Porn Merchants Targeted by Bank Regulators, Trade Group Says

From the Wall Street Journal

WASHINGTON – U.S. bank regulators tried to “coerce and intimidate” banks in an effort to force them to sever ties to the porn industry, a trade group says.

In a court filing this week, a year-old trade group called the Third Party Payment Processors Association accused the Federal Deposit Insurance Corp of engaging in “moralistic regulation” over the banking industry,.

The filing is the latest wrinkle in a long-running fight about a regulatory crackdown on fraud schemes processed through payment firms. Bank regulators in recent years have been stepping up warnings to banks to keep close watch over payment firms that work with certain merchants – such as escort services, coin dealers and payday lenders — over concerns about fraudulent or illicit behavior.

Banks earn money by charging fees to such payment firms, which in turn provide thousands of merchants with access to the U.S. financial system.

The Third Party Payment Processors Association, a trade group formed last year to represent payment firms, accused the FDIC of using the bank-examination process “to coerce and intimidate banks” into cutting off relationships with payment processing firms that do business with porn merchants.

The FDIC has engaged in an “improper practice of moralistic regulation” of  the banking industry, the legal brief says.

Regulators didn’t target the pornography industry because of evidence of fraud against consumers, the group wrote. In stead regulators “targeted the industry because they thought pornography was not good for consumers.”

An FDIC spokesman said the regulator does not comment on pending litigation.

The payment processors’ group filed their amicus brief Thursday in a lawsuit against U.S. banking regulators filed in June by a different trade group representing short-term lenders. That suit, filed by the Community Financial Services Association of America, seeks to stop federal banking regulators from pushing banks to terminate their business relationships with short-term lenders, gun shops and other kinds of businesses.

The Justice Department has also been probing banks’ relationships with payment firms. As part of an investigation dubbed “Operation Choke Point,” the Justice Department has issued more than 50 subpoenas and has opened at least 15 civil and criminal investigations into whether banks and payment-processing firms helped enable fraudulent activity. Officials at the DOJ say their probe is focused on illegal activity and not on forcing banks to cut off businesses’ accounts.

Marsha Jones, the payment group’s president, issued a statement criticizing the government for “legitimate, albeit politically-unfavorable, businesses from the economy according to the flavor of the day. Today it’s payday lenders and firearms-related businesses; tomorrow, it could be environmental and civil rights groups or family planning clinics. No one can predict who’s next.”

The FDIC has backed down somewhat on its crackdown. In July, after criticism from lawmakers, the regulator announced it would no longer list specific categories of high-risk merchants that banks should monitor carefully.