FTC settles with payment processor for fraud

Federal Issues FTC Enforcement Payment Processors FTC Act

On December 10, the FTC announced a settlement with a payment processor and its former CEO (collectively, “defendants”) for allegedly processing consumer credit card payments for certain entities “when they knew or should have known that the schemes were defrauding consumers,” in violation of the FTC Act. According to the complaint, the defendants allegedly arranged for merchants engaged in fraud to obtain merchant accounts with acquiring banks in order to process “unlawful credit and debit card payments through the card networks” totaling more than $93 million in consumer charges. The FTC alleges the defendants knew or should have known that the merchant accounts were being used by third parties that the defendants had not underwritten or being used by merchants to sell products that the defendants had not underwritten. Specifically, the FTC argues that the defendants ignored “clear red flags” that the merchants were operating fraudulent schemes, including high rates of consumer chargebacks and the use of multiple accounts to artificially reduce the number of chargebacks. The FTC notes that a number of the merchants the defendants contracted with were shut down by federal law enforcement.

The proposed order requires the defendants to pay $1.5 million to provide redress to affected consumers, and permanently bans the defendants from (i) acting as a payment processor for any companies providing free trial offers for nutraceutical products; (ii) engaging in credit card laundering; and (iii) assisting companies in the evasion of financial institutions’ fraud monitoring. Additionally, the defendants must conduct enhanced screening and monitoring of merchant clients.