How Backpage Is Different from Choke Point

The Seventh Circuit Court of Appeals recently slammed Cook County Sheriff Thomas Dart for his actions trying to get Mastercard and Visa to stop processing payments for Backpage, an advertising website whose ads include various adult services (some legal, some not). The Backpage decisions has been taken as an indication of the strength of the legal case by some payday lenders against the FDIC, OCC, and Fed over Operation Choke Point. 

Unfortunately, Judge Posner got it wrong in Backpage because he incorrectly assumed facts not in the record. But even if he got it right, there's a lot that differentiates Operation Choke Point (whose name does, unfortunately, sound like it might be from an adult ad on Backpage). 

In Backpage, Sheriff Dart wrote to Mastercard and Visa telling them that Backpage was advertising illegal services and that if they didn't stop processing payments for Backpage that he would (as Judge Posner puts it) "sic the feds on them" for antimoney laundering violations. (Let's remember that the Cook County Sheriff has no authority to make any federal regulator to act...) Judge Posner found Sheriff Dart's behavior an attempt to organize a boycott of Backpage with the goal of preventing its exercise of free speech and enjoined the Sheriff from doing so. 

I think Judge Posner got it wrong. Yes, there's no question that Sheriff Dart was threatening Mastercard and Visa, albeit with an empty threat--he has no ability to prosecute them of which I am aware (perhaps one could get creative with aiding and abetting sex trafficking as a charge...). But Judge Posner's opinion is predicated on an assumption that Mastercard and Visa acted because of Sheriff Dart's threat as opposed to acting once they were alerted to Backpage's activities by Sheriff Dart (as the District Court held was possible). The reason Judge Posner gets this wrong is that he makes an incorrect judicial assumption about MC and Visa's knowledge of Backpage. Sadly, this sort of judicial just-so story about how the world works is common in Judge Posner's opinions. When he's right, it's part of what makes his opinions great--he's able to understand what is really going on in the dispute--but it is also often where his opinions go off track because as smart as Judge Posner is, the world doesn't always operate according to his assumptions. 

Specifically, Judge Posner writes

Had the companies not known that “advertisers peddle flesh” on Backpage, the judge’s point would have been well taken. But of course they knew about the nature of the advertising on Backpage—everyone does—without having to be told by Sheriff Dart. ...If Judge Tharp had been correct in crediting the companies with “ceas[ing] doing business with Backpage.com because they did not want their products to be associated with the content posted there,” they would have ceased doing business with it years before. Backpage’s content was not a discovery of Sheriff Dart’s.

Actually, that's far from clear. One would think from reading Judge Posner's opinion that Mastercard and Visa dealt directly with Backpage.  They didn't. Mastercard and Visa never have any direct dealings with any merchant. Mastercard and Visa deal with an acquirer bank, which deals with the merchant. The acquirer is required to "know its customer", but Mastercard and Visa are unlikely to have any particular knowledge of Backpage or any other of the hundreds of thousands of firms whose payments they process, and have no incentive to takethe initiative to look too closely themselves. (Yes, individuals at Mastercard and Visa might be familiar with Backpage in their personal capacities, but that's a separate matter.)

Thus, it really is quite plausible that Mastercard and Visa were not aware of the illegal content on Backpage, and once alerted to it by Sheriff Dart decided to cut off services not because of Sheriff Dart's threats, but because they don't want to deal with sketchy firms (and given their past history of cutting off fraudsters, I think that's very possible). Indeed, the cutoff decision appears not to have been Mastercard or Visa's but the acquirer banks', who were not apparently contacted by Sheriff Dart. Thus, from the American Banker, here is what MasterCard said subsequent to the ruling: 

Several months ago, we contacted Backpage's acquiring bank about the Cook County Sheriff's claims of Backpage's activities in the U.S., as well as separate violations of MasterCard rules. The acquirer advised us that they had decided to terminate acceptance. MasterCard has not taken further action since that time.

Thus, there really isn't anything supporting a causal link between Sheriff Dart's threats and the cutoff of Backpage by its payments processors. The cutoff probably was by the acquirers, not MC/V, and the good Sheriff never contacted the acquirers, but even if the cutoff were by MC/V, that might have been because they were alerted to Backpage's activities, rather than because of the Sheriff's threats.  

The only evidence Judge Posner has to support his assertion of Mastercard and Visa's knowledge is an internal Visa email referring to Sheriff Dart's communications as "blackmail," but that email doesn't really indicate anything about Visa's previous knowledge or the reason for its ultimate actions. Instead, it refers to Dart suggesting that he'll say negative things about Visa if it didn't comply with his request. It doesn't say why Visa acted (and tells us nothing about Mastercard). Put another way, even if Sheriff Dart acted inappropriately, it isn't clear that his threats (the problematic part of his behavior) had any causal effect, which is why Judge Posner got this one wrong. 

OK, so what does this have to do with Operation Choke Point? First, let's be clear about what Operation Choke Point is. It is a Department of Justice investigation of payments fraud. Associated with Operation Choke Point, however, is regulatory guidance from bank regulators about certain types of businesses presenting elevated risks for payments processors. It's that regulatory guidance that has some people in a tizzy. 

