FTC Complaint Alleges Unfair Payment Processing and Credit Card Laundering

According to the FTC, you are known by the companies you keep as clients. That’s the message of a $10 million proposed settlement with a payment processing company, a related corporate defendant, a former CEO and a Senior Vice President.

Accepting credit and debit cards is the lifeblood of most businesses. As a processing service, the company helps businesses establish merchant accounts with a financial institution affiliated with a credit card network like Mastercard or Visa. The company allegedly advertised itself as an “all-in-one payment orchestration platform,” but according to the FTC, the defendants processed payments for known scammers, violating the Telemarketing Sales Rule, and engaging in credit card laundering.

Card networks don’t grant access to just anyone. To prevent fraud, they impose rules on merchants and on third-party companies like the payment processing company. For example, before accepting a merchant as a client, payment facilitators have a due diligence obligation to ensure the merchant’s business is legitimate and to screen out merchants engaged in potentially fraudulent or illegal activity. What’s more, credit card networks impose an ongoing obligation to monitor merchants’ transaction activity for signs of fraud or deception.

Among the most notable red flags is a high chargeback rate. As illustrated by the FTC, using Visa as an example, if a merchant has 100 or more disputes in a single month and the ratio of disputed transactions to total transactions – the chargeback rate – is 0.9% or more, Visa puts the company in a special monitoring program. Visa imposes similar scrutiny when a merchant has $75,000 or more in fraudulent transactions in a month and the ratio is 0.9% or higher. The merchant remains in Visa’s program until its chargeback or fraud level stays below the threshold for three straight months. If merchants continue to experience a high rate of questionable transactions, the credit card network may impose fines or ultimately deny them access to the credit card system.

Because those threshold numbers are so integral to their anti-fraud programs, card networks specifically prohibit practices that fidget with the digits to make a merchant’s chargeback rate look misleadingly low. Merchants sometimes try this by processing transactions through another company’s account (known as credit card laundering); concealing their identities from consumers, banks, and card networks; using shell companies; or hiding the true nature of their business.

According to the FTC, the corporate processing company dealt with an outfit that perpetrated a deceptive telemarketing scheme to sell bogus debt relief services. Here is how the complaint summarizes the assistance the processing company allegedly provided to th outfit:

Defendants knew or consciously avoided knowing that latter was engaged in deceptive telemarketing and defrauding consumers. “Yet Defendants time and again disregarded warnings and continued processing…” “Even worse, Defendants took affirmative steps to launder … payments and conceal the true nature … so that they could continue processing for the scheme.
The FTC says the processing company ignored consumer complaints, turned a blind eye to lawsuits charging the outfit with fraud or deception, and disregarded warnings from credit card companies, banks, and other payment processors.
The FTC says the defendants engaged in this conduct even as the outfit’s accounts posted high chargeback and fraud rates and even incurred a $75,000 fine imposed by Visa.
The FTC says the defendants took deliberate steps to help conceal the outfit’s alleged illegal conduct. For example, according to the complaint, the processing company falsely classified the outfit’s merchant accounts as lower-risk business categories to evade increased scrutiny, helped the outfit create a merchant account for a shell company, and continued to process its accounts even after the card network shut one of them down.

The complaint further alleges:

Defendants’ support for the outfit’s scam, even in the face of warnings and direct evidence of fraud, was not an anomaly. Rather, Defendants allegedly processed payments for other merchants that they knew or consciously avoided knowing were likely engaged in fraudulent or illegal business practices and that they received multiple warnings about from upstream processors, card networks, and the processing company’s own fraud prevention team.

For example, the FTC says the processing company moved payment traffic from merchants generating excessive chargebacks to its own “merchant of record” account – a practice called load-balancing designed to “dilute” companies’ high chargebacks by mixing them with other accounts. But the FTC says that this backfired because chargeback rates for those merchants were so high that the processing company’s own “merchant of record” account exceeded monitoring thresholds.

Count I of the complaint alleges the defendants’ unfair payment processing practices violated the FTC Act. Count II charges them with assisting and facilitating violations of the Telemarketing Sales Rule. And according to Count III, their credit card laundering practices also violated the TSR.

The proposed settlement will require the defendants to turn over $10 million to provide refunds for consumers. In addition to mandating closer screening and monitoring of higher-risk clients (for example, companies selling money-making opportunities, nutraceuticals sold with negative options, and tech support services), the order bans the defendants from providing payment processing services to debt collection, debt consolidation, and debt relief companies. Also prohibited: processing payments for companies on an industry monitoring program due to excessive chargebacks, fraud, laundering, illegal transactions, or identity theft and helping any client evade fraud monitoring.

Takeaway: Pay close attention to warning signs that emerge as you do your due diligence. Savvy business people keep their eyes open when taking on new clients. If a prospective client’s line of work or business model looks questionable from the start, don’t look the other way. Businesses are known by the companies they keep. Card networks require payment facilitators to monitor their merchants’ activities for signs of fraud or deception, but it’s wise advice for any business. If you spot questionable conduct by an affiliate, insist they move quickly to fix the problem. If their response isn’t fast and comprehensive, cut them loose. And certainly don’t help them to continue or conceal their practices. The FTC’s Telemarketing Sales Rule is broad in scope. “We don’t do telemarketing, so we don’t need to concern ourselves with the TSR. Right?” Wrong. Section 310.3(b) of the Rule prohibits assisting and facilitating others who engaged in illegal telemarketing and Section 310.3(c) makes credit card laundering illegal in the context of telemarketing.