Payment Processor Faces Joint Federal, State Action

Financial Services Law

The Federal Trade Commission (FTC) and the Ohio attorney general have sued a payment processor arising from activities that allegedly enabled its merchant customers to defraud consumers.

The Texas federal court complaint alleges that the defendants (the corporate entity and its owners) opened bank accounts at numerous banks and generated and processed remotely created payment orders or remotely created checks (RCPOs) in order to allow “unscrupulous merchants” to withdraw money from consumers’ bank accounts, in violation of the FTC Act and Ohio law.

What happened

For more than a decade, the defendants operated a payment processing scheme through which they “routinely” used RCPOs to withdraw funds from consumers on behalf of perpetrators of fraud and deceptive schemes, including various telemarketing schemes, the FTC and the Ohio AG alleged. What makes the RCPOs so problematic is that the “check-like” bank orders are created by the processor, and result in debits to consumers’ bank accounts without the signature of the consumer on the payment order.

“To execute their payment processing scheme, Defendants open business checking accounts under various assumed names with banks and credit unions, the majority of which are local institutions,” according to the complaint.  Within the last five years, the defendants opened at least 60 business checking accounts at 25 different financial institutions, mainly in Texas and Wisconsin, to enable their activity, the regulators said. “Defendants often misrepresent to the financial institution the type of business for which they open the account, and routinely fail to disclose the real reason for which they open the account—processing consumer payments for third-party merchants via RCPOs.”

The defendants specifically market their RCPO payment processing service to telemarketers and other merchants that financial institutions and the card networks consider high risk, the FTC and Ohio AG said.

Further, according to the complaint, the defendants are aware that some of their largest merchant clients sell their products or services through telemarketing, and they process RCPOs despite the fact that the Telemarketing Sales Rule (TSR) explicitly prohibits the use of RCPOs in telemarketing sales. The complaint noted that the Ohio attorney general’s office previously filed suit against the defendants in 2008 for the same violations.  However, the resulting judgment and injunction did not deter the defendants from continuing their RCPO scheme, the regulators said.

The defendants have processed consumer payments in excess of $13 million over the past four years for at least three telemarketing schemes sued by the FTC and state attorneys general for consumer fraud or deception, the regulators noted, with more than $8.5 million in RCPOs processed after June 13, 2016, the date on which using RCPOs in telemarketing sales became illegal under the TSR.

The complaint alleges violations of the FTC Act and Ohio state law for unfair payment processing allegedly resulting from the defendants misleading financial institutions to obtain checking accounts, processing consumer payments for merchants engaged in, or likely to be engaged in, fraudulent or deceptive marketing practices, and violations of the TSR for engaging in unlawful telemarketing through the use of RCPOs. The complaint requests injunctive relief, as well as disgorgement of all ill-gotten monies.

U.S. District Court Judge Kathleen Cardone granted the regulators’ request for a temporary restraining order to stop the defendants’ operations, freeze their assets and appoint a receiver.

Concurrent with the case against the defendants, the FTC and state of Ohio filed a second action against one of the processor’s largest clients, a company that allegedly marketed a credit card rate reduction telemarketing scheme based in Canada and the Dominican Republic. The defendants in that case, with the help of the processor, withdrew at least $11.5 million from American consumers’ accounts through this scam, the FTC and Ohio AG said. To read the FTC and Ohio AG’s complaint, click here.

To read the court’s order, click here.

Why it matters

The complaints are evidence of continued activity by the FTC and state authorities to stop merchants that engage in unfair and deceptive conduct that harms consumers, and to pursue payment processors that enable merchants to use the financial systems in furtherance of such conduct.  Payment processors, beware: “The FTC will continue to pursue such schemes aggressively, and hold accountable payment processors that are complicit in the illegal conduct,” Andrew Smith, director of the agency’s Bureau of Consumer Protection, said in a statement about the case.



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