On March 3, 2021, the Consumer Financial Protection Bureau (CFPB) filed a complaint in the Northern District of Illinois against a third-party payment processor and its founder and former CEO alleging that defendants violated the Consumer Financial Protection Act and the Telemarketing Sales Rule.
The CFPA prohibits unfair acts and practices.
An act or practice is unfair when it causes or is likely to cause substantial injury to consumers; which is not reasonably avoidable by consumers; and such substantial injury is not outweighed by countervailing benefits to the consumers or to competition.
According to the CFPB, the company processed remotely created check payments for entities that telemarketed antivirus software and technical support services. As alleged in the complaint, from 2016 to 2018, the company processed remotely created check payments for merchant clientele that represented to have provided such services but, in reality, scammed consumers into purchasing bogus software.
According to the complaint, merchant clients used pop-up ads stating that computers were infected with a virus and that they should phone for assistance. The CFPB alleges that merchant clients required consumers to verbally authorize remotely created check payments, and to provide personal information that included banking details.
Importantly, according to the CFPB, approximately 1,000 consumers submitted complaints and refund requests, some to the payment processer. Originating banks that processed the remotely created payments also allegedly voiced concerns to the payment processor. The complaint alleges that the payment processor failed to implement reasonable controls to screen and monitor its clientele, in addition to making false statements to banks about monitoring procedures.
In December 2015, the Federal Trade Commission amended the TSR to prohibit the use of remotely created payment orders and checks, cash-to-cash money transfers, and cash reload mechanisms in both outbound and inbound telemarketing. The TSR also prohibits providing “substantial assistance” to any seller or telemarketer when that person “knows or consciously avoids knowing” that the seller or telemarketer is engage in an prohibited practice.
Here, the CFPB alleges that the payment processor knew or should have known that its merchant clients were using remotely created payments orders via telemarketing. The Bureau further alleges that the company’s acts and practices caused substantial injury, and that the payment processor knew its clients were violating the TSR.
The CFPB has asked the court to prohibit the processor from participating in the business of payment processing, in addition to damages, disgorgement and civil penalties.
Interestingly, the Federal Trade Commission recently announced that it reached settlements with four defendants charged with helping to launder millions of dollars in credit card charges through fraudulent merchant accounts.
Takeaway: The CFPB and Federal Trade Commission have demonstrated a commitment to going after third parties, including payment processors, that possess actual or constructive knowledge regarding the unlawful actions of those to whom they provide substantial assistance. Consult with an experienced FTC defense attorney if you are interested in learning more about this topic, including the implementation of preventative compliance measures.
Informational purposes only. Not legal advice. May be considered advertising material.