In testimony before the U.S. House Committee on Oversight and Government Reform Subcommittee on National Security and Subcommittee on Government Operations, the Federal Trade Commission described its law enforcement program to fight consumer fraud, and the Commission’s actions against payment processors that facilitate fraud.
Testifying on behalf of the Commission, the Director of the FTC’s Bureau of Consumer Protection, Andrew Smith, noted that the FTC’s anti-fraud program stops some of the most egregious scams that prey on U.S. consumers—often, the most vulnerable Americans who can least afford to lose money. During the past year, for example, the Commission has led enforcement initiatives to combat tech support scams and frauds aimed at small businesses, the testimony states. The testimony further describes how the FTC is using every tool at its disposal to fight illegal robocalls.
One critical component of the FTC’s efforts to fight fraud and illegal robocalls is challenging those unscrupulous payment processors that help fraudsters process payments in violation of the FTC Act, the testimony states. To date, the Commission has taken 25 such actions.
“Payment processors engaged in illegal conduct harm not only consumers; they harm legitimate industry players and undermine confidence in the financial system,” the testimony states.
The testimony describes the role payment processors play in the payment system. Credit card networks require banks, which in turn require their payment processors, to comply with detailed rules, including requirements that they underwrite and monitor merchants to ensure that their systems are not being used to process fraudulent transactions.
But when unscrupulous payment processors violate the law, they also cause significant economic harm to consumers and legitimate businesses, the testimony states. The FTC has brought actions against a variety of payment processors that have assisted fraudulent merchants to help them perpetuate the fraud, avoid the scrutiny of acquiring banks and credit card networks, and cause significant harm to consumers.
The testimony notes two previous examples. In one case, the FTC charged that a processor called CardReady fabricated merchant accounts in the names of shell companies to enable a fraudulent debt relief telemarketing scam to process credit card payments. To settle the case, the CardReady defendants agreed to permanent injunctions, including a $12.3 million judgment. The judgment was suspended based upon defendants’ financial condition, provided they made a $1.8 million payment for consumer redress.
In another case, the FTC charged payment processor Newtek with substantially assisting a fraudulent credit card interest rate reduction operation. The Commission alleged that Newtek opened and approved a merchant account without performing customary reviews and despite clear indications of fraud. The court entered summary judgment against the defendants in the Newtek case, and awarded the Commission $1.7 million.
The testimony notes that the FTC also brings actions against other payment entities that help dishonest merchants obtain payments from consumers. In 2017, for example, the FTC entered into a settlement with Western Union, alleging that massive fraud payments flowed through its money transfer system for many years, including payments in which complicit Western Union agents processed the fraud payments in return for a cut of the proceeds. The case resulted in separate settlements with the FTC and the Department of Justice that provided $586 million in redress for consumer victims.
The overwhelming majority of payment processors abide by the law and provide substantial benefits to the marketplace, the testimony states. However, when a payment processor helps a fraudulent merchant take money from consumers—either by actively helping the merchant hide its fraudulent conduct from the acquiring banks and payment networks or by turning a blind eye to the merchant’s fraud—the Commission will pursue appropriate law enforcement, to protect consumers and competition, the testimony states.
The Commission vote approving the testimony and its inclusion in the formal record was 5-0.
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