Article

Fed's controversial 'Choke Point' collars ATM processors

The government's Operation Choke Point initiative has put a stranglehold on many law-abiding businesses — including payment processors and pornographers.

November 18, 2014

by Daryl Cornell, CEO, Triton Systems

Talk about strange bedfellows. Representatives from the pornography and payment processing industries have joined forces in a fight against the feds.

Last month, the two filed a complaint against the FDIC alleging that the government was using improper and coercive tactics in an attempt to pressure banks to quit processing porn payments. [Editor's note: the complaint was filed in the form of an amicus curiae, or "friend of the court" brief, in support of a lawsuit brought by Community Financial Services Association of America Ltd. against the Federal Deposit Insurance Corp.]

This might all be amusing if it didn’t also have negative implications for the ATM industry.

The lawsuit stems from Operation Choke Point, a joint effort by the FBI, the U.S. Treasury Department and the FDIC to choke off “fraudulent businesses” — supposedly in order to protect consumers.

In 2011, the FDIC released a list of merchant categories the government deemed "suspect," including gun and coin dealers, fireworks sales, money transfer services, payday loan providers, and pornography and tobacco sales.

The Feds argued that these businesses, while not illegal, posed a “reputational risk” to the U.S. banking system. Banks were discouraged from doing business with these industries and some reported being threatened with an audit by the feds if they didn’t comply.

Large banks, weary of being sued and harassed by the feds for a host of other transgressions, quickly fell in line, closing the accounts of many clients in these lines of business.

After howls of protest from constituents, the list of businesses in the government’s crosshairs was withdrawn this summer. By then, however, the damage had been done.

The FDIC now claims that a “misperception” was created by the list and that banks weren’t really being discouraged from doing business with companies in the targeted industries. Huh?

Anyway, the blowback has also affected the ATM industry. Though they were not singled out on the 2011 list, a large and growing number of ATM ISOs have had their accounts summarily cancelled by banks running scared of the feds.

Many of these cancellations have been made over the phone by banks unwilling to invite legal action by putting the terminations in writing.

Ironically, it appears that the feds have pushed companies in the targeted industries into the arms of bitcoin and cash. Where traditional financial transaction information can be audited and monitored, the anonymous nature of cash and bitcoin mean that they generally can't be.

Much like federal prohibitions against processing payments for marijuana dispensaries in states where its sale is now legal, Choke Point will continue to push businesses away from electronic payment processing. Choke Point is just one more reason why cash is still king.

This article has been republished from the Triton blog, atmAToM, with kind permission from Triton.

photo courtesy theilr | flickr

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