A new war is brewing between banks and their customers, and the fight is going public.
PR black eyes of the past would have come from ATM surcharges or foreclosure injustices. Now, news reports are stacking up about angry customers payday lenders, check cashers, telemarketers, gun dealers and even adult entertainers who are complaining that their accounts have been, or could be, unfairly terminated.
The businesses say they are legitimate, but banking regulators and the Justice Department are warning that these and other businesses are high risk for money laundering, consumer fraud and other crime. Pressure is being applied through stalled merger approvals and the lingering threat of lawsuits.
The pornography sweep in particular only strengthens bankers' suspicions that
"Banks are left to guess who deserves access to the banking system and who doesnt," says William Isaac, a former Federal Deposit Insurance Corp. chairman who recently stepped down as chairman of Fifth Third Bancorp (FITB). Isaac, who is now head of the financial institutions group at FTI Consulting, has advised payday-lending companies.
JPMorgan Chase (JPM) has closed accounts of individuals or businesses associated with the adult entertainment industry, several media outlets have reported. In one case, the adult film actress Teagan Presley posted on her Twitter site a copy of the alleged letter from Chase saying her account would be closed on May 11. Presley's husband, film producer Joshua Lehman,
Presley
JPMorgan declined to discuss these reports or answer how widespread the account closures are.
In another instance, PayPal has blocked attempted transactions by porn-affiliated customers, and in the case of porn star Teal Conrad, she was "banned for life," Al Jazeera reported on Apr. 30. In an email to American Banker, PayPal said it does not comment on specific customers. PayPal "does not discriminate against the people who use our services. We will not and have never closed a PayPal account based on what a customer does for a living," it said.
They were only the latest in a recent string of incidents where banks seem to be shutting off any exposure to industry groups deemed risky by regulators. JPMorgan, in one example, has began closing the accounts of foreign officials and diplomats, in an attempt to avoid being sued or fined by regulators over anti-money-laundering violations, the
BankUnited (BKU), in Miami Lakes, Fla., closed the account of a Florida gun dealer after he launched an online store for his business,
The whole effort to weed out money laundering and other misuses of the payment system has been building for a couple of years, says Thomas Vartanian, a banking attorney at Dechert. It began with the Financial Fraud Enforcement Task Force, of which both the FDIC and the Department of Justice were members, and has culminated in Operation Choke Point, the Justice Department's crackdown on online consumer fraud. One of Choke Point's big cases was
"The Department of Justice is setting itself up as a significant force in the bank regulation world," Vartanian says.
A Justice Department spokeswoman declined to comment for this story.
Banking regulators are backing up their warnings with tough action, also. The most prominent example is the delay of M&T Bank's (MTB) agreement to acquire Hudson City Bancorp, based on the banks' substandard compliance processes related to the Bank Secrecy Act and anti-money laundering. M&T has been forced to
What makes the whole issue more complicated and emotional is deciding where to draw the line. Do strip club owners and stars of adult films present the same threat to the banking system as, say, international cartels laundering ill-gotten funds?
Though the issue has gotten a lot of attention lately, porn purveyors have historically had persistent troubles with their financial institutions, says Alan Begner, an Atlanta attorney who represents adult entertainment businesses, including strip clubs.
Neither he nor his clients have ever really discovered the main reason banks seem to dislike them, especially when they generate millions of dollars in fees for the banks, Begner said.
"Some of my clients over the years have gotten letters from their banks saying their money is no good here anymore and they need to take their business elsewhere," Begner says. "Then if you try to find out why, you can't."
Adult entertainment simply seems to be "the next payday lending industry" as the target for prosecutors and regulators, says Adam Rust, director of research at Reinvestment Partners in Durham, N.C., and author of the blog BankTalk. Banks like JPMorgan Chase are merely falling in line, he says.
"Chase seems to be rethinking the idea that business and morality can be separate," Rust says.
Pornography is one of several potentially problematic industries
"An increasing number of processors have been initiating payments for abusive telemarketers, deceptive online merchants, and organizations that engage in high risk or illegal activities," the FDIC said in the report.
The FDIC later noted in the same report that while banks are subject to anti-money-laundering regulations, payment processors "generally are not."
The FDIC report mentions both consumer fraud and money laundering as issues of concern. That's intentional, says Richard Riese, senior vice president for the Center for Regulatory Compliance at the American Bankers Association.
"The two are almost inseparable," Riese says.
The banking industry is concerned that if a bank provides services to a specific industry, then "you have a certain level of knowledge. If you continue to provide banking services, then are you opening yourself up to claims for that customer's activity?"
In addition to pornography, the other high-risk industries the FDIC identified included ammunition and firearms sales, credit-repair services, drug paraphernalia, fireworks sales, dating services, racist materials and tobacco sales.
David Barr, an FDIC spokesman, declined to comment for this story.
Jeffrey Douglas, a Santa Monica, Calif., attorney who represents adult entertainment clients, notes that some businesses that the FDIC termed risky are illegal, such as Ponzi schemes. Adult entertainment, in large measure, is legal and highly lucrative for financial institutions, yet banks continue to make things difficult for that customer segment, Douglas says.
"It's striking how credit card companies make an incredible fortune off commercial, sexually explicit transactions," says Douglas, who sits on the board of the Free Speech Coalition, an adult entertainment industry trade group.
But, Douglas says, the relationship "between financial institutions and adult entertainment has, over time, been extraordinarily unreliable and arbitrary."
There is no industry consensus on how far banks must go on closing accounts of customers that regulators deem to be high risk, Riese says. But it's not surprising if some banks appear to be taking the safest approach which is to close the account of any customer that could eventually get the bank in trouble.
"Since [the Justice Department] professes to be holding people accountable for the illegal activities of banks' customers, banks are feeling they are going to be asked to either be surrogate regulators, or surrogate targets when they undertake to do business" with these groups.
