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.