By: Adam B. Brandon
As part of a coordinated, multi-agency initiative known as “Operation Choke Point,” the Federal Deposit Insurance Corporation (FDIC) has warned financial institutions that they might be liable for maintaining banking relationships with certain “high risk” businesses and customers. Specifically, the FDIC expressed concern about relationships between banks and payment processors who use their deposit accounts to process payments for third-party merchant clients. If these merchant clients are involved in money laundering or consumer fraud, then the banks could be liable for facilitating illegal activity. However, critics of Operation Choke Point contend that the regulators are actually seeking to deny access to credit markets for legitimate industries that are politically unpopular.
FDIC Guidance and Clarification
On January 31, 2012, the FDIC issued a Financial Institution Letter cautioning financial institutions about certain “high-risk” merchants who typically use payment processors, including credit repair companies, debt consolidation and forgiveness programs, online gambling operations, will-writing kits, payday loans, and online tobacco sales. The FDIC also published on its website a larger list of disfavored industries, including dating services, firearms sales, fireworks sales, life-time memberships, telemarketing, and travel clubs. As a result of this guidance, several banks terminated accounts with businesses that fell into these high-risk categories.
Following an investigation by the U.S. House Committee on Government and Oversight Reform, the FDIC clarified its guidance in a Financial Institution Letter dated July 28, 2014. This letter explained that the list of high-risk merchant categories was not meant to discourage banks from maintaining relationships with specific businesses. Rather, the FDIC intended the list to be illustrative of types of businesses that warrant elevated risk management. Since the list of specific industries caused confusion, the FDIC removed the list from its website and also revised its 2012 Financial Institution Letter.