WASHINGTON -- On Tuesday, Republicans on the House Financial Services Committee took up Rep. Darrell Issa's crusade against the Department of Justice's efforts to root out petty fraud.
"In essence, this is a government hit list!" declared Rep. Patrick McHenry (R-N.C.), in what could have been confused for a comment on drones.
"Indefensible and irresponsible," concluded Rep. Blaine Luetkemeyer (R-Mo.). "If you don't like a given industry, bend your authorities and force that industry out of the financial services space, making it impossible for them to survive."
Rep. Sean Duffy (R-Wis.), perhaps unaware that Congress is less popular than cockroaches, decided to deride the witnesses before the committee because they work for the government.
"You've come in here and said, 'They've committed fraud!' You're an attorney at DOJ!" Duffy shouted, as if DOJ attorneys were not qualified to identify fraudulent transactions. "We have a bureaucrat in the DOJ who says, 'I think it's fraud, and so I'm going to shut down a legitimate business!'"
The Obama administration has not, in fact, shut down any legitimate businesses. And there is no evidence that it has even tried to shut down one because it doesn't like an entire industry.
All of this House GOP outrage is directed at a Justice Department initiative called Operation Choke Point, which seeks to block fraudulent businesses from using the banking system.
Federal law has long prohibited the use of banks to clean up criminally acquired money -- that is, money laundering. And banks have long tried to work around those restrictions and profit off others' fraudulent behavior.
What McHenry calls a "hit list" is actually a footnote to regulatory guidance issued by the Federal Deposit Insurance Corporation in January 2012 telling banks to closely monitor relationships with companies in some industries for fraudulent transactions. Here's the footnote:
Examples of telemarketing, online businesses, and other merchants that may have a higher incidence of consumer fraud or potentially illegal activities or may otherwise pose elevated risk include credit repair services, debt consolidation and forgiveness programs, online gambling-related operations, government grant or will-writing kits, payday or subprime loans, pornography, online tobacco or firearms sales, pharmaceutical sales, sweepstakes, and magazine subscriptions. This list is not all-inclusive.
One way banks try to avoid such monitoring of relationships is to sign contracts with independent payment processors, which puts some distance between the financial institution itself and, say, retailers that routinely ding customers with bogus charges. In turn, the DOJ is trying to identify payment processors that have a lot of consumer chargebacks.
"Some third-party payment processors know that their merchants are engaged in fraud and yet continue to process their transactions in violation of federal law," said Assistant Attorney General Stuart Delery at Tuesday's hearing. "Our policy is to investigate specific unlawful conduct based on evidence that consumers are being defrauded."
None of this sounds like the Justice Department run amok. So what has Republican lawmakers up in arms?
Their outrage may have been whipped up by payday lenders' complaints and bankers' newfound zeal -- and encouraged by Democrats' own misgivings.
Payday lenders are one of the types of businesses highlighted in the FDIC's footnote -- indeed, payday lending is already illegal in many states. And payday lenders seem to have taken it on the chin under Operation Choke Point.
But that doesn't mean the lenders lack friends. They have a lot of supporters on the House Financial Services Committee and in Issa, the California Republican who chairs the House Oversight and Government Reform Committee. In May, Issa published a report concluding that Operation Choke Point has been unfairly focused on the payday lending industry.
As for those legitimate businesses that Duffy suggests are being forced to close, neither Issa nor any other Republican has publicly detailed any example of the Justice Department actually telling banks to end contracts with legitimate businesses.
But there is some anecdotal evidence that banks have done so nonetheless. In March, JPMorgan Chase terminated its payment processing contract with fledgling condom company Lovability, only to offer to renew the contract after the story was published in The Huffington Post. Other examples of sex-related companies being cut off have been detailed by other media outlets.
Banks have been cutting off those contracts even though both federal financial regulators and the Justice Department have spent nearly a year telling them publicly that they shouldn't. In September 2013, the FDIC updated its guidance to make clear that the mere fact of participating in one of the listed industries isn't a problem, and regulators repeated that point at an April congressional hearing.
At Tuesday's hearing, FDIC Acting General Counsel Richard Osterman emphasized that the list isn't intended to block whole industries from the banking system, whatever some lawmakers might suggest.
Osterman also noted that the identification of industries with a high incidence of fraud actually comes from the payment processing industry itself. Indeed, third-party payment processors routinely publish lists of "high-risk" industries, often to attract business from these very industries. Here's one. Here's another. And another.
Tuesday's nastiness may have been invited by Democrats who posed sharp questions about Operation Choke Point at that April hearing, in some cases explicitly defending check-cashing companies -- another high-risk industry.
"I also wanna make sure that we don't throw the baby out with the bathwater, in that if you have someone that is legal and doing good work that we eliminate them," said Rep. Gregory Meeks (D-N.Y.). "Such as is sorta starting to happen with the check cashers."
"The ends do not justify the means, especially when consumers are hurt the most," said Rep. William Lacy Clay (D-Mo.). "My constituents need basic services; they have families."
On Tuesday, Republicans escalated the rhetoric, as Rep. Stephen Fincher (R-Tenn.) suggested that President Barack Obama may soon destroy a business for selling "maybe too big of a soft drink." Duffy claimed that a Republican administration could shut down Planned Parenthood using the same logic as Operation Choke Point does.
"This is a little bit ridiculous and a waste of time," said Rep. Maxine Waters (D-Calif.).