What Do Chase Bank, Condoms, The Tea Party, And Petty Fraud Have In Common?

In mid-March, a division of JPMorgan Chase rejected an application to process payments for a fledgling New York City condom association Lovability, citing "reputational risk" compared with "adult" products. Ridicule as well as mockery predictably ensued. But Chase's preference wasn't an isolated corporate gaffe -- it's a latest, weirdest product to emerge from a subculture of start-up lobbying groups, border Tea Party hyperventalists as well as small-time crooks who have spent months fighting a simple crackdown upon income laundering.

All of this came down upon Tiffany Gaines' new sex-positive startup condom company, Lovability.

"My mouth just dropped open," Gaines told The Huffington Post, describing a moment she received an email saying Chase wouldn't accept her business. "It really points out a problem which my association is trying to solve this cultural perception which it's naughty, which it's something which young people should be ashamed to be compared with."

Chase declined to comment for this story. But according to Gaines, after a couple of days of bad press, someone from a company's marketing department pronounced which a firm would retreat a decision. When she asked for an explanation, Gaines pronounced a bank initially tried to pin a misfire upon a bad sales rep, but eventually got around to blaming a government.

"She told me there were federal regulations upon what kinds of businesses they could work with," Gaines said. "I challenged her upon what is in a prohibited area. And she pronounced publishing as well as this as well as that."

There have been no government rules which require major corporations to annoy birth control startups for a couple of days before agreeing to do business with them. In fact, there have been no federal regulations requiring remuneration processors to reject sex toy shops, porn or any other authorised businesses connected to sex.

But banks, remuneration estimate firms as well as a relatively new lobbying group called a Third Party Payment Processors Association have been starting wild upon Capitol Hill in recent months over a flattering conventional law enforcement effort with a salacious name: Operation Choke Point. The project attempts to curb income laundering by scrutinizing banks as well as remuneration processors which facilitate transactions with bootleg businesses -- petty fraudsters running payday lending scams, sham telemarketing operations as well as other untrustworthy groups.

It's Money Laundering 101, but a program's detractors have portrayed it as a vicious government effort to dictate what kinds of companies banks can do business with.

The most extreme element of a movement comes from a anonymous, conspiratorial website stopthechoke.com, a site which features an image of President Barack Obama as Godzilla "destroying America" as well as warns which guns, ammunition, pharmaceuticals as well as other total industries may soon be eliminated. The site has developed a bit of a following upon Facebook, with more than 37,000 likes.

Democrats in Congress say a Third Party Payment Processors Association -- a lobby group which formed last year in response to Operation Choke Point -- has issued similar warnings in private meetings.

"They came in here as well as said, 'How would you like it if we started cutting off things liberals like, like birth control?'" says one House Democratic aide who met with a TPPPA in November.

"They can assign repute risk based upon their moral judgements, but everyone has different moral judgments," TPPA President Marsha Jones told HuffPost. "That's a danger of it. One administration is polarized one way as well as a other an additional way. And we must remove morality out of payments because it's dangerous."

What's astounding about a lobbying blitz isn't which major companies have been complaining about government regulations -- rather, it's which this is a response to a simple crackdown upon straightforward fraud. Early this year, House Oversight Committee Chairman Darrell Issa (R-Calif.) suggested in a minute to Attorney General Eric Holder which a Department of Justice is abusing a fraud investigation in an effort to harass as well as intimidate all payday lenders.

"We support a fight against fraud because it only hurts a processors, too," Jones said. "But a tactics a government is using right now is like bombing a neighborhood to catch a drug dealer."

There is no evidence which Chase declined Lovability's application to send a political message. But a part highlights just how extreme a private sector reaction has been to a very basic law enforcement effort. Even for Washington, this is all a bit much.

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Moving income for criminals is called income laundering, as well as it's illegal. Since 1970, banks have been required to monitor their clients' transactions to ensure they don't funnel funds for drug dealers, gun runners, or any other bootleg outfit. But a little banks have been indicted of seeking a other way in a name of profit. In 2011, Wachovia settled federal charges which it laundered over $378 billion from Mexican drug cartels. The bank paid a fine, as well as a Department of Justice in conclusion decided not to prosecute any Wachovia employees (although it has done a bang-up job jailing rank-and-file workers during medical marijuana shops which have been authorised under California state law).

There's a similar lowest-common-denominator enforcement strategy during play in a hubbub over Lovability as well as payday lending. In late 2009, Obama established a Financial Fraud Enforcement Task Force -- a coalition of federal agencies committed to combating bad things which people do with money. Bank reform watchdogs had hoped which a group would prosecute Wall Street malfeasance from a 2008 financial crash.

They have been disappointed. Instead, a Obama administration has focused upon relatively penny-ante frauds, although "focused" may be a generous term. An Inspector General for DOJ recently concluded which a agency had been doctoring a mortgage fraud investigation numbers to boost a PR image.

