financial crime

“Credit card laundering” or “factoring” refers to the practice of processing credit card transactions for one company through the merchant processing account of another company. In recent years, the FTC has sued several companies for engaging in this practice or assisting allegedly fraudulent merchants to launder card payments through multiple processing accounts. On July 28, 2017, the FTC filed a complaint against an ISO called Electronic Payment Systems, LLC (EPS), its own ISOs and sales agent companies, and certain of its officers and sales agents in their individual capacities. The complaint serves as a strong reminder that, whatever else has changed in Washington, the FTC continues to pursue fraudulent merchants and those that assist them in getting access to the payments system.

The FTC’s complaint alleges that EPS approved 23 merchant account applications for a deceptive telemarketing scam called Money Now Funding, which the FTC sued in 2013. Among the red flags that the FTC cites in its complaint against EPS:

  • High-Risk Marketing: EPS’ marketing allegedly advertised its ability to obtain merchant processing services for “High-Risk Merchants” including through the use of “special partnerships with internal banks overseas” and “offshore merchant accounts.”
  • Criminal History of Sales Agent: EPS allegedly maintained a sales agent relationship with one of the individual defendants, both before and after his 57-month sentence on a federal bank fraud conviction. This individual allegedly submitted the 23 merchant applications to EPS.
  • Acquiring Bank Warnings: EPS allegedly persevered in efforts to obtain merchant accounts for fraudsters despite several warnings from its acquiring bank. EPS was allegedly undaunted by alerts from the bank’s risk officer related to high levels of chargebacks among the accounts, load-balancing concerns, and re-submission of applications for merchants that the bank previously rejected.
  • Fraud-Monitoring Evasion: Visa considers telemarketing businesses to be higher-risk merchants and requires ISOs to assign specific Merchant Classification Codes (MCC) to such businesses. EPS allegedly used other MCCs to avoid the merchant accounts being identified as high-risk telemarketing accounts subject to heightened monitoring.

While there has been legislation introduced in Congress to stop Operation Choke Point, the FTC seems set on its course of pursuing payment processors it believes knowingly help alleged fraudsters gain access to the payments system. Payment processors, ISOs, and sales agents wishing to avoid FTC scrutiny need to continue to take necessary steps to underwrite merchants, monitor for suspicious transactions, and pursue appropriate action after identifying red flags.