The Federal Trade Commission recently brought an enforcement action against a company that processed credit card payments for the operator of an alleged debt relief telemarketing scam. This action serves as a reminder to banks of the need to carefully monitor their relationships with deposit customers that engage in payment processing.
In its amended complaint filed in a Florida federal court against the telemarketer, its principals, and the payment processor, the FTC charged that by “assisting and facilitating” the telemarketer’s alleged violations of the FTC’s Telemarketing Sales Rule (TSR), the processor had itself engaged in deceptive telemarketing acts and practices. Only the telemarketer and its principals were named as defendants in the original complaint, and when it was filed, the FTC obtained a temporary restraining order shutting down the telemarketer’s operations. The amended complaint, to which the processor was added as a defendant, seeks permanent injunctive relief involving all the defendants as well as other relief such as restitution, refunds, and disgorgement.
The FTC alleges in the amended complaint that the processor continued to process credit card charges for the telemarketer “despite alarmingly high chargeback rates” and that it “knew, or consciously avoided knowing, key facts” about the telemarketer’s business. Such key facts included that the company was a telemarketer selling debt relief services and collected up-front fees (which are barred by the TSR).
According to the amended complaint, the processor was aware that the telemarketer was under investigation by the Florida Attorney General and the FTC, had been placed in MasterCard’s highest fraud category, and was the subject of multiple fraud alerts from Discover. Rather than cease processing for the telemarketer, however, the complaint alleges that the processor increased the percentage it withheld from processed transactions to protect its own interests. The FTC further alleges that the processor assisted the telemarketer in its attempts to defeat chargeback requests and by making substantial cash advances.
Bank regulators have increased their scrutiny of payment processor relationships in recent years. The Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency have brought several civil enforcement actions against banks for engaging in allegedly unfair practices or unsafe and unsound practices through the handling of their relationships with payment processors. Several of those banks were also the subject of criminal enforcement actions brought by the U.S Department of Justice.
In guidance issued last year highlighting the risks payment processors can present for banks, the FDIC reminded banks that they cannot solely rely on the diligence performed by a processor on the merchants for whom it processes payments. The FDIC also warned that a bank’s failure to adequately manage its payment processor relationships could be viewed as facilitating unlawful activity by a processor or a processor’s merchant client and could cause the bank to be liable for such activity. (The FDIC guidance was discussed in a prior legal alert.)