The truth is that Backpage has little in common with Operation Choke Point beyond the hydraulic regulatory idea of regulating a payments processor to regulate the recipient of the payments.  Here are some key differences:  

1. The actors just don't line up. In Backpage a law enforcement officer with no authority to bring charges threatened the operators of some payment systems.  The Choke Point equivalent would be if the Sheriff threatened NACHA.  That's different from the FDIC giving non-binding guidance to a bank that processes payments within the NACHA system.
2. Sheriff Dart was less-than-subtle in his messaging. The bank regulators appear to be much more subtle...therefore much less threatening. Reminding banks that certain types of customers are higher risk isn't the same as demanding that they "cease and desist" from serving them. Instead, it is doing what bank regulators are supposed to do--ensure that banks comply with their regulatory obligations, including AML/KYC. 
3. The DOJ prosecutions have been in cases when there were glaring red flags for fraudulent activity that were ignored by the banks processing the ACH payments. Very different from Mastercard and Visa, which did not have any red flags or knowledge (other than that assumed by Judge Posner) that they were processing credit card transactions used to advertise illegal activities.  
4. Backpage is a First Amendment case. The First Amendment rights at issue are those of Backpage advertisers as much as Backpage. Judge Posner noted that Sheriff Dart would have been fine if there had been no constitutionally protected speech on Backpage. As it happens, there's no First Amendment issue with a payday loan. There's no "speech" involved. In other words, Backpage just isn't a relevant precedent for Operation Choke Point. 

All told, I don't think Backpage presages much of anything about the Choke Point litigation. 

Comments

[ltk]

Are you really suggesting that no one within Visa or MasterCard was aware of what Backpage sells before Sheriff Dart called? Considering the level of media attention that craigslist and then Backpage has received over this, and the past and very public litigation, that seems fantastic. Perhaps an individual employee first learned about it from her personal New York Times, but that doesn't mean she didn't know it in her professional capacity too.

If this were a serious argument, then you could resolve the factual question by deposing Visa and MC employees. Do you doubt that an appropriately-placed exec could truthfully state that he was aware of Backpage's business before Dart's call? Of course, that's kind of awkward. ("No, judge, I swear we knew all along that pimps were indirectly giving us money...")

And it doesn't take much to start an acquirer, so they can be pretty fly-by-night. At the low end, are you saying they're motivated by reputational concerns beyond keeping access to the network and not going to prison? Have you met their salesmen? Even if the acquirer had made the decision to drop Backpage with no contact whatsoever from Visa or MC, it's hard to see why they'd lose the revenue unless they believed (rightly or wrongly) they might themselves get cut off if they didn't.

The note that credit card processors cut off "sketchy" businesses seems misleading too. A typical "sketchy" merchant presents a high risk of fraud that's hard to reserve for. By that standard, Backpage seems like a wonderful merchant--the dollar amount per transaction is too small to be worth falsely disputing, and its customers are getting exactly what they paid for.

All this is independent of whether Choke Point is analogous, of course.

[Adam Levitin]

ltk: I largely disagree with you.

(1) There are probably only a few MC/V employees with responsibility in this area whose knowledge would be relevant. I wouldn't assume that they had knowledge. (I myself had never heard of Backpage prior to this opinion, even though I was aware of the Craigslist issue.)

(2) You're right that this could be resolved by deposition. Backpage didn't do this (or at least this wasn't cited by the 7th Circuit). Absent a factual record, I don't think the court was right to assume knowledge.

(3) You're confusing acquirers and ISOs. Acquirers are required to be FDIC insured (or at least eligible for FDIC insurance). That means that they are always banks. There's no such thing as a fly-by-night banking charter. ISOs are a different matter. They don't require much capital or regulatory approval, so they can be fly-by-night. But the cutoff decision would be the acquirer bank, which is actually vouching for the transaction, not the ISO. (To be clear, the acquirers surely acted only after being notified by MC/V, but that dilutes the chain of influence from Sheriff Dart).

(4) You're right that generally "sketchy" means a high risk of fraud that's hard to reserve for. But it can also include reputational concerns, like AML.

[ThomasW]

I find your criticism of Judge Posner's opinion a bit hard to believe. You assume that absent proof that MC/V were aware of the nature of Backpage prior to Sheriff Dart's letter, we should assume that the letter was the first they knew of the nature of the Backpage. This ignores evidence to the contrary.

Judge Posner states "For there is evidence that the credit card companies have received such complaints from private citizens" (in reference to Backpage adult ads). Did Judge Posner make this up? American Express had previously dropped Backpage (see news reports of the MC/V action last July). So is it reasonable to assume the right people at MC/V were unaware of this information but on receipt of a letter on official law enforcement stationary suddenly discovered their ignorance?

MC/V currently accept payments for porn sites and for other businesses much more closely associated with the illegal sex trade. If MC/V have any group charged with vetting businesses, they are either completely incompetent or would have been aware of the nature of Backpage. One person spending one day a month doing some simple web searches could generate a long list of suspect businesses if MC/V didn't want to accept their business.

