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Targeted? Gun sellers say ‘high risk’ label from feds cuts off banking options, restricts business

Obama plan pressures financial institutions

Associated Press In 2011, The Federal Deposit Insurance Corp. urged banks to better manage the risks of their merchant customers who employ payment processors, such as PayPal, for credit card transactions. The FDIC listed gun retailers as “high risk” along with porn stores and drug paraphernalia shops.

By Kelly Riddell -The Washington Times Sunday, May 18, 2014

Gun retailers say the Obama administration is trying to put them out of business with regulations and investigations that bypass Congress and choke off their lines of credit, freeze their assets and prohibit online sales.

Since 2011, regulators have increased scrutiny on banks’ customers. The Federal Deposit Insurance Corp. in 2011 urged banks to better manage the risks of their merchant customers who employ payment processors, such as PayPal, for credit card transactions. The FDIC listed gun retailers as “high risk” along with porn stores and drug paraphernalia shops.

Meanwhile, the Justice Department has launched Operation Choke Point, a credit card fraud probe focusing on banks and payment processors. The threat of enforcement has prompted some banks to cut ties with online gun retailers, even if those companies have valid licenses and good credit histories.

“This administration has very clearly told the banking industry which customers they feel represent ‘reputational risk’ to do business with,” said Peter Weinstock, a lawyer at Hunton & Williams LLP. “So financial institutions are reacting to this extraordinary enforcement arsenal by being ultra-conservative in who they do business with: Any companies that engage in any margin of risk as defined by this administration are being dropped.”

A Justice Department representative said the agency is conducting several investigations that aim to hold accountable banks “who are knowingly assisting fraudulent merchants who harm consumers.”

“We’re committed to ensuring that our efforts to combat fraud do not discourage or inhibit the lawful conduct of these honest merchants,” the Justice Department said in a May 7 blog post.

But gun retailers say their businesses are being targeted in the executive branch’s efforts:

• T.R. Liberti, owner and operator of Top Gun Firearms Training & Supply in Miami, has felt the sting firsthand. Last month, his local bank, BankUnited N.A., dumped his online business from its service.

An explanatory email from the bank said: “This letter in no way reflects any derogatory reasons for such action on your behalf. But rather one of industry. Unfortunately your company’s line of business is not commensurate with the industries we work with.”

• Black Rifle Armory in Henderson, Nevada, had its bank accounts frozen this month as the bank tried to determine whether any of Black Rifle’s online transactions were suspicious.

• In 2012, Bank of America suddenly dropped the 12-year account of McMillan Group International, a gun manufacturer in Phoenix, even though the company had a good credit history, the owner said. Gun parts maker American Spirit Arms in Scottsdale, Arizona, received similar treatment by Bank of America, the country’s largest banking institution.

“This seems to be happening with greater frequency and to many more dealers,” said Joe Sirochman, owner of American Spirit Arms. “At first, it was the bigger guys — gun parts manufacturers or high-profile retailers. Now the smaller mom-and-pop shops are being choked out, and they need their cash to buy inventory. Freezing their assets will put them out of business.”

Choking off access to banks

After McMillan Group owner Kelly McMillan publicized Bank of America’s action on his Facebook account, he found that thousands of small gun-shop owners across the country were in the same situation. Banks were either dropping them, freezing their accounts or refusing to process their online sales, so he opened a credit card processing company for the gun industry called McMillan Merchant Solutions.

“Four generations of my family have been in this industry. This is my way to give back,” said Mr. McMillan, adding that many of his customers were denied banking access because of the nature of their business. “This is an attempt by the federal government to keep people from buying guns and a way for them to combat the Second Amendment rights we have. It’s a covert way for them to control our right to manufacture guns and individuals to buy guns.”

BankUnited N.A., which dropped Top Gun Firearms Training & Supply in Miami from its customer list, declined to comment.

In a statement to The Washington Times, Bank of America said: “We would not deny banking services to an organization solely on the basis of its industry.”

The banking giant blamed a misunderstanding with the Arizona gun manufacturers McMillan Group International and American Spirit Arms.

