answer that question in the positive.
Mr. Johnson. Well, how about you?
Mr. Talbott. I think that there is a need in--for some
regulations some places, financial services probably less so
than other areas. But there is a value to having some
regulations.
Mr. Johnson. Mr. Thompson?
Mr. Thompson. My clients are not contesting the validity of
any of the regulations or----
Mr. Johnson. No. My question is: Would you agree that that
would be a perfect world for corporations, to not have any
rules or regulations----
Mr. Thompson. No.
Mr. Johnson [continuing]. And they could pretty much self-
regulate?
Mr. Thompson. No, Congressman. That----
Mr. Johnson. Is that the kind of world that we want, Mr.
Weinstock?
Mr. Weinstock. I never read the book. So I am not exactly
sure why a Rand-perfect world would be. But I think what we are
all saying is what is appropriate is balance in regulation.
Mr. Johnson. Well, now, how can we have reasonable
regulations if the banking institutions don't want to deal with
the potential loss of customers because they determine for
themselves that their reputational risks--that the reputational
risks are not worth the business and you have to also do more
oversight, got to do more--the costs of doing business for
certain businesses is high because of regulation, and you would
prefer to not have to--for your clients to not have to incur
those costs. And I understand that.
But where do we draw the line? Where is regulation
meaningful and reasonable and in the public interest?
And so that is a fundamental question I think we have to
deal with as opposed to an incendiary guilty-until-proven-
innocent study of propriety and legal authority for the Justice
Department's Operation Choke Point.
I mean, Operation Choke Point has only resulted in one
civil action. Subpoenas have been sent out to other
institutions. There are ongoing investigations.
But a settlement in a civil case--and we are sitting up
here wasting, you know, your time bemoaning the fact that your
clients have to incur costs of doing business.
I mean, you know, when is the--when do we--who protects the
consumer, which is the real customer?
Mr. Weinstock. Can I respond?
Mr. Johnson. Yes.
Mr. Weinstock. In terms of the level of regulation, as they
say in East Texas, if you hang the meat too high, the dogs
won't jump.
And the problem for our client base, which they are
community banks, they are the lifeblood of their local
communities, is that, if the level of regulation is such that
they have a duty to police all of their customers, their
scripts----
Mr. Johnson. Well, shouldn't that be just a normal cost of
business, that you do your due diligence and you make sure that
certain benchmarks are met with enhanced scrutiny, like rate of
returns in excess of 1.5 percent?
Isn't it--I mean, isn't that the regulations of your
industry, Mr. Talbott?
Mr. Talbott. Yes.
Mr. Johnson. And so, if--if regulators or the Department of
Justice notes some benchmarks that have been met which trigger
suspicion, you all seem to be opposed to DOJ following up on
that. You just want there to not be a loss of the customer----
Mr. Weinstock. That is not what we are saying, Congressman.
Mr. Johnson [continuing]. And you don't want a loss of the
cost of doing business, and it just seems very Utopian to me.
Mr. Weinstock. If--in terms of the 1\1/2\ percent, that is
really a red hearing. That is an average based on lots of
different NACHA transactions. The DOJ disowned the 3 percent,
which was just mathematically doubling the 1\1/2\ percent
average.
NACHA, which is the agency that calculates the averages,
never indicated that it is an indicator of fraud. The DOJ took
it on itself and then at this hearing disowned the 3 percent.
Unquestionably, banks have an obligation to know their
customer. Banks are complying with that obligation to know the
customer.
Where this is all insidious is if the level of regulation
and the level of supervision is such where the bankers don't
believe they can ever chin the bar, they can ever jump and
catch the meat.
Then their smart thing to do is to de-risk, cut the
customer off. And the costs we are talking about are access to
the lifeblood of an electronic economy.
Mr. Johnson. Yeah. Well----
Mr. Bachus. Actually, we did 7 minutes. So it is 8\1/2\.
