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FTC sues sales organization in business opportunity scam
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.)
Fed reshaping “novel institutions” guidelines
On March 1, the Federal Reserve Board announced that it is soliciting comments on a supplement to a previous proposal intended to ensure that the Fed’s banks utilize a transparent and consistent set of factors when reviewing requests to access Federal Reserve Bank accounts and payment services. The framework, which builds on a proposal from May 2021 (covered by InfoBytes here), would establish a three tier system. Tier 1 would consist of eligible institutions that are federally-insured, and would be “subject to a less intensive and more streamlined review.” Tier 2 would consist of certain eligible institutions or holding companies that are not federally-insured but subject to prudential supervision, and would generally receive an “intermediate” level of review. Tier 3 would consist of eligible institutions that are “not federally insured and not subject to prudential supervision by a federal banking agency at the institution or holding company level,” and, given their potential higher risk, “would be subject to the strictest level of review.” Comments close 45 days after publication in the Federal Register.
Chopra highlights consumer protection topics
On February 10, CFPB Director Rohit Chopra answered questions during a Washington Post Live session on several consumer protection topics. Citing auto lending as a top concern for the Bureau, Chopra noted that it is important for consumers to be able to shop around, refinance loans, and navigate a competitive market. He also discussed recent Bureau initiatives related to junk fees and overdraft/insufficient funds fees, and said the Bureau intends to sharpen its supervisory scrutiny in these spaces. Chopra stated that, as part of a fair and competitive market consumers want to know when they are being charged these fees, noting that financial institutions have started to transition away from dependency on these types of fees and instead implement programs that will allow a bank to determine what shortfall they will allow on an individual consumer basis. He added that the Bureau may eventually see if rulemaking will increase competition and upfront pricing.
Chopra also discussed the role agencies play in the future regulation of cryptocurrency. He noted that while most of the cryptocurrency market is currently related to speculative trading, this could change if one of the big tech payment platforms decides to expand its services to cryptocurrency. Chopra highlighted several concerns, including how payment data from these systems will be used, how money will be transacted, and how consumers will report fraud. He stated that the Bureau is closely monitoring this space and any regulation will be an interagency effort. While Chopra also discussed the need for transparency with respect to how big tech companies are tracking, monetizing, and harvesting consumer data, he stated it is too early to tell whether there is a need for rulemaking in this area. Chopra also discussed topics related to the buy-now-pay-later industry and student lending, and stated that the Bureau is monitoring both areas carefully.
Fed releases synthetic identity fraud mitigation toolkit
Recently, the Federal Reserve released a synthetic identity fraud mitigation toolkit to help financial institutions, businesses, and consumers improve awareness, detection, measurement, and mitigation of identity fraud. The Fed emphasized that synthetic identity fraud (in which fictitious people are created to penetrate the financial system) is a challenge facing the payments industry and other businesses and continues to grow in frequency and impact. Synthetic fraud accounted for an estimated $20 billion in losses to U.S. financial institutions in 2020, the Fed stated, stressing the need for synthetic identity fraud awareness and continued discussions about detection and mitigation strategies. The toolkit contains several modules, including resources on the basics of synthetic identity fraud, how fraudsters use synthetic identities, what to do when synthetic identities become a reality, and how to detect synthetic identities. Additional resources will be added in the future, including more on synthetic identity fraud detection and mitigation.
FTC comments on CFPB’s big tech payments inquiry
On December 21, FTC Chair Lina M. Khan submitted a comment in response to the CFPB's Notice and Request for Comment inquiring about the CFPB’s October orders issued to six large U.S. technology companies seeking information and data on their payment system business practices. (Covered by InfoBytes here.) In her comment, Khan noted her three areas of concern that she hopes can help to inform the CFPB’s inquiry, including that big tech companies’ (i) “participation in payments and financial services could enable them to entrench and extend their market positions and privileged access to data and AI techniques in potentially anticompetitive and exploitative ways”; (ii) “use of algorithmic decision-making in financial services amplifies concerns of discrimination, bias, and opacity”; and (iii) “increasingly commingled roles as payment and authentication providers could concentrate risk and create single points of failure.” Khan noted that “[t]he potential risks created by Big Tech’s expansion into payments and financial services are notable and demand close scrutiny,” and stated that she will be monitoring “this inquiry and the findings it produces to help inform the FTC’s work.”
FSB requests feedback on data frameworks affecting cross-border payments
Recently, the Financial Stability Board (FSB) issued a survey requesting stakeholder feedback on “how existing national and regional data frameworks interact with and affect the functioning, regulation and supervision of cross-border payment arrangements,” in addition to feedback on issues concerning the cross-border use of these data frameworks by national authorities and the private sector. Data frameworks within the survey’s scope include those concerning data access; data privacy, security, or storage; requirements for data retention; and multilateral or bilateral trade agreements covering the use and sharing of data across borders. Among other things, the survey seeks information on (i) ways data-specific national and regional data frameworks affect the costs and speed of delivering payments, as well as access and transparency; (ii) potential barriers to cross-border data use; (iii) areas of improvement for overcoming barriers in data frameworks; (iv) whether one jurisdiction’s data framework can impact the provision or supervision of cross-border payments services offered in other jurisdictions; and (v) whether there are particular payment corridors (especially related to emerging markets) that face specific challenges related to data frameworks. The survey also requests information on the implementation of international standards from the FSB and other standard-setting bodies, “if not included as part of formal, domestic data frameworks,” and “[o]ther international efforts, arrangements, or agreements that jurisdictions may implement in their domestic data frameworks or that may affect cross-border data flows.” The survey will close on January 14, 2022.
