Is the FDIC Behind Adult Industry Bank Account Cancellations?

CYBERSPACE—In the Summer of 2011, the Federal Deposit Insurance Corporation (FDIC), the federal agency that insures bank accounts against bank failures and other financial calamities, issued a "Supervisory Insight" titled "Managing Risks in Third-Party Payment Processor Relationships." The purpose of the memo is stated in its first paragraph: "During the past few years, the Federal Deposit Insurance Corporation (FDIC) has observed an increase in the number of deposit relationships between financial institutions and third-party payment processors and a corresponding increase in the risks associated with these relationships. Deposit relationships with payment processors can expose financial institutions to risks not present in typical commercial customer relationships, including greater strategic, credit, compliance, transaction, legal, and reputation risk. It was for this reason in 2008 that the FDIC issued Guidance on Payment Processor Relationships which outlines risk mitigation principles for this type of higher-risk activity."

Now, if there's one thing the adult industry, especially the online segment, is familiar with (besides naked bodies), it's third-party payment processors. They're the folks who take the subscriptions from fans who want to join a particular porn star's fan site, from people who want to view a company's movie online or simply subscribe to its website, and a host of other online transactions, and run the payment through a third-party processor, which has an established relationship with a bank. Once the bank approves the payment charged to a credit or debit card, the processor takes a fee and puts the rest in its web client's account.

Of course, it's not as if the industry hasn't run into trouble in the past by using that system. Used to be that many websites would use an "affirmative opt-out system," whereby if a person subscribed to a particular site for, say, a month, the site would nonetheless continue to charge that credit card every month ad infinitum unless the subscriber affirmatively opted out of future payments—and even then, s/he might have to argue with the site owner to recoup credit card charges the subscriber never meant to make. There were even a few sites that would overcharge a subscriber's card, apparently hoping the subscriber wouldn't notice—but plenty of them did, requiring a "chargeback," and such tactics are more rare in online adult transactions now.

But it's not as if it's only the adult industry who's pulled such frauds shenanigans; there are plenty of schemes floating around the internet that involve third-party payment processors in all sorts of shady dealings, so it was probably a good idea that the FDIC called attention to it—and made it part of the U.S. Department of Justice's anti-fraud initiative called "Operation Choke Point," named for the thermodynamic term indicating a place in a system that all information (or chemicals or energy) feeds through, and which can therefore be used to stop such flow by applying a small amount of pressure to the "choke point."

"[The U.S.] Justice [Department] launched the effort in early 2013 as a policy initiative of the president’s Financial Fraud Enforcement Task Force, which includes the Federal Deposit Insurance Corp., the Consumer Financial Protection Bureau and other regulatory agencies," wrote Frank Keating, president and CEO of the American Bankers Association, in an op-ed for the Wall Street Journal on April 24. "Though details are scant—much of the investigation has been conducted in secret—the probe aims to crack down on fraud in the payments system by focusing on banks that service online payday lenders and other services deemed suspicious by the government.

"Justice’s premise is simple: Fraudsters can’t operate without access to banking services, and so the agency is going after the infrastructure that questionable merchants use rather than the merchants themselves," Keating continued. "Most of these merchants are legally licensed businesses on a government list of 'risky profiles'."

"The theory behind Operation Choke Point is that by cutting off the access that scammers and fraudsters have to banks, there would be less fraud," wrote Jana Kasperkevic of UK's The Guardian newspaper. "To determine who the potential fraudsters are, the regulators came up with a blacklist of potential bad guys: credit card schemes, gambling, escort services, Ponzi schemes and payday loans."

Those "regulators" were the FDIC, but they didn't limit themselves to the "blacklist" Kasperkevic cites above. The full list, as detailed in the FDIC memo, includes "ammunition sales, cable box de-scramblers, coin dealers, credit card schemes, credit repair services, dating services, debt consolidation scams, drug paraphernalia, escort services, firearms sales, fireworks sales, get rich products, government grants, home-based charities, life-time guarantees, life-time memberships, lottery sales, mailing lists/personal info, money transfer networks, on-line gambling, payday loans, pharmaceutical sales, Ponzi schemes, pornography, pyramid-type sales, racist materials, surveillance equipment, telemarketing, tobacco sales, and travel clubs"—a motley crew, to say the least!

Now, it's clear that many of the topics on that list should certainly be there. Who knows how many people have been ripped off by people claiming to sell Viagra and myriad other medications online; cable box de-scramblers that either don't work or are illegal; life-time guarantees on products that, when they break after a couple of years, the purchaser finds the "guarantor" has long since disappeared, and on and on and on?

But nestled in the middle of that list is the simple term "pornography." Simple, that is, to the FDIC memo writers, but far more complex in real life, since it can conceivably refer to anyone who acts in an adult movie, anyone who webcams, anyone who produces a XXX movie, any adult webmaster, any adult brick-and-mortar or online retailer—quite simply, anyone who has anything to do with creating or selling adult content—or, as Director Joshua recently found out, anyone who's even married to an adult industry member.

"And then they told me that they canceled my husband's account too, because our social security numbers are linked," actress Teagan Presley told VICE News. "They told him that it was because I’m a notorious adult star. Which is funny, because I’m kind of a goody-goody in the business, and I’m not even doing porn anymore."

From the few industry members who've had their bank accounts closed who were willing to speak to AVN, the most common excuse given to them for the closures has been "risk management," the exact reason cited in the FDIC memo for why banks should avoid doing business with any type of company on the FDIC's "blacklist." It's not as if the banks have necessarily experienced any problems with the porn people's accounts; it's apparently just that they work in the "pornography" business or are related to someone who does, and "pornography" appears on the FDIC's blacklist.

And the banks have plenty of incentive to do it.

"But law-enforcement agencies and courts, not banks, are responsible for determining criminal violations," Frank Keating noted. "The 1970 Bank Secrecy Act spells out the proper partnership for banks and law-enforcement agencies...  Justice is now blurring these boundaries and punishing the banks that help them fight crime. If a bank doesn’t shut down a questionable account when directed to do so, Justice slaps the institution with a penalty for wrongdoing that may or may not have happened. The government is compelling banks to deny service to unpopular but perfectly legal industries by threatening penalties. This puts them in a difficult business position."

No shit! But the banks' actions have created a strange bedfellow for the adult industry: Republican congresscritters.

Of course, the Repugnicans are far more interested in the effect Choke Point will have on businesses like payday lenders and money transfer networks, according to "news" site—plus, we're guessing, online ammunition and firearms sales. Nonetheless, Rep. Darrell Issa (R-CaliforniaAutoTheft), chair of the House Oversight and Government Reform Committee, and Rep. Jim Jordan (R-NoGayMarriageInOhio), chair of the House Economic Growth Subcommittee, together sent a "harsh letter" to Attorney General Holder "accusing the Department of Justice of abusing its power and intimidating banks through its Operation Choke Point" and demanding that the DOJ turn over all documents relating to Choke Point.

"There is evidence," they wrote, "that the true goal of Operation Choke Point is to target online lenders and the payment processors who serve them... The extraordinary breadth of the Department's dragnet prompts concern that the true goal of Operation Choke Point is not to cut off actual fraudsters' access to the financial system, but rather to eliminate legal financial services to which the Department objects."

And to drive the adult industry out of business? Only time will tell—and the DOJ seems to be in no hurry to turn over the requested documents, so this issue may take a very long time to resolve.