Operation Choke Point was a controversial initiative launched under President Barack Obama’s administration in 2013 that marked certain industries as a “high risk merchant.” It was led by the Department of Justice (DOJ), in collaboration with other federal agencies such as the Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency (OCC). The primary goal of the operation was to combat fraud, money laundering, and other illegal activities by scrutinizing banks and payment processors that facilitated transactions for “high risk” industries.
Under Operation Choke Point, the firearms industry was categorized as a “high risk merchant,” along with other industries such as payday lending, telemarketing, and tobacco sales. The initiative aimed to prevent illegal firearms sales and other illicit activities by pressuring banks and payment processors to sever ties with businesses operating in these high risk sectors. This categorization meant that firearms merchants faced difficulties in obtaining or maintaining banking services and payment processing.
What is a High Risk Merchant?
High risk merchant processing refers to the handling of credit card transactions for businesses that are deemed to be at a higher risk of fraud, chargebacks, or legal issues. Due to the perceived risks associated with these industries, payment processors often charge higher fees and impose stricter requirements for high risk merchants. In some cases, payment processors might refuse to work with high risk businesses altogether.
Critics of Operation Choke Point argued that the initiative was an overreach by the government and unfairly targeted legitimate businesses in the firearms industry. They contended that law-abiding gun sellers were being denied access to essential financial services, which hindered their ability to operate and grow.
In response to the criticism and growing concerns, the FDIC updated its guidance in 2014, clarifying that financial institutions should assess the risks of individual customers rather than making broad risk assessments based on industry categories. In 2017, under President Donald Trump’s administration, the DOJ officially ended Operation Choke Point.
While the initiative is no longer in effect, the firearms industry, along with other high risk merchants, still faces challenges in obtaining and maintaining banking and payment processing services. Some financial institutions continue to adopt cautious approaches when dealing with high risk industries due to the potential legal and reputational risks involved.
Operation Choke Point was an initiative launched by the U.S. Department of Justice (DOJ) under the Obama administration in 2013. The primary goal of the operation was to combat financial fraud and other illegal activities by targeting banks and payment processors that facilitated transactions for high risk industries.
The pressure exerted by Operation Choke Point on banks was mainly in the form of heightened scrutiny and regulatory enforcement. The DOJ and other federal agencies, such as the Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency (OCC), closely monitored banks’ relationships with high risk businesses, including payday lenders, online gambling platforms, and firearms and ammunition dealers.
Several tactics were used to pressure banks to sever ties with these high risk categories:
- Regulatory investigations: Banks found to have inadequate risk management procedures or to be facilitating transactions for illegal activities could face investigations, fines, and other penalties. The fear of potential legal repercussions made banks more cautious in their dealings with high risk industries.
- Reputation risk: The negative publicity generated by Operation Choke Point and its association with illegal activities placed a reputational risk on banks that maintained relationships with high risk businesses. To protect their reputation, some banks chose to discontinue services to these industries.
- Compliance burden: Operation Choke Point increased the regulatory compliance burden on banks dealing with high risk industries. The need for enhanced due diligence, monitoring, and reporting added to the operational costs, which may have incentivized banks to cut ties with businesses in high risk categories.
- Guidance from federal agencies: The FDIC issued guidance in 2011 that listed “high risk” industries, which may have led banks to believe that maintaining relationships with these industries could attract regulatory scrutiny. Although the FDIC later clarified its stance and withdrew the list, the initial guidance contributed to the pressure on banks.
These factors combined to create an environment in which banks were under pressure to sever ties with businesses in high risk categories. Critics of Operation Choke Point argued that it unfairly targeted legitimate businesses in these industries, causing them to lose access to banking and payment processing services. In response to these concerns, the Trump administration officially ended Operation Choke Point in 2017.
