Foreign Payment Processor, CEO Settles With FTC

Financial Services Law

The Federal Trade Commission (FTC) has reached a deal with a Latvian payment processor and its CEO, settling charges that the defendants facilitated a “free trial” scam involving personal care products and dietary supplements.

In addition to a $3.5 million payment, the defendants are banned from payment processing for certain merchant categories and prohibited from the conduct alleged in the complaint.

What happened

In November 2018, the FTC filed suit in California federal court against a third-party company and its principals, accusing them of marketing “free trial” offers online and then billing consumers the full price of the products and enrolling them in negative option continuity plans without their consent.

To perpetuate the scam, the company used dozens of shell companies and straw owners to obtain and maintain the merchant accounts necessary to accept consumers’ credit and debit card payments, the agency alleged.

The FTC filed an amended complaint in May 2019, adding the Latvian-based payment processor and its CEO, alleging that they illegally manipulated merchant accounts in the name of shell companies for the third-party company’s deceptive scheme, enabling the third party to evade credit card chargeback monitoring programs.

Specifically, the agency said, the defendants used two methods to artificially lower the level and rate of chargebacks: load balancing and microtransactions processing. With load balancing, the use of numerous merchant accounts spread sales volume across multiple accounts, artificially reducing the chargeback levels in each account.

The defendants used prepaid gift cards to make thousands of individual transactions in small dollar amounts in their microtransaction processing, the FTC alleged, artificially diluting the ratio of chargebacks to total sales in the merchant accounts because these transactions would not lead to chargebacks.

While the defendants neither admitted nor denied the allegations that they violated the FTC Act, the Restore Online Shoppers’ Confidence Act (ROSCA) and the Electronic Fund Transfer Act (EFTA), they agreed to a stipulated order for permanent injunction and monetary judgment with the agency.

Pursuant to the agreement, the defendants are permanently restrained and enjoined from payment processing and from assisting others engaged in payment processing, whether directly or through an intermediary, for any person selling, promoting or marketing a good or service with a negative option feature that involves add-on goods or services; cosmetics, food, dietary supplements or pharmaceutical drugs; or where the good or service is touted as “free,” “risk free,” a “trial” or with the phrase “no obligation.”

The stipulated order also prohibits the other conduct cited in the complaint, including credit card laundering, and requires enhanced screening and monitoring procedures for “high-risk” clients (defined as a merchant account that processes more than 15% card-not-present transactions and more than $500,000 in total card-not-present transactions).

A $3.5 million judgment was imposed, which the FTC said may be used to provide refunds to the consumers defrauded by the third party’s “free trial” scam.

To read the stipulated order in the case, click here.

Why it matters

The FTC remains a vigilant enforcement agency actively engaged in identifying third parties who use deceptive practices to defraud consumers.

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