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Financial Services Law Insights and Observations

FTC sues sales organization in business opportunity scam

Federal Issues FTC Enforcement Payments Credit Cards Fraud FTC Act Telemarketing Sales Rule UDAP

Federal Issues

On March 15, the FTC filed an administrative complaint against an independent sales organization and its owners (collectively, “respondents”) for allegedly opening merchant accounts for fictitious companies on behalf of a business opportunity scam previously sued by the FTC in 2013. According to the complaint, the scammers promoted business opportunities to consumers that falsely promised they would earn thousands of dollars. From its previous 2013 lawsuit, the FTC obtained judgments and settlements of over $7.3 million (covered by InfoBytes here). The complaint alleged that respondents violated the FTC Act and the Telemarketing Sales Rule by helping the scammers launder millions of dollars of consumers’ credit card payments from 2012 to 2013 and ignoring warning signs that the merchants were fake. The FTC claimed that the respondents, among other things, (i) opened merchant accounts based on “vague” business descriptions; (ii) ignored the fact that for most of the merchants, the principals or business owners had poor credit ratings, which should have raised questions about the financial health of the merchants; (iii) neglected to obtain merchants’ marketing materials or follow up on signs that the merchants were engaged in telemarketing; and (iv) ignored inconsistencies related to the bank accounts listed on several of the merchants’ applications. The FTC further claimed that the respondents created 43 different merchant accounts for fictitious companies on behalf of the scam and even provided advice to the organizers of the scam on how to spread out the transactions among different accounts to evade detection.

Under the terms of the proposed consent order (which is subject to public comment and final FTC approval), the respondents would be prohibited from engaging in credit card laundering, as well as any other tactics to evade fraud and risk monitoring programs. The respondents would also be banned from providing payment processing services to any merchant that is, or is likely to be, engaged in deceptive or unfair conduct, and to any merchant that is flagged as high-risk by credit-card industry monitoring programs. Furthermore, the respondents would be required to screen potential merchants and monitor the sales activity and marketing practices of current merchants engaged in certain activities that could harm consumers. The FTC noted that it is unable to obtain a monetary judgment due to the U.S. Supreme Court’s decision in AMG Capital Management v. FTC, which held that the FTC does not have statutory authority to obtain equitable monetary relief under Section 13(b) of the FTC Act. (Covered by InfoBytes here.)