Choking Off Fraud | Commentary
Networks come in many forms. There are highways for commuting, broadband Internet for web surfing, wireless communications for text messages and phone calls — all constituting infrastructure that underlies vital daily activities. As valuable as they are, these networks can also be used for crime — drunk driving on our roads, predatory online activities, violent threats communicated over a call or text. Because of the unquestionable utility of our nation’s networks, law enforcement pursues such crime directly — and not the innocent and uninvolved infrastructure over which the crime occurs.
Recently, this has not been the case when it comes to financial activity on our nation’s payments infrastructure. Consumers in the U.S. rely on electronic payments to purchase more than $5 trillion in goods and services each year from the eight million U.S. merchants that accept debit and credit cards. These payment systems are, like highways or communications, interconnected networks that make it possible (in the case of payments) for consumers and merchants to exchange money. Without payments infrastructure, commerce in this country would grind to a halt.
Like other networks, sometimes our payments infrastructure can be used by criminals. For example, unbeknownst to the payments company, a merchant could sell fraudulent products to consumers — at which point, in theory, law enforcement would pursue the merchant for committing a crime. After all, no law enforcement agency would hold a phone company liable for a criminal threat uttered over a phone call.
Enter the curiously named federal law enforcement campaign, “Operation Chokepoint.” The project (named by the Department of Justice, but joined by other federal agencies, including the FDIC and FTC) is ostensibly targeted at fraudulent merchants that use electronic payments to collect money from their customers. But those fraudsters aren’t the “Chokepoint” in the operation. Rather, as the House Oversight Committee revealed in a recent report, Operation Chokepoint is targeting entire merchant categories — not just specific fraudulent merchants. The enforcement theory is easy to understand, but hard to stomach: make the costs and potential reputational harm of law enforcement inquiries so high that refusing to serve these disfavored merchant categories is the more compelling option.
But how do payments companies know which merchants to avoid? Helpfully, this group of government agencies published an “Operation Chokepoint” list — it includes pharmaceutical sales, guns, payday lending, tobacco and many other categories. Of course, these are legal services (although some states impose restrictions) and thus merely providing payments acceptance capabilities to such merchants is not a crime. But if the goal is to put these lines of commerce out of business, that doesn’t matter.
A recent House Oversight Committee investigation found federal agency documents trumpeting that pursuit of these merchant categories through Chokepoint was having its intended effect – payments companies were disconnecting those merchants. More sunlight will be cast on Operation Chokepoint in the coming days, as the House Judiciary Committee and House Financial Services Committee will hold hearings. Rep. Blaine Luetkemeyer (R-MO) has introduced legislation (H.R. 4986) that would help bring an end to Operation Chokepoint by expressly permitting financial institutions to offer nondiscriminatory access to payments systems without fear of government reprisal for serving a disfavored but legal category.
Perhaps most troubling in this law enforcement campaign is this question: we know what the list looks like today, but who will decide what a disfavored merchant category is tomorrow? Indeed, if Operation Chokepoint were truly about pursuing fraud, there would be no list of “unliked” merchant categories — the target would be individual bad actors.
Payments companies share an interest with law enforcement in stamping out fraud — after all, because consumers have zero liability for fraud, it is payments companies that bear the financial burden of such illegal activity. We think we make a better partner than a target in the effort to choke off crime.
Jason Oxman is the chief executive officer of the Electronic Transactions Association.