FTC Settlement with Payment Processor Highlights Importance of Anti-Money Laundering Programs for Non-Bank Financial Institutions

Jun 23, 2014   

On June 11, 2014, the Federal Trade Commission (“FTC”) announced that it had entered into a stipulated permanent injunction with Independent Resources Network Corp., a payment processor, to settle charges that it knowingly assisted and facilitated a telemarking scam that swindled nearly $10 million from unsuspecting consumers. A copy of the FTC’s press release can be read here.

In its most simple terms, payment processors are entities that process credit or debit card transactions between merchants and consumers. As described by FinCEN:

Non-bank, or third party, Payment Processors … provide payment processing services to merchants and other business entities, typically initiating transactions on behalf of merchant clients that do not have a direct relationship with the Payment Processor’s financial institution. Payment Processors use their own deposit accounts at a financial institution to process such transactions and sometimes establish deposit accounts at the financial institution in the names of their merchant clients.

See FinCEN Advisory FIN-2012-A010.

In its Complaint, FTC alleged that Independent Resources either knew or consciously avoided knowing facts about the illegal conduct of a telemarketing scam operated by one of its merchants, Innovative Wealth Builder, Inc. (“IWB”). According to the complaint, IWB operated a phony debt relief scam wherein IWB would cold call its victims explaining how, for a fee, IWB could reduce the interest rates the customers were correctly paying on their outstanding credit card debt. In reality, no such program existed.

As alleged in the complaint, Independent Resources ignored several indicators of potential fraud including: 1) that IWB had an “F” rating with the Better Business Bureau; 2) that IWB was the subject of an investigation by the Florida Attorney General’s Office for unfair and deceptive trade practices; 3) that MasterCard identified IWB as “tier 3” or “high fraud alert” because of the number of fraudulent transactions which were associated with the debt relief company; 4) that IWB was the subject of an FTC investigation for unfair and deceptive trade practices; and 5) from August 2009 until January 2013 (the filing date of the complaint) IWB’s chargeback rate exceeded 40% multiple times despite the average chargeback rate for all other merchants of the payment processor was below 1%. In addition, the complaint alleged that the payment processor assisted IWB in responding to and defeating thousands of chargeback requests and helped structure sales transactions in order to divide fees over multiple transactions.

In an effort to settle the FTC’s allegations of violations of the Telemarketing Sales Rule, Independent Resources entered into a Stipulated Order. As part of the Stipulated Order for Permanent Injunction and Monetary Judgment, the payment processor agreed to pay $1.1 million. In addition, the order prohibits the payment processor from processing payments for any client that sells debt relief products or services. Further, the payment processor cannot process payments from collection agencies, credit card protection services, lead source provides, mortgage loan modifications, or outbound telemarketing without conducting upfront screening and ongoing monitoring.

As the Independent Resources settlement makes clear, in addition to the numerous agencies which regulate the financial services industry, including FinCEN, FDIC, OCC, and the IRS, non-bank financial institutions must also ensure that the business practices of their customers are not false, misleading, or unlawfully deceptive so as to violate the FTCA. The stipulated order and settlement highlights the need for payment processors, and the financial institutions that serve them, to develop, implement, and maintain robust anti-money laundering compliance programs. See generally, 31 U.S.C. § 5318. A properly constructed AML program — even for companies which are not technically required to have one – will be helpful in accomplishing two critical tasks: 1) detecting potential fraud and abuse by merchants, and 2) ensuring that the company is not unwittingly participating in the legal violations of third parties. As we have previously reported with regards to internet gambling, in addition to civil liabilities, third party payment processors face potential criminal prosecution for facilitating violations of federal law. (Our previous reports regarding payment processor liability can be read here and here.)

We will continue to watch for the latest developments. Fuerst Ittleman David & Joseph’s Anti-Money Laundering practice covers a wide range of businesses and legal issues. Our AML practice group has represented a wide array of financial services providers in all aspects of their business. In addition, our attorneys have experience working with regulated industry to ensure that marketing, advertisements, and disclosures are in compliance with applicable FTC law and regulation. For more information regarding the Bank Secrecy Act or if you seek further information regarding the steps which your business must take to become or remain compliant, you can reach an attorney by emailing us at contact@fidjlaw.com or by calling us at 305.350.5690.