You can go ahead, if you have got another question, and then I
will----
Mr. Johnson. I just wanted to ask Professor Levitin did he
have anything he wanted to say in response to what we have
heard.
Mr. Levitin. Again, I would just say that I am not sure
that--I am not sure I would agree with Mr. Weinstock.
Certainly for some banks they will decide that it is not
worthwhile serving high-risk customers. They just can't get--
that they are afraid that their compliance costs are just going
to be too high to get comfortable with it.
But we have nearly 7,000 banks. Unless we assume that we
have a real market failure in the banking industry in this
particular area, there will be banks that will step up and
serve these high-risk clients.
They will start specializing in it. They are going to do
more diligence. It will cost them more. It will cost the
clients more. It will cost Mr.--and high-risk businesses will
have to pay more for access to the banking system.
But that is exactly the way it should be. Parties should
bear their own risk. If you are imposing costs on the system,
you should have to internalize them. And I don't think there is
anything wrong with that.
Mr. Johnson. Well, I think that would be the way that Ayn
Rand would want it to be.
Mr. Levitin. I would just add it is not clear to me that
markets exist except with regulation. If you try and imagine a
totally unregulated market, I think that looks like the
Mogadishu arms bazaar, and I don't think that is the way we
want our economy to operate.
Mr. Bachus. Let me start with that. I somewhat--I agree
with you. I think that the market needs to be regulated.
That is really why I am just, you know, disturbed about
payday lenders, short-term lenders, being put out of business.
Let me explain why. And I think history is a good teacher.
Mr. Johnson talks about a perfect world. In a perfect
world, there will be no payday lenders. But there always have
been. In the South, do you know who the payday lender was in
many cases?
Mr. Levitin. It was often the employer.
Mr. Bachus. It was--no. It was--there were some--some
occasions where the employer--you are absolutely right. You had
the company store where people bought things----
Mr. Levitin. I was thinking of Faulkner, actually. He has
got Old Man Snopes loaning sawmill workers a dime on Sunday.
And they are supposed to pay it back with a penny the next
week.
Mr. Bachus. That is right.
Mr. Levitin. Never asked for the dime back. Just keeps
taking a penny every week.
Mr. Bachus. And I actually had two employers and they--many
times was a high interest rate. They don't loan money anymore.
I mean, I don't know of any--very few cases. You don't have a
lot of company stores.
What you do have is you have the sheriff in those counties
or you have a guy that is just a self-appointed guy that stands
outside the--used to stand outside the gate when people got
their paycheck. You know, he--or--you know, he--he was waiting
to get his money back. During the week, he had loaned at a 50
percent or a 30 percent.
A lot of times, though, it was--it was totally unregulated.
And people got their arms broken. People got their fingers
mashed. People got beat up. So we--States wanted it regulated,
and they set rules. And that is the rules we have today.
So these payday lenders are--you know, if you--if they go
out of business, you are going to have the guy at the gate
getting his money back. And if he doesn't get his money back,
kind of like in the--gambling used to be. You know, when you
have unregulated gambling, people get--people get hurt, people
get killed.
So, really, you shut these down, you are going to have
people loaning money. And they are going to be unregulated.
They are not going to answer to anybody. So this isn't about
regulation. It will be Mogadishu again, like you said, I mean,
about something else.
I just say consider that. And you talk to anyone that ran a
plant in the South, they will tell you there was always a
payday lender. And--you know, and a lot of times you share for
the probate judge.
That is how they made their money. There were other things
that--they used to make their money on illegal whiskey by
protecting some people. They were in the protection business.
Mr. Levitin. Mr. Chairman, I think it is important to note
that payday loans basically don't make money absent customers
get stuck in a--in a debt trap.
Let me illustrate. Online payday lenders buy leads. If you
go to a Web site looking for a payday loan, that is actually a
lead-generator's Web site----
Mr. Bachus. No. I understand.
Mr. Levitin [continuing]. Get auctioned off.
Mr. Bachus. Professor, what I am saying, you know, you--in
a perfect world, I would never argue with you that, you know,
it--but I would tell you there will always be a payday lender,
and it will be unregulated or regulated. Those are our two
choices.
You know, one thing you do is you talk about Congress
should not be using its oversight power to subsidize these
businesses. You say that twice.
Mr. Levitin. That is correct.
Mr. Bachus. And you say payday lenders, online gun shops,
escort services, online gambling parlors--now, they are all
illegal. That is flat out prohibited.
Mr. Levitin. Actually, I am not sure that any of those are,
per se, illegal. There is a small sliver of online gambling----
Mr. Bachus. Yeah. The wire----
Mr. Levitin. Similarly, escort services, if they are very
narrowly only companionship----
Mr. Bachus. Yeah. But I will just say most of your gambling
online. You know, it is hard to stop. A lot of them are
overseas. But purveyors of drug paraphernalia and racist
material, pornographers that serve no clear public service.
But, you know, you--when you get into saying that, you are
equating short-term lenders. I mean, you are making a judgment
there that--you are equating them to drug purveyors or drug
paraphernalia. I know you don't intend do that.
Mr. Levitin. No. No. No. Actually, I think for----
Mr. Bachus. Or online gun shops.
Mr. Levitin [continuing]. For the purposes of what I am
saying, I very much intend--intend that because----
Mr. Bachus. Okay.
Mr. Levitin [continuing]. In terms of whether these are
high-risk merchants or not, from a bank's perspective, it
doesn't really matter what the ultimate transaction is. It is
how much risk.
And the porn Web site and the payday lender, if they are
high risk, they are high risk. It doesn't--the specifics of the
industry don't matter. It is high risk.
Mr. Bachus. But, you know, I think--when you are talking
about a criminal investigation by the Justice Department, I
think it matters whether it is a legitimate business or a
fraudulent business. That is my point.
Mr. Thompson, FIRREA passed in 1989. It was never used
until now against payment processors, was it?
Mr. Thompson. Mr. Chairman, I am not an expert on that
aspect of FIRREA, but I believe you are correct.
Mr. Bachus. Yeah.
Mr. Talbott, do you know.
Mr. Talbott. Same answer. I think that is right.
Mr. Bachus. Okay. I think that concludes our hearing today.
I appreciate all our witnesses. Concludes the hearing.
Did you have another question.
Mr. Johnson. No, sir. I do not, Mr. Chairman.
I just want to, for the record, thank the Chairman for his
willingness to have these kinds of hearings that are not so
structured and that--it prevents us from getting down into the
meat of the matter. And so I want to thank you for----
Mr. Bachus. Well, as you know, I am retiring after 22 years
and I was a trial lawyer before I got here. And I don't think I
could have ever tried a case on a 5-minute rule or even made a
point, and it--the structure doesn't really lend itself.
And not in this particular hearing, but in some hearings it
causes the witness to filibuster by talking about anything but
answering the questions. But then it also--because Members rush
and I--I really hate to see Members do this, but they interrupt
witnesses.
If the witness wants to give a 2-minute response, they want
a ``yes'' or ``no'' answer. And that is not always possible.
You want to explain yourself.
So you get--you really don't get a complete picture. You
don't--you don't get--and then you have another witness wants
to come in on what this witness said, which is good.
But we--so the 5-minute rule I wish we would--would do
something about that in certain cases. But I am sure a freshman
sitting down here wouldn't want that. But we could always start
at the bottom every other time.
This concludes today's hearing. As I said, thank you for
all our witnesses.
Without objection, all Members will have 5 legislative days
to submit additional written questions for witnesses or
additional materials for the record.
This hearing is adjourned.
[Whereupon, at 1:18 p.m., the Subcommittee was adjourned.]
A P P E N D I X
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Material Submitted for the Hearing Record