FTC Claims Card Processor Is Liable for Merchant Fraud

20 Jun

   firealarmOn June 4, 2013, the Federal Trade Commission named independent sales organization IRN Payment Systems (“IRN”) in a lawsuit alleging that IRN violated the FTC’s Telemarketing Sales Rule by processing credit card transactions for, and providing cash advances to, a merchant engaged in deceptive telemarketing.  The FTC’s complaint claims that IRN provided substantial assistance to the merchant by, among other things, processing chargebacks while knowing or consciously avoiding knowledge of the merchant’s fraudulent acts. 

The FTC’s suit should be heard as a fire alarm throughout the card processing industry.  The complaint serves both as a loud warning of the pitfalls of processing for certain types of telemarketing merchants, and as a guide on how to avoid the FTC’s wrath when doing so.

The merchant, Innovative Wealth Builders, Inc. (“IWB”), claimed through telemarketing campaigns that it would save consumers money by reducing interest rates on their outstanding credit card balances.  The FTC alleges that IRN’s due diligence revealed that IWB was a telemarketing company selling debt relief services with complaints against it on consumer websites.  Further, IRN was aware of IWB’s deceptive practices through a number of warning systems, including that IWB’s chargeback rates at times exceeded 40% and that IWB was placed on MasterCard’s high fraud alert program. 

Despite such indications, IRN continued to process transactions.  The FTC states that IRN responded to “the numerous indicators of the illegal nature of [IWB’s] business by seeking to protect its own interests”, specifically, increasing the merchant’s reserve account.  In addition, IRN allegedly assisted the merchant in challenging chargeback disputes and made recommendations on how to defeat chargeback requests. 

Those are actions routinely taken by card processors in the normal course of business.  The difference, it seems, is that IRN profited by earning fees for itself while turning a blind eye and “allowing” (apparently by processing its card transactions) IWB to harm consumers who purchased the bogus card interest rate reduction services.

The FTC’s Telemarketing Sales Rule provides that it is a deceptive telemarketing act and a violation of the Rule for a person to provide substantial assistance or support to any telemarketer when that person knows or consciously avoids knowing that the telemarketer is engaged in a deceptive telemarketing act, as defined in the regulation. 

The filing of this action underscores that the FTC is serious about holding card processors liable for the acts of their merchants.  The industry would be well advised to take heed.

Holli Targan

Attorney & Partner


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