Allegedly Debited Millions of Dollars from Consumers Bank Accounts Without Their Consent
A payment processor and two of its principals are banned from processing electronic payments under a settlement with the Federal Trade Commission, which resolves charges that they debited, or tried to debit, millions of dollars from tens of thousands of consumers’ bank accounts without their consent. The FTC’s action against Automated Electronic Checking Inc. (AEC) and its principals, John P. Lawless, and Kenneth Mark Turville is part of its continuing efforts to protect consumers in financial distress.
Payment processors enable merchants to obtain customer payments for products and services via electronic banking. Processors provide a link between merchants and consumers’ banks. They are compensated by receiving a fee for each consumer transaction that they process. According to the FTC’s complaint, AEC knew, or should have known, that some of its client merchants got consumers’ financial account information through deceptive means and lacked consumers’ authorization to debit their accounts. For example, the FTC has alleged that many consumers thought they were applying for a credit line through one of AEC’s client merchants, but instead they were enrolled in an online “shopping club” with hefty fees. The FTC has also charged that AEC often debited the accounts of consumers who had never heard of its client merchants, had never knowingly bought anything from them, and could least afford unauthorized debits, which resulted in the additional burden of bank overdraft charges.
As alleged in the complaint, the defendants processed payments by using remotely created payment orders (RCPOs), a payment method that allows a processor to reach into and debit a consumer’s bank account. Unlike some payment mechanisms, such as credit cards, RCPOs are not subject to significant oversight and monitoring, making them vulnerable to abuse. As a result, the FTC alleges, they have become a particularly attractive payment method for merchants and processors engaged in fraud and unauthorized debiting.
According to the complaint, AEC encouraged merchants to use RCPOs as a way to avoid the scrutiny other payment methods provide. It processed payments for clients through banks whose risky practices had gotten them into trouble with banking regulators, including First Regional Bank in Century City, California; Metro Phoenix Bank in Phoenix, Arizona; SunFirst Bank in St. George, Utah; and First Bank of Delaware in Wilmington, Delaware. The FTC charges that AEC turned a blind eye to excessively high return rates – the rate of transactions that were rejected and returned by consumers or their banks. AEC also instructed its clients on ways to avoid detection and ignored consumer complaints, the FTC alleged.
According to the complaint, AEC’s violations of the FTC Act are exemplified by the fraudulent and unauthorized transactions it processed for two merchants, EdebitPay LLC and Platinum Online Group, both run by Dale Paul Cleveland and William Richard Wilson. From February 2008 to November 2010, AEC processed more than $49.8 million for EDebitPay and Platinum. During this period EdebitPay and Platinum had consistently high return rates. The banks notified AEC of the specific reasons for the high return rates, and AEC knew that the principals of both companies were already subject to an earlier FTC order.
The settlement order requires that AEC pay $950,000 it earned from processing for EdebitPay and Platinum. The money will be returned to consumers harmed by AEC’s actions. The order also bans AEC, Lawless, and Turville from processing payments by any means in the future. Per the terms of the settlement, Lawless may work for a financial institution, but only if his job does not involve providing, selling, or arranging payment processing. In addition, the order:
- prohibits the defendants from billing consumers, or telling them they owe money, for telephone-billed transactions that have not been authorized by the consumers;
- bars the defendants from referring defendants’ payment-processing clients to other processors for money; and
- prohibits the defendants from selling or otherwise benefitting from customers’ personal information.
A number of related actions were recently brought against First Bank of Delaware, one of the banks through which AEC processed debit transactions on behalf of its client merchants. In November 2012, the Department of Justice announced its $15 million settlement with First Bank of Delaware, together with related regulatory actions announced by the Department of the Treasury Financial Crime Enforcement Network (“FinCEN”) and the Federal Deposit Insurance Corporation (“FDIC”). DOJ alleged that the First Bank of Delaware originated withdrawal transactions on behalf of fraudulent merchants and knew – or turned a blind eye to the fact – that consumer authorization for the withdrawals had been obtained by fraud.
Today’s announcement is part of efforts by the Consumer Protection Working Group of President Obama’s Financial Fraud Enforcement Task Force (www.stopfraud.gov).
The Commission vote authorizing the staff to file the complaint and approving the proposed settlement order was 5-0. The order was entered by the U.S. District Court for the District of Nevada on March 11, 2013.
NOTE: The Commission files a complaint when it has “reason to believe” that the law has been or is being violated and it appears to the Commission that a proceeding is in the public interest. The complaint is not a finding or ruling that the defendants have actually violated the law. The consent judgment is for settlement purposes only and does not constitute an admission by the defendants that the law has been violated. Consent judgments have the force of law when approved and signed by the District Court judge.
The Federal Trade Commission works for consumers to prevent fraudulent, deceptive, and unfair business practices and to provide information to help spot, stop, and avoid them. To file a complaint in English or Spanish, visit the FTC's online Complaint Assistant or call 1-877-FTC-HELP (1-877-382-4357). The FTC enters complaints into Consumer Sentinel, a secure, online database available to more than 2,000 civil and criminal law enforcement agencies in the U.S. and abroad. The FTC’s website provides free information on a variety of consumer topics. Like the FTC on Facebook, follow us on Twitter, and subscribe to press releases for the latest FTC news and resources.
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