On July 26, 2018, the Federal Trade Commission testified before the U.S. House Committee on Oversight and Government Reform Subcommittee on National Security and Subcommittee on Government Operations about its law enforcement program to fight consumer fraud, and the FTC’s actions against payment processors that facilitate fraud.

Andrew Smith, the Director of the FTC’s Bureau of Consumer Protection, noted that the FTC’s anti-fraud program stops some of the most egregious scams that prey on vulnerable U.S. consumers.  He noted regulatory enforcement initiatives combatting tech support scams, robocalls and frauds targeting small businesses.  The FTC works with its state, federal and international partners to combat illegal robocalls.

A key aspect of the FTC’s efforts to fight fraud and illegal robocalls is challenging payment processors that help marketers process payments in violation of the FTC Act.  To date, the Commission has taken 25 such actions.

“Payment processors engaged in illegal conduct harm not only consumers; they harm legitimate industry players and undermine confidence in the financial system,” the testimony states.

The testimony also describes the role payment processors play in the payment system.  Credit card networks require banks, which in turn require their payment processors, to comply with detailed rules, including requirements that they underwrite and monitor merchants to ensure that their systems are not being used to process fraudulent transactions.

The FTC has brought actions against numerous payment processors that have assisted fraudulent merchants to help them perpetuate the fraud, avoid the scrutiny of acquiring banks and credit card networks, and cause significant harm to consumers.

The testimony notes two previous examples.

In one case, the FTC charged that a processor called CardReady fabricated merchant accounts in the names of shell companies to enable a fraudulent debt relief telemarketing scam to process credit card payments.  To settle the case, the CardReady defendants agreed to permanent injunctions, including a $12.3 million judgment.  The judgment was suspended based upon defendants’ financial condition, provided they made a $1.8 million payment for consumer redress.

In another case, the FTC charged payment processor Newtek with substantially assisting a fraudulent credit card interest rate reduction operation.  The Commission alleged that Newtek opened and approved a merchant account without performing customary reviews and despite clear indications of fraud.  The court entered summary judgment against the defendants in the Newtek case, and awarded the Commission $1.7 million.

The testimony also points out that the FTC initiates actions against other payment entities that help dishonest merchants obtain payments from consumers.  For example, in 2017 the FTC entered into a settlement with Western Union, alleging that massive fraud payments flowed through its money transfer system for many years, including payments in which complicit Western Union agents processed the fraud payments in return for a cut of the proceeds.

FTC defense lawyer Richard Newman states that, with increasing frequency, payment processors are requiring that businesses submit attestations of outside legal counsel review regarding compliance with applicable laws rules and regulations.  Such due diligence includes engaging legal counsel to review   product/service offerings and marketing practices to ensure that standards are met pertaining to, without limitation, endorsements, testimonials, claim substantiation and the Restore Online Shopper’s Confidence Act.

The prepared statement of the Federal Trade Commission on the agency’s enforcement of “Operation Chokepoint” can be seen, here.

Richard Newman is an attorney at Hinch Newman LLP.

Informational purposes only. Not legal advice. Always seek the advice of an attorney. Previous case results do not guarantee similar future result. Hinch Newman LLP | 40 Wall St., 35th Floor, New York, NY 10005 | (212) 756-8777