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US probes banks over ties to shady money lenders - NY Times

The U.S. justice department is exploring civil and criminal actions against more than 50 big and small banks that conduct business with so-called payday lenders and dubious online merchants, the New York Times reported on Monday.

Under a new program, "Operation Choke Point," the department is checking banks over whether they enabled payday lenders to illegally siphon billions of dollars from U.S. consumers' checking accounts in exchange for handsome fees, the newspaper said, citing state and federal officials.

The critical role played by banks largely plays out in the shadows because they typically do not deal directly with the Internet merchants. What they do is provide banking services to third-party payment processors, financial middlemen that, in turn, handle payments for their merchant customers.

In the first action under the program, federal prosecutors have already brought a lawsuit against Four Oaks Bank in North Carolina for being "deliberately ignorant" about processing payments on behalf of merchants, the report said. About $2.4 billion was illegally withdrawn from checking accounts of U.S. customers by companies enabled by Four Oaks Bank, the New York Times said.

The bank later negotiated a civil settlement of about $1.2 million with federal prosecutors.

The move has attracted criticism from congressional lawmakers, who accused the Department of Justice of trying to covertly quash the payday lending industry, according to the newspaper.

The Department of Justice could not be immediately reached for comment,

Banks are required under the Bank Secrecy Act to maintain internal checks against money laundering, to thwart suspicious activity by thoroughly examining both their customers and the companies their customers do business with. But until recently, they have largely escaped scrutiny for their role providing financial services to the payment processors.

The new, more rigorous oversight could have a chilling effect on Internet payday lenders, which have migrated from storefronts to websites where they offer short-term loans at interest rates that often exceed 500 percent annually.

As a growing number of states enact interest rate caps that effectively ban the loans, the lenders increasingly depend on the banks for their survival. With the banks’ help, the lenders that typically work with a third-party payment processor that has an account at the banks are able, authorities say, to automatically deduct payments from customers’ checking accounts even in states where the loans are illegal.