Is Operation Chokepoint Back?

Is Operation Chokepoint back? 

Written by Dave Griffiths, The Consultants

Over the last several weeks, I have seen on forums references to what many believe is a resurgence of the old bank discontinuance. Some are even referencing its old “Operation Chokepoint” name, although this isn’t really accurate. So, are banks actually ramping up the shedding of their “high-risk” accounts? The short answer is, yes, at least from the uptick in volume I am seeing in calls for my services.

Why is this happening? Well, there are a couple of reasons, but first, let’s identify what is really occurring. Operation Chokepoint was an underhanded program borne during the Obama/Holder administration that was officially stopped years ago. After the program was put out to pasture, the banks continued to engage in two behaviors that were (and are) detrimental to us as pawnbrokers. The official term used was “de-risking”. As pawnbrokers, we were either flat out canceled by our banks for ‘no reason’ or were denied services and accounts strictly because of our industry.

About bank de-risking 

Many of you reading this either have been a victim of de-risking or know someone who has. In January 2020, I was asked by a California pawnbroker to help their company find a bank after Wells Fargo “de-risked” them. It took us calling twenty-six banks before we found one that would actually talk to and eventually bank them. Twenty-six banks said “no” over the phone. Twenty-six! All because of the fact that this company was in the pawnbroking business.

De-risking has gotten so bad that the reasons behind which the banks hide to shed these unwanted customers have been kept top secret. Most of you whose accounts were cancelled were never given a reason. The fact is, the bank had to jump through extra hoops to bank you due to your status as a “high-risk” business. It costs them money to perform the due diligence required to satisfy the regulators, and it was just easier to tell you they could not do business with you when in truth, what they were doing was counter to the banking rules and guidelines. Because there was no enforcement provision behind the rules, however, this behavior went on for ten years, all driven by the banks’ bottom lines.  

The Office of the Comptroller of the Currency (OCC) finally had enough when six of the seven major banks in Alaska weaseled out of providing funding and services for those in the oil and gas exploration industry. Stop and imagine for a moment if the majority of the major banks in the Mid-West said they would no longer support the farming industry? This, of course, was strictly political, but the banks had the power (and audacity) to weasel and weasel they did. It was the straw that broke the camel’s back and prompted a response. 

The Fair Access Rule 

In November of 2020, the OCC proposed the Fair Access Rule, which was set to become effective April 1, 2021 (now on hold). “The rule codifies more than a decade of OCC guidance stating that banks should conduct risk assessments of individual customers, rather than make broad-based decisions affecting whole categories or classes of customers when provisioning access to services, capital, and credit”.1

The rule requires, “covered banks (those with $100 Billion or more in assets) to make those products and services they choose to offer available to all customers in the communities they serve based on consideration of quantitative, impartial, risk-based standards established by the bank.”  

The banks covered by the rule are ironically the same bad actors that were (and currently still are) canceling accounts. Think Bank of America, Wells Fargo, Chase, Capital 1, US Bank, etc.

Further, the OCC states, “As Comptrollers and staff in previous administrations have made clear in speeches, guidance, and testimony, banks should not terminate services to entire categories of customers without conducting individual risk assessments. It is inconsistent with basic principles of prudent risk management to make decisions based solely on conclusory or categorical assertions of risk without actual analysis.” 

What this means for pawnbrokers

So, this is good news for pawnbrokers, right? It is, and it will likely now be an offense punishable by a monetary fine for a large bank to either discard you without giving you a chance to measure up, or to ignore you outright just because you are a pawnbroker. While small banks are exempted, there will be pressure for them to follow the same guidance.

Like all good things, there is almost always more to the story. The catch here is that if the banks are required to perform their due diligence, and they will, the very first thing on their list will be to make sure that any precious metals business has an Anti-Money laundering (AML) program in place. 

The presence of an AML program has been required since 2005 but widely ignored in the pawn industry, is now going to be pivotal in helping you maintain your banking relationship. 

What is an AML program? 

An anti-money laundering (AML) program is a set of procedures designed to guard against someone using the firm to facilitate money laundering or terrorist financing. The main components that must be included are:

• Internal policies, procedures, and controls reasonably designed to assure compliance with the Bank Secrecy Act and implementing regulations;
• Appointment of a designated compliance officer to oversee the program’s day-to-day operations;
• Ongoing training program;
• Independent audit. 

About your pawnshop’s AML program

It should go without saying that your pawnshop’s program will need to be current and not sitting in the bottom of a file cabinet somewhere with 10 years of dust on it. There is little else separating you from the other businesses they bank besides the fact that you deal in precious metals, so the only tool they have to justify discarding you is the lack of an AML program.

Risk going without one in place, and it is surely only a matter of time before the hammer comes down. 

It has been our experience that all too often, pawnbrokers wait until the bank asks to see the program and then make the frantic call to us for help in a panic. To date, we have been able to help every single customer in that situation that has called our firm. However, we believe that will be evolving and, notably, that banks may determine that a brand new program does not make the pawnbroker compliant since they were supposed to be compliant so long ago.

The rules are changing, and they will continue to be more challenging, not less. AML programs require annual training and reviews. Obviously, you cannot review the future, only the past. By the very nature of the word, reviews are backward-looking processes that you are expected to have in place. Remember, banks set their own rules and can still boot you with the slightest infraction if they so choose. The good news is that they have to let us know the rules, and we can hold them accountable to their own Fair Access Rule.  

If you think back 20-25 years if you have been in the industry that long, you know that the whole Compliance piece was not something you had to worry about a few years ago.  

Well, now you do. 

No pawnbroker should kid themselves into thinking that the industry will have fewer compliance requirements directed its way in the future. At best, we can hope for the status quo.

How do we help minimize future regulatory burdens? 

This is just one more of the many reasons that every pawnbroker throughout the US should take the time to get involved with your local and state legislators. Do it now. Proactively. It is absolutely critical that you build your relationships with them now before you need to ask them for a favor. Hiding in your store, assuming someone else will handle it for you, does not allow you to influence them in a positive way. Rather, it allows them to formulate their own opinions.

Our industry has a perpetual black-eye which tells us that our industry still has not done enough to change our image. That image is going to cost us in many ways if we don’t stop being ignorant. It is why we have had to fight throughout the COVID crisis to prove we are essential. It is why we end up on a high-risk list when the banks who can cast us aside in an instant are the ones who are actually the ones that are high risk.

It’s time for action from every pawnbroker

Pawnbrokers must decide to do now whatever it takes for your business and your industry. 

First, get your compliance house in order. It’s a far easier task than you might imagine and begins with a call to a trusted consultancy like ours to get the ball rolling.  

Next, be sure that you proactively advocate for your business like your life depends on it…because it does. Remember, advocacy is not someone else’s job, it is yours. Joining your state and national associations is only the first step.

You cannot stop there.

You need to put on your advocacy hat and speak up on behalf of your livelihood as if your life depended on it. Great recommendations for establishing a line of communication with legislators and lawmakers was shared during a webinar in early February hosted by BRAVO. Click here for the replay or visit this blog post for important takeaways. Check them out and learn ways that you can become informed about laws that impact your business at the local, state, and federal level and establish a grassroots relationship with the lawmakers who influence your livelihood that will help you ensure your ability to remain in business for the future. 

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Dave Griffiths founded The Consultants in 2012. He works tirelessly to help pawnshops thrive and comply with confusing laws. Learn more at theconsultants.us.