LOS ANGELES—According to David Dayen over at Naked Capitalist (not a porn site), the recently publicized actions by Chase Bank, taken against existing and prospective account holders who have even the most negligible connection with the pornography industry by denying or closing accounts, has nothing whatsoever to do with morality or reputation risk and everything to do with getting back at the federal government for forcing them to get serious about cracking down on businesses "likely to be committing fraud."
Dayen insists the government has been very clear about what it wants to accomplish and against whom. In a series of presentations made to banks, he notes, the Department of Justice said it wants the financial sector to "red-flag businesses that generate a lot of consumer complaints, or had high rates of unauthorized returns or charge-backs. This is already the responsibility of the banks, through the Suspicious Activity Reports they must file if they have knowledge that a client engaged in money laundering."
It was in the same vein, adds Dayen, that Operation Choke Point was begun by the DoJ, to hold banks more directly responsible for their relationships with transactional entities called third party payment processors, or TPPPs. In the adult industry, we also refer to these entities as internet payment service providers (IPSPs).
Per Dayen, "In a rare move designed to actually enforce the law, the Justice Department, along with banking regulators OCC and FDIC, have told banks to look critically at their relationships with TPPPs. Previously, TPPPs gave the banks plausible deniability to work with the scummiest of predatory operators. If those businesses ripped off consumers, the bank would simply say they didn’t know who the TPPP brought in, effectively transferring the reputational risk. Operation Chokepoint, the Justice Department initiative, held banks more responsible for these relationships."
In reaction, he adds, a new lobbying group was formed last year called the Third Party Payment Processors Association (TPPPA), to push back against Operation Chokepoint. It is at this point, according to Dayen's analysis, that Chase in particular started going after merchants (and then mere account holders) who do not fit the description of the sorts of problem players the government was interested in targeting.
"As I noted in a story for The Guardian last month," writes Dayen, "a major target of Operation Chokepoint is the payday lending industry. Recently, payday lending has migrated to the Internet. Online payday lenders set up shop in jurisdictions without much regulation – some on Indian reservations – and market shady loans nationwide, even in states that have interest rate caps or other restrictions. They can’t do this without access to the payment system – basically the payday lender gets access to the individual borrower’s bank account to debit fees, with the loans rolling over unless the borrower jumps through a bunch of hoops to pay them back. The banks pocket giant fees from the payday lenders, in exchange for ACH access."
In other words, says Dayen, the banks have a vested interest in keeping the TPPP status quo in place, and when the government decided that instead of going after the payday lenders one at a time it "would target banks for doing business with lawbreakers," the TPPPA was formed to oppose that move, and one way they decided to fight back was to make innocent people pay a price.
The threat to do that, reports Dayen, was not even delivered secretly or subtly, but out in the open and directly to Congress. Indeed, Dayen even cites a House Democratic aide who met with the TPPPA in November as complaining, “They came in here and said, ‘How would you like it if we started cutting off things liberals like, like birth control?'"
It was not an idle threat, according to Dayen, who cites the Tiffany Gaines case as a perfect example of the TPPPA following through on those threats. Gaines is the woman who started Lovability Condoms, which she called "the first ever condom brand that’s been exclusively designed by women, for women, to meet women’s needs." When Gaines approached third party payment processor Chase Paymentech—a Chase subsidiary—to open a business account to serve her new company, she assumed there would be no problem. But in short order she was rejected via email with the sole explanation that the bank could not process for her legal business because of "reputational risk."
Chase Paymentech took no direct responsibility for shutting her and others down, just as the TPPPA argues that it is powerless before the directives of the government. “They can assign reputation risk based on their moral judgments, but everybody has different moral judgments,” TPPPA President Marsha Jones told HuffPost. “That’s the danger of it. One administration is polarized one way and the other another way. And we must remove morality out of payments because it’s dangerous.”
But to Dayen, "The TPPPA’s stance is ridiculous. Again, DoJs presentation was pretty clear: they’re looking for businesses that generated lots of consumer complaints, or that delivered high rates of unauthorized returns or charge-backs. A condom company selling a perfectly legal product had nothing to do with it.
"So you see what probably happened here," he concludes. "The TPPPs are deliberately interpreting Operation Choke Point incredibly broadly, to generate complaints and embarrass the regulators into calling off the dogs."
The proof of that, he adds, is a comment made to Gaines by a marketing executive for Chase Paymentech, who "put the blame on the government. She said that Chase Bank is a federally regulated bank, and that they have to pay attention to federal regulations."
According to Dayen, "The fact that the marketing exec cited federal regulations makes it clear that Chase Paymentech was 'following' the guidance from DoJ and the banking regulators. Only they were following it to a ludicrous degree, I would argue deliberately, in order to make the regulatory effort look bad."
He calls it "lobbying-through-threat," by making "life so miserable for innocent bystanders that you’ll drop the regulations."
The TPPPS, he notes, has friends on Capitol Hill in the form of Republicans, adding, "I heard a Senate hearing last week where every Republican gave almost the exact same talking point about banks 'being strong-armed to cut off credit to legal businesses.'" It was left to committee member and Democrat Sherrod Brown to observe that “the basis is safe and sound practices ultimately.”
If his hypothesis is accurate, it's an interesting conundrum in which the banking sector, through the new TPPPS, is falsely accusing the government of forcing it to be a moral arbiter so that it can get out of performing regulatory duties it is already tasked with, in order to reap handsome returns from unscrupulous players it wants to continue doing business with. The only fly in the ointment is where the porn stars who have had their accounts closed fit into this picture. Though presumably innocent of any wrongdoing with respect to their bank account activity, it's hard to imagine the greater public, or the government for that matter, coming to their defense in significant numbers.
But maybe adult performers were just the lowest hanging fruit that provided Chase with the least resistant path to be able to continue making the argument that it is the government that is forcing its moral stance onto them and the performers, and not the bank using the performers to "lobby-through-threat."