On March 15, 2022, the Federal Trade Commission (“FTC”) announced a proposed consent order in resolution of an administrative complaint filed against payment processor Electronic Payment Systems (“EPS”) and its individual owners, John Dorsey and Thomas McCann, alleging violations of the Federal Trade Commission Act’s prohibition against unfair and deceptive acts or practices and the Telemarketing Sales Rule. According to the FTC’s press release announcing the proposed consent order, EPS and its individual owners opened credit card processing accounts for fictitious merchants that allowed an entity the FTC previously had sued, Money Now Funding, to launder millions of dollars in payments by consumers nearly a decade ago.
The consent order, which has been submitted for public comment and has not yet been made final by the FTC, identifies a number of red flags that EPS and its owners allegedly ignored in opening the accounts, including indicia that the merchants for whom they opened accounts were in poor financial condition and engaged in telemarketing, an activity that the FTC contends should have presented additional barriers to opening the accounts. The FTC’s consent order proposes injunctive relief to prevent recurrence of the conduct, including prohibiting EPS and its owners from engaging in credit card laundering, evading fraud or risk monitoring programs, and providing payment processing services either to merchants that are likely to be engaged in unfair or deceptive acts or practices, or that appear on a high-risk merchant list maintained by MasterCard as a result of certain practices.
Among other things, the FTC will require EPS to obtain enhanced documentation and information from certain merchants regarding their business or products that they market or advertise, their ownership structure, the transactions they process where a consumer’s credit card is not physically presented to the merchant, and their chargeback rates. EPS will be required to establish a reasonable screening process of merchants designed to assess the accuracy of that information and to confirm their identities as non-fictitious entities, including reviewing the credit reports of both merchants and anyone with a greater than 25% ownership interest in such merchants. The proposed consent order will obligate EPS to ensure the merchants for whom they open accounts do not make certain misrepresentations or omissions about their products or services or cause payments that are not authorized by consumers to be made. Finally, the FTC will require EPS and its owners to monitor its merchants for certain metrics that may indicate the occurrence of fraudulent activity or credit card laundering, and its sales agents for any conduct implicated by the proposed consent order in which they may have directly engaged or the merchants that they referred to EPS for payment processing services may have engaged.
Payment processors should take heed of the prescriptive measures set forth in the FTC’s proposed consent order in developing their own compliance and oversight programs, both with respect to their contractual counterparties as well as any third parties involved in facilitating those contractual relationships.
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