The timeline also speaks against MC/V being ignorant. Within 2 days of receiving the Sheriff's letter (and follow-up email threatening negative press) MC/V dropped Backpage. So in two days they said "gee, we didn't know about these guys," contacted the acquirer, did a reasoned, thorough, and objective analysis of Backpage's business, and decided to drop Backpage as a customer. I think it much more likely the analysis by MC/V was simply "we better drop Backpage to avoid bad press". Personally, I'm not comfortable if a law enforcement official who doesn't like my business can shut down my access to banks or credit cards with a threatening letter.

As to Operation Choke Point and this decision, you're right that this decision is a First Amendment case and not directly related to payday lenders. And the similarities may not be in reference to the actual Operation Choke Point but rather actions which have been associated (rightly or wrongly) in the press as Operation Choke Point.

From what I've been able to determine, the issue is FDIC guidance to banks (Supervisory Insights, Summer 2011) which lists "high risk" activity. While these include obviously illegal businesses (escorts, ponzi schemes, online gambling), they also include legal businesses (coin dealers, tobacco sales). The problem here is that "law enforcement by regulation" too easily turns into scare tactics. It's much easier for a bank to blanket ban businesses on the FDIC list and blame the government (e.g. it's Operation Choke Point) than get into the nuances of who is and is not a legitimate business.

My other problem with Operation Choke Point is it appears that rather than prosecuting payday lenders directly (e.g. gather evidence of unauthorized banking activity) or outlawing payday lenders through legislation, the solution is to try to put them out of business by denying access to banking services.

This is the other similarity with Backpage. Sheriff Dart didn't file charges or directly take action against Backpage for promoting or enabling illegal activity. He may have realized Backpage's adult ads are perfectly legal. So instead he resorted to third parties to try to force Backpage to remove the ads.

Is this the type of legal system we want to live under?

[ltk]

(1,2) We're speculating about a factual question that neither party seems to have tried seriously to answer. That said, the one piece of evidence we do have, that a Visa employee called it "blackmail", sure seems to suggest they weren't glad for the friendly warning.

(3) I prefer "conflate" to "confuse", and corrupt small banks aren't rare either. You're right, though. I think my larger point stands, that if Visa/MC will tolerate a client, then somewhere, you'll find an ISO and acquiring bank to serve them.

(4) To present an AML concern, Backpage would have to be involved with something illegal. Sheriff Dart's whole problem is that they don't seem to be, or else he'd pursue them directly. All of this arises from his attempt to punish them notwithstanding that.

At a high level, Posner seems to have assumed that Visa and MasterCard, absent any extralegal threats, will comply with the law but otherwise do whatever is most profitable within its strict boundaries. That seems reasonable to me.

[Knute Rife]

I can't really connect the dots you're connecting between this and Choke Point, but I CAN connect the dots Posner is connecting. In Choke Point the regulators had followed the standard practice of providing guidance opinions, and DOJ included that in its subpoena affidavits for no good reason other than standard, law enforcement procedure, namely "Throw ALL the mud at the wall!" Someday they may learn, but I doubt it.

In Backpage, Dart had already gone after the publishers and had been smacked down in the Craigslist case. Now he was trying an end run around that decision by going after Visa and Mastercard (As you note in your entry, he didn't even bother to do any due diligence, since he was blissfully unaware that MC and Visa are not the lenders but are rather just servicers/clearinghouses/whatevers. I don't see that anyone briefed this point, though, so it doesn't surprise me Posner doesn't address it.). His letter was a not-so-veiled threat: Stop processing ad money and help with my investigation, or I'll bring heat down on you. He went light years beyond the authority of his badge. It doesn't matter if there were or will be no money damages; the act was the damage. This is the cop who does the Terry stop with zero reasonable suspicion or pulls over a car for Driving While Black. It makes no difference that this time he picked on a couple of big boys who weren't intimidated and could fight back if they wanted. Word gets out (as it obviously did here) that the cops are leaning on your business associates because of what you're putting in print, that is going to have a chilling effect, and if that isn't a Constitutional issue the courts can at least address, feel free to run what's left of the First Amendment through a shredder immediately so we don't waste any more time.

So Dart was exceeding his authority in an unconstitutional manner, and he was doing it to circumvent another court ruling. There was no way Posner was not going to jump all over this, and there was no way he was going to be gracious. He basically kicked Dart to the curb and said, "Now go away, or I shall taunt you some more." And he was right. For the record, I am a former prosecuting attorney (elected, so yes, there were political considerations in my decisions) and father of three girls who have faced various forms of sexual harassment (as has my wife), but if I'd been in the Cook County Attorney's office, and Dart had brought this "plan" to me, I would have said, "Not just no, but Hell no. The vendetta ride stops now, and if it doesn't, I'm going to have to protect Cook County by first seeking a writ of prohibition against you and then advising the commission to seek your recall, because you've gone Joe Arpaio here."