One strategy from a FFETF which hasn't become a punchline is Operation Choke Point. The idea is to prevent bootleg funds from breaking into a banking system through remuneration estimate companies. When consumers get hoodwinked by a bogus sweepstake or a untrustworthy porn site, they will infrequently contest a transaction as well as get their income returned. When remuneration processors show an unusually high rate of returned funds, DOJ subpoenas records to review whether a banks know they have been operative with scammers. It's not quite a least which a government can do to fight financial fraud, but it's flattering close.

Nevertheless, it has sparked an aggressive backlash. Most of a activity from DOJ so far has focused upon payday lenders which mangle a law, prompting Issa's particular grievance about Obama trying to clean out a payday lending business.

Banks can process payments upon their own, but they infrequently hire third-party firms to outsource a gruntwork of gathering as well as maintaining clients, or to distance themselves from risks. A third-party remuneration processor generally foots a bill if a customer can't pay up, for instance.

Usually everything is above-board. But a relationship also provides a reputational aegis when operative with unsavory characters. A bank can still profit from a dirtbag customer without having to fess up to operative with a lowlife. If a untrustworthy operation gets busted, a bank can pin a blame upon it's third-party remuneration processor in a justice of public opinion. That's what Chase meant by "reputational risk," when it rejected Lovability. Chase Paymentech is basically a third-party remuneration processor which happens to be owned by JPMorgan. The association declined to comment upon whether it is a member of a TPPPA, as well as a lobbying organization does not disclose a membership.

Under Operation Choke Point, a FDIC has warned banks against operative with firms which defraud people. Working with fraudsters creates two liabilities. Under income laundering law, a bank can be liable for losses which consumers take upon petty scams. And a bank can also look like a bunch of jerks who help slice off consumers -- repute risk which can curb profitability as well as contribute to financial strain in times of trouble.

Obama didn't invent this law enforcement focus upon remuneration processors to crush a free market. In a George W. Bush years, Wachovia paid almost $150 million to resolve charges which it authorised a third-party remuneration processor to funnel income from telemarketer scammers into a bank.

The highest-profile fruit of Operation Choke Point thus far was borne in January, when Four Oaks Bank agreed to pay $1.2 million to settle civil charges which it used untrustworthy remuneration processors to work with a pyramid scheme called ZeekRewards as well as payday lenders which had been charging bootleg fees.

Four Oaks Bank is tiny. With $865 million in assets, a bank is well below 1 percent a size of a $2.4 trillion JPMorgan Chase.

Senate Democrats have been pleased with a consumer protection effort from DOJ. In February, more than a dozen of them sent a minute to a agency encouraging it to keep up a efforts, despite Issa's saber-rattling upon behalf of a payday loan industry. The list of signatures includes bank reform advocates Sens. Elizabeth Warren (D-Mass.) as well as Jeff Merkley (D-Ore.) alongside Sen. Dick Durbin (D-Ill.), a third-highest ranking Democrat in a Senate.

So where does all a crushing of private business come in? It doesn't, really. But in Jan 2012, a FDIC issued guidance -- not even a formal regulation -- which banks be careful about operative with third-party remuneration processors which process a lot of fraudulent transactions. The FDIC also pronounced to be particularly careful with a little industries where fraud is especially common. In a footnote, they listed a few:

Examples of telemarketing, online businesses, as well as other merchants which may have a higher incidence of consumer fraud or potentially bootleg activities or may otherwise pose elevated risk include credit repair services, debt consolidation as well as forgiveness programs, online gambling-related operations, government grant or will-writing kits, payday or subprime loans, pornography, online tobacco or firearms sales, pharmaceutical sales, sweepstakes, as well as magazine subscriptions. This list is not all-inclusive.

The guidance was updated in September 2013, but zero bans or even officially punishes banks for even indirectly operative with companies in any of these industries.

In short, Chase relied upon a footnote to two-year-old regulatory guidance upon being careful about fraud to reject Lovability's application. Neither a FDIC nor DOJ care a whit about banks doing business with condom companies. The FDIC told HuffPost which a guidance speaks for itself, whilst DOJ emphasized which it's just trying to examine fraud.

"The goal of these investigations is to hold financial institutions accountable for knowingly assisting fraudulent merchants which harm consumers or estimate transactions whilst deliberately ignoring evidence which they have been fraudulent," a DOJ spokesperson told HuffPost. "I want reiterate which our array of investigations is addressing fraud, not 'third-parties involved with payday lending.'"

Lovability's online store is up as well as running. For a time being, Gaines is using PayPal instead of Chase.

UPDATE: Chase passed along this statement after a article was published:

Weve reached out to Ms. Gaines, apologized for a misinformation which we originally provided to her as well as offered to process payments for her business. As you know, we process payments for a wide variety of merchants, including grocers as well as drug stores, which sell similar products.