Schemes, Scams, Frauds.
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Factoring of Credit Card or ACH Transactions for FraudMany telemarketing businesses rely almost exclusively on credit card purchases but in order to conduct credit card sales, a legitimate business must first enter into a merchant account agreement with a bank which agrees to process their credit card transactions. In most retail credit card transactions, the business provides the merchant bank with a sales slip (draft) representing the customer's credit card information and signature authorizing the charge. The bank then transfers this amount into the business's merchant account. The business may then draw from that amount or transfer the money to other accounts. The merchant bank then contacts the issuer of the customer's credit card (issuing bank), presents the sales draft and requests reimbursement. The card-issuing bank then bills the customer for the purchase. If the customer returns the purchased item or challenges the charge, a "charge-back" results and the issuing bank credits the customer's account and asks the merchant bank for a refund. The merchant bank is then only entitled to recoup its loss from the "business", not the credit card customer. If the business refuses, lacks sufficient funds, or is no longer functioning, the merchant bank absorbs the loss. One bank review revealed that a single telemarketing operation deposited almost $1,000,000 into various merchant accounts. As a result of charge-backs, the bank lost $663,456 resulting from multiple sales credits of $399.50. Due to the high charge-back ratios and lack of signed sales slips prevalent with fraudulent telemarketing companies it is difficult for the scammers to find merchant banks willing to accept their credit card transactions. This restriction led to the development of "factoring" where the telemarketer uses a "reputable" third-party, non-telemarketing business (factoring merchant) as a conduit for depositing credit card sales for a percentage fee of around 15%. This factoring merchant processes the transaction either through his account or through a separate one created for the telemarketing company. Telemarketers will induce acquaintances, friends and reputable merchants to open a merchant account with promises of easy money, neglecting to mention the personal liability involved. They may advise them not to deposit too substantial an amount of sales in a single day, or deposit too many sales using the same dollar amount, as this may raise suspicion at the bank. Section 310.3(c) of the Telemarketing Sales Rule, which prohibits credit card laundering or factoring, provides that:
A Key Factor in Prize Fraud Electronic Clearing House, Inc. (ECHO) agreed to settle FTC charges that it aided and abetted deceptive prize-promotion telemarketers, including four against whom the FTC has filed lawsuits -- Pioneer Enterprises, Sierra Pacific Marketing, Legacy Unlimited, and Fitness Express -- by continuing to process their credit-card sales even when it knew, or should have known, about their deceptive sales practices. ECHO, a Nevada corporation with offices in Las Vegas and in Agoura Hills, California, is an independent service organization (ISO) -- a