By Alan Zibel and Andrew R. Johnson
The U.S. Department of Justice has opened at least 10 civil and
criminal investigations into whether banks and payment processing
firms helped enable fraudulent activity, according to an internal
Justice Department memo viewed by The Wall Street Journal.
More than 850 pages of internal documents on the DOJ's probe of
alleged fraud in the financial industry were obtained by the House
Oversight and Government Reform Committee.
The panel has been conducting an inquiry into the federal probe
known as "Operation Choke Point," which is aimed at reducing the
ability of fraudulent businesses to operate by going after
financial firms--like banks and payment processors--that help move
their money.
The memos viewed by the Journal detail last year's launch of the
sweeping probe, which resulted in the government issuing subpoenas
to about 50 banks and six payment processing firms, according to a
November 2013 memo by DOJ official Maame Ewusi-Mensah Frimpong.
Ms. Frimpong, in her memo, wrote that the government had the
opened civil investigations into 10 banks and payment processors
and was in settlement talks with three of them.
The DOJ has also opened criminal investigations of four
payment-processing firms as well as one criminal investigation of a
bank "and responsible bank officials."
The names of affected banks were blacked out in the memos viewed
by the Journal.
Some banks have disclosed investigations related to payment
processing.
In January, the Justice Department reached a $1.2 million
settlement with a small North Carolina bank, Four Oaks Fincorp
Inc., over allegations the bank processed more than $2 billion in
transactions for a payment processor that worked with allegedly
fraudulent merchants, including short-term lenders that operate
from offshore. A federal judge approved the settlement in
April.
Zions Bancorp., a regional lender based in Salt Lake City, has
said in regulatory filings that it faces an investigation by the
Justice Department related to payment processing for "allegedly
fraudulent telemarketers and other" customers. The bank said in a
May filing that the investigation is ongoing.
And PNC Financial Services Group Inc. in February disclosed it
had received a subpoena from the Justice Department seeking
information about transaction return rates for certain
payment-processing customers. The subpoena is intended to determine
"whether, and to what extent, PNC may have facilitated fraud
committed by third-parties against consumers, " PNC said in a
filing, adding it was cooperating with the subpoena.
The release of the documents comes amid a battle between the
Justice Department and congressional Republicans, who argue the
government is trying to intimidate legal businesses, including
short-term lenders that operate online.
Republicans say the government has pressured banks to stop
handling payments for merchants deemed as high risk--including gun
dealers, short-term lenders and credit repair programs--punishing
good actors along with bad ones.
"If the administration believes some businesses should be out of
business, they should prosecute them before a judge and jury," said
Rep. Darrell Issa (R., Calif.), the chairman of the oversight
panel. "By forcibly conscripting banks to do their bidding, the
Justice Department has avoided any review and any check on their
power."
Ms. Frimpong, in her memo, described the Choke Point Probe as a
success.
"We have learned directly from many sources that banks that have
received our subpoenas, and others aware of our efforts, are
scrutinizing their relationships with high risk third-party payment
processors," she wrote. "In several cases, after receiving a
subpoena, banks and processors have self-disclosed potentially
problematic relationships and have informed us that they have taken
corrective action."
Ms. Frimpong also said prosecuting some cases won't be difficult
because "because employees expressly admitted in emails, memos, or
other written documents that they believed or suspected that the
merchant was engaged in fraud against consumers, but nonetheless
continued to process payments in return for significant fees."
A DOJ spokeswoman didn't immediately comment.
Write to Alan Zibel at a lan.zibel@wsj.com and Andrew R. Johnson
at Andrewr.johnson@wsj.com
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