However, the American Banking Association, the industry’s advocacy group in Washington, said businesses deemed “risky” will be frozen out of the financial system if the Justice Department continues Operation Choke Point because the regulatory burden and risk of investigation will be too great for less-specialized banks to bear.

“We’re being threatened with a regulatory regime that attempts to foist on us the obligation to monitor all types of transactions,” Richard Riese, a senior vice president at the American Bankers Association, said in the April 28 issue of American Banker. “All of this is predicated on a notion that the banks are a choke point for all businesses.”

In an interview with The Times, Mr. Riese said the cost of doing business with gun retailers outweighs the benefits for some banks, given that regulators deem the industry as “risky,” state laws vary on the sale of guns and ammunition, and the Justice Department’s enforcement.

The Independent Community Bankers of America, an association for small banks, said enforcement actions from the Justice Department are too broad and overly aggressive.

“While preventing fraud is a top concern for community banks, it needs to be balanced with ensuring that businesses and consumers that operate in accordance with applicable laws can still access payment systems,” bankers association President Camden Fine told the Justice Department in an April 7 letter. “ICBA requests that the DOJ suspend Operation Choke Point immediately and focus its resources directly on businesses that may be violating the law, rather than targeting banks providing payment services.”

Justice’s operation threatens to “close access to the financial system to law-abiding businesses, because the mere prospect of an enforcement action is sufficient to cause financial institutions to restrict access to their payment systems to only established companies that present low risks,” the organization said.

‘No statutory authority’

Regulations on the financial industry have increased over the past few years, said Thomas P. Vartanian, chairman of Dechert LLP, a global law firm specializing in regulatory and financial matters.

He noted the chilling effect of overregulation by the Financial Fraud Enforcement Task Force, an interagency behemoth that includes the departments of Commerce, Justice, Labor, Education, Homeland Security and Justice along with the Internal Revenue Service, the Securities and Exchange Commission, the Secret Service, the FBI, the Social Security Administration and the Federal Trade Commission.

“The key to effective regulation is the balancing between too little and too much regulation,” Mr. Vartanian said. “The problem here is that there are now so many regulators, including the Department of Justice, with their fingers on the scales on that balancing act.”

Congressional Republicans say the Obama administration is using its regulatory powers to shutter industries it doesn’t like. Last year, 31 Republicans accused the Justice Department and the Federal Deposit Insurance Corp. of intimidating banks and payment processors to “terminate business relationships with lawful lenders.”

In a March hearing before the Senate Banking, Housing and Urban Affairs subcommittee on consumer protection, Sen. David Vitter, Louisiana Republican, complained that several payday lenders — another industry labeled “risky” by the administration — were being dropped by their banks in his home state.

“There is a determined effort from [the Justice Department] to the regulators to cut off credit and use other tactics to force [payday lenders] out of business,” Mr. Vitter said. “I find that deeply troubling because it has no statutory basis, no statutory authority.”

In a House hearing in April, FDIC acting General Counsel Richard Osterman defended his agency’s definition of what constitutes a “risky” business — subject to money laundering or other criminal behavior — but made it clear that no bank is outright prohibited from serving any such companies.

“We have actually put out a policy statement on this issue to make it very clear from the very top that as long as financial institutions are properly managing their relationships and the risks, they’re neither prohibited nor discouraged from providing these services,” Mr. Osterman said.

“Basically, what we’re saying is, these types of programs can be, can involve high-risk activities that could create litigation risk and reputation risk for financial institutions,” he said. “So, they need to do due diligence to ensure that the folks who they’re banking are acting in a safe and sound manner.”

But the cost of that due diligence, coupled with the threat of a lawsuit for doing business with a customer in an industry the government has defined as risky, is having a chilling effect on legitimate companies such as gun dealers, said Mr. Weinstock, the Hunton & Williams lawyer.

“We are one of the most heavily regulated industries in America,” said Mr. Sirochman of American Spirit Arms. “We have to ship our guns to another federal licensed dealers for pickup. The people that are picking up the rifles have to go through a background check to make sure they don’t have any felonies. You can’t own a gun or pass the background check if you do.

“All this is, is an assault on our Second Amendment rights.”

http://m.washingtontimes.com/news/2014/may/18/targeted-gun-sellers-say-high-risk-label-from-feds/?page=2