Justice Department Investigating Illegal Third-Party Payments by Banks

January 30th, 2014
in Op Ed

An Inside Look At Operation Choke Point

by Shah Gilani, Money Morning

As if banks aren’t choking us enough…

The Justice Department says lots of hard-pressed borrowers – the ones that too often have to rely on payday lenders – are gagging.

The DOJ (the Department of Justice – but not always “just” itself) has sent out over 50 subpoenas to third-party payment processors and banks as part of its latest investigation, which they’re calling Operation Choke Point.

Follow up:

Apparently, some payday lenders and crooked Internet merchants are having their third-party payment processors simply take money out of customers’ bank accounts.

The payment processors have legitimate relationships and accounts at big and small banks. Sometimes a payday lender or an Internet merchant is given authorization to withdraw monies from borrower’s account… and sometimes they aren’t.

The problem is that under the Bank Secrecy Act banks must monitor account activity of their customers businesses and businesses’ customers if they have accounts at that particular bank.

But, many banks apparently turn a blind eye to third-party withdrawals, for a number of reasons.

Sometimes, they just believe that the payment processors have a right to take money out of accounts.

And, I know this will surprise you… Sometimes the banks know there’s something very wrong, yet they let monies be withdrawn anyway.

If account holders complain and are legally entitled to get their withdrawn money back, the banks are only too happy to comply.

Why are they happy?

Because they charge the account holder a fat fee to put the money (which they get from the third-party processor… who, in turn, gets it back from the payday lender) back into the account.

In fact, banks get more money from those fees than they get from payment processor fees paid to the bank. It’s just business.

How bad is the problem?

One bank, Four Oaks Bank of Four Oaks, North Carolina, has tentatively agreed to pay $1.2 million to settle its part in processing payments on behalf of crooked merchants and payday lenders (many of whom operate illegally in states that have outlawed them) who illegally withdrew $2.4 billion from Four Oaks and other banks. That’s one bank doing this to the tune of $2.4 billion. Can you imagine that?

That’s not turning a blind eye; that’s bank fraud. And they get a slap on the wrist?

Do any of you have first-hand experience or know of anybody who has had money illegally withdrawn from their bank account? Please share your stories here.

I’ll keep watching this investigation and where it ultimately goes, and I will follow up.

On another note…

The market selloff last week was a little disconcerting. I’m still very bullish. But we’re not going to go straight up. There are some macro headwinds as well as domestic slippery slopes we’re trudging up.

Frankly, even though a lot of big-time analysts and billionaire investors say the shadow banking problem in China isn’t a real or big enough problem to worry about… and that the Chinese government has plenty of wherewithal to easily deal with it… I don’t buy it.

And you shouldn’t either.

China is now the tail wagging the dog, and that doggie is the world. If China is struck with a full-blown banking crisis, which leads to a credit crisis, it will upend global markets.

Are we facing another possible “Lehman moment?” We could be; it really is that bad.

China has gotten so big and its banking sector (especially its shadow banking realm) so monstrously over-leveraged that if the government doesn’t step in very soon and create a fix to what could blow up, we could be in for a very, very scary time ahead.

Here’s a short understanding of what’s going on that I wrote for Forbes on Friday.

You’ll want to have a plan to protect your stock positions and capital in the event China’s shadow banking problem casts its ugly spell around the globe.

Over the next several weeks, I’ll be sharing my plan with you in Wall Street Insights and Indictments.

So keep a look out.


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