Inspector General Report Finds Agency’s Role in Choke Point ‘Limited’

Kelsey Bolar / September 17, 2015

An investigation into the Federal Deposit Insurance Corporation’s role in Operation Choke Point, a program that critics say targeted gun sellers, found the agency’s involvement to be “limited” but issued significant recommendations to address issues “engrained” in the organization’s supervisory culture.

“[W]e believe it is prudent for FDIC senior leadership to reiterate its revised policies on a sustained basis to ensure they become engrained in the organization’s supervisory culture,” the report, issued Thursday by the FDIC’s inspector general, wrote. “Given the significance of these issues, we will, at an appropriate time, follow up on the FDIC’s actions to ensure they address the underlying concerns that support our recommendations.”

Three of the Republican lawmakers who requested the investigation said they were “pleased” the FDIC is being held accountable for its alleged wrongdoing but said “concerns remain.”

“While we appreciate the FDIC acknowledging these issues, and vowing to take remedial steps, concerns remain around the damage that has already been done to these legal businesses whose banking relationships have been shunned and shuttered,” Reps. Sean Duffy, R-Wis.; Randy Neugebauer, R-Mo.; and Blaine Luetkemeyer, R-Mo., said in a statement.

Operation Choke Point was designed by the Justice Department in 2012 as a way to combat consumer fraud by working with multiple government agencies—among them the FDIC—to discourage banks from doing business with “high-risk” industries.

Since its inception, Republicans in Congress voiced concern that the program is being used to drive industries that are politically unpopular out of business.

Among the businesses allegedly targeted by a “high risk list” created by the FDIC are payday lenders, firearms sellers, and coin dealers.

That list, the investigators found, “created a perception among some bank executives that we spoke with that the FDIC discouraged institutions from conducting business with those merchants.”

Overall, investigators consider the FDIC’s involvement in Operation Choke Point “inconsequential to the overall direction and outcome of the imitative” and found “no evidence” that the FDIC used that high risk risk list to target certain industries they don’t like. However, the inspector general found multiple instances of agency employees using “moral suasion with financial institutions,” which goes against FDIC policies.

The FDIC does not have a formal definition of moral suasion, but based on the agency’s manuals, it consists of examiners persuading financial institutions to correct a high-risk issue “without imposing an informal or formal enforcement action.”

In order to address these issues, investigators issued three recommendations:

review and clarify, as appropriate, existing policy and guidance pertaining to the provision and termination of banking services;
assess the effectiveness of the FDIC’s supervisory policy and approach after a reasonable period of time is allowed for implementation; and
coordinate the FDIC’s Legal Division to review and clarify, as appropriate, supervisory policy and guidance to ensure that moral suasion is adequately addressed.

The FDIC formally agreed to those recommendations and expects to complete all actions to address the recommendations by Sept. 30, 2016. The agency also says it has already begun implementing some of these recommendations.

“We are pleased to see a prescriptive timeline under which the FDIC will hold themselves responsible for correcting the policy and personnel issues contributing to the unjust treatment of these lawful businesses,” said Duffy, Neugebauer, and Luetkemeyer, all members of the House Financial Services Committee, said in response to the report’s recommendations.

“The American people, and the targets of the FDIC’s misguided policies, can be assured that Congress will continue to exercise our oversight authority to ensure that a few top-level bureaucrats ‘regulation by intimidation’ practices will not continue.”

The FDIC is the primary government agency responsible for regulating and auditing more than 4,500 U.S. banks.

In order to conduct its research, the office of the inspector general interviewed and reviewed documents from 23 financial institutions represented across six different regional FDIC offices. The investigators did not interview any third-party payment processors, which some firearms sellers have accused of terminating their accounts as a result of Operation Choke Point.