CFPB seeks comments on recent orders to U.S. tech companies
On November 5, the CFPB published a notice in the Federal Register seeking public comments on recently issued orders to six large U.S. technology companies requesting information and data on their payment system business practices (covered by InfoBytes here). According to the notice, the Bureau invites comments from “any interested parties, including consumers, small businesses, advocates, financial institutions, investors, and experts in privacy, technology, and national security.” The notice is “one of many efforts within the Federal Reserve System to plan for the future of realtime payments and to ensure a fair and competitive payments system in our country.” Comments are due by December 6.
CFPB deputy director discusses future rulemaking research efforts
On November 5, CFPB Deputy Director Zixta Martinez spoke before the Bureau’s Academic Research Council (ARC) meeting, in which she discussed recent research efforts taken to inform future rulemaking and identify root causes of challenges facing consumers. Martinez highlighted Section 1022 orders recently sent to several big tech payment platforms seeking information on their products, plans, and practices (covered by InfoBytes here). She noted that the evaluation of these companies’ payments platform data will help inform the Bureau on the future of the payments system as well as potential emerging risks, and will provide insights that may impact future rulemaking under Section 1033 concerning the disclosure of consumer data by regulated entities. Among other things, Martinez also discussed the importance of small business lending research to better understand whether these businesses provide fair and equitable access to credit and referred to the Bureau’s Section 1071 notice of proposed rulemaking issued in September (covered by a Buckley Special Alert). Martinez also noted that one of the Bureau’s priorities is ensuring access to fair and affordable credit for low-income, minority, or traditionally underserved communities, and said the Office of Research will solicit “suggestions and advice for ways to integrate racial and economic equity analyses into the CFPB’s research agenda.”
Biden Administration releases stablecoin recommendations
On November 1, the U.S. Treasury Department announced that the President’s Working Group on Financial Markets (PWG), with the FDIC and the OCC (collectively, “agencies”), released a report on stablecoins, which are a kind of digital asset intended to maintain a stable value relative to the U.S. dollar. The report noted that stablecoins may be more widely used in the future as a means of payment, which Secretary of the Treasury Janet L. Yellen said could increase “risks to users and the broader system.” Additionally, Secretary Yellen considers current stablecoin oversight to be “inconsistent and fragmented.” Among other things, the report discussed gaps in regulatory authority to reduce these risks. The report recommended that Congress promptly enact legislation to address the risks of payment stablecoins and ensure that payment stablecoins and payment stablecoin arrangements are subject to consistent and comprehensive federal oversight and to “increase transparency into key aspects of stablecoin arrangements and to ensure that stablecoins function in both normal times and in stressed market conditions.” According to the announcement, “[s]uch legislation would complement existing authorities with respect to market integrity, investor protection, and illicit finance, and would address key concerns,” including: (i) risks to stablecoin users and stablecoin runs; (ii) payment system risk; and (iii) systemic risk and concentration of economic power.
While Congress examines legislation on stablecoin, the report recommended that the Financial Stability Oversight Council consider steps for addressing risks, such as “the designation of certain activities conducted within stablecoin arrangements as, or as likely to become, systemically important payment, clearing, and settlement (PCS) activities,” which would be subject to an examination and enforcement framework. The report also recommended that stablecoin issuers “comply with activities restrictions that limit affiliation with commercial entities,” to maintain the separation of banking and commerce. Additionally, the report discussed that, in addition to existing AML/CFT regulations, stablecoin arrangements and activities may implicate the jurisdiction of the SEC and/or CFTC. Therefore, to prevent misuse of stablecoins and other digital assets, the announcement noted that Treasury “will continue leading efforts at the Financial Action Task Force (FATF) to encourage countries to implement international AML/CFT standards and pursue more resources to support supervision of domestic AML/CFT regulations.”
The same day, Treasury released a fact sheet on the PWG report, which clarified, among other things, the purpose of the report, risks posed by stablecoins, and the agencies’ recommendations. In a statement released by OCC acting Comptroller of the Currency Michael J. Hsu, he emphasized his support for the recommendations highlighted in the report pointing out that, “[s]tablecoins need federal prudential supervision to grow and evolve safely.” In a statement released by CFPB Director Rohit Chopra, he noted that though the CFPB was not a member of the PWG, the Bureau “will be taking several steps related to this market,” such as the CFPB’s orders to six large U.S. technology companies seeking information and data on their payment system business practices (covered by InfoBytes here), among other things.
OCC updates Payment Systems booklet
On October 21, the OCC issued Bulletin 2021-49 announcing the revision of the Payment Systems booklet of the Comptroller’s Handbook. The booklet rescinds the Payment Systems and Funds Transfer Activities booklet of the Comptroller’s Handbook (March 1990); the Office of Thrift Supervision Examination Handbook section 580, the Payments Systems Risk (January 1994); banking Circular 235, International Payments Systems Risks (May 10, 1989); and OCC Bulletin 1996-48, Stored Value Card Systems: Information for Bankers and Examiners (September 3, 1996). Among other things, the revised booklet: (i) provides information on payment systems, types of payments, risks associated with payment systems, and associated risk management practices; (ii) highlights the requirements of 12 CFR 7.1026 on payment systems memberships; and (iii) includes expanded examination procedures and “supplemental procedures for deeper review of certain payment activities.”