Yes, the FTC will pursue payment processors!

In early March of this year I attended the MAC Conference and one of the speakers was an Associate Director at the FTC. She stated that since 1996, the FTC has filed 650 lawsuits. In 25 of those cases, the FTC pursued payment processors for facilitating or being directly involved in violations of the telemarketing sales rule or unfair/fraudulent business practices.

It’s obvious why the FTC looks beyond the merchant and includes payment processors: the processors provide merchants the opportunity to make more money via e-commerce and phone calls through credit and debit card payments. In some cases, the payment processors turn a blind eye to a merchant’s bad behavior and in other cases payment processors have fully supported the bad behavior. The FTC sees compliant payment processors as a filter for bad merchants. Therefore, if the FTC removes bad payment processors from the market, it can decrease the probability that bad merchants will find a payment processor that supports the merchant’s fraud. Below is a summary of the most recent FTC lawsuit involving a payment processor.

FTC v.  Allied Wallet

                On May 20, 2019 the FTC filed a lawsuit against Allied Wallet Inc., Allied Wallet Ltd., GTBill LLC, GTBill Ltd., Ahmad Khawaja, Mohammad Diab, and Amy Rountree ("Allied"). The FTC alleged one count for acts in violation of the FTC Act, which stated, “Defendants’ acts or practices in processing fraudulent and unauthorized transactions to consumers’ accounts,… have caused or are likely to cause substantial injury to consumers….” The following actions by defendants led the FTC to take action:

  • Allied worked with a specific agent/reseller to defraud consumers. Allied started working with this agent at least as far back as 2006, when the FTC took action against this agent. At that time, the FTC alleged that the agent was involved in a large scheme to debit consumer accounts without authorization.  Allied should have been aware of this agent’s behavior due to the fact that the FTC prevailed in the lawsuit via summary judgment in 2009 and won an appeal in the Ninth Circuit in 2010.

  • Allied knowingly processed for merchants engaged in unlawful conduct. Allied processed for companies engaged in fraud such as Stark Law (fake consumer collections), TelexFree (pyramid scheme), MOBE (business opportunities), and Digital Attitude (business coaching). During Allied’s time processing, it did not comply with card brand due diligence and monitoring rules, ignored signs of unlawful activity, concealed fraudulent behavior, submitted merchant applications with false information, and attempted to avoid card brand anti-fraud monitoring.

  • Allied formed foreign shell business entities for merchants. The card brands often have stricter regulations for merchants processing within the United States. To circumvent the strict regulations, Allied would form and register U.K. entities for U.S. merchants so the U.S. merchants could process their U.S. transactions offshore and avoid the card brands’ U.S. regulations.

  • Allied's agents set up websites misrepresenting merchants’ businesses. The agent would set up dummy websites abroad and Allied would knowingly approve the applications with the dummy websites. The dummy websites were necessary to establish that the shell entities operated in the U.K.

  • Allied disregarded chargeback and decline ratios. Allied continued to a board merchants from the same agent and allowed merchants to continue processing with extremely high chargeback and decline ratios.

  • Allied actively attempted to evade card brand controls and monitoring. Allied knowingly supported load balancing as well as allowing fake sales to be processed on merchant accounts to reduce chargeback ratios. In addition, Allied would continue to approve new merchant accounts for merchants who had been shut down for excessive chargebacks or fraud.

  The defendants in this case have all settled with the FTC with a permanent injunction as well as monetary damages. Although there have been 25 cases against payment processors in the last 25 years, there is no specific legal test to assess a payment processors liability for merchant fraud. Thus, payment processors should be aware of the facts in FTC cases against individuals and entities in the payments space in order to best protect against being named in an FTC lawsuit.

 

If you have any questions regarding liability as a payment processor, don’t hesitate to reach out to Toomey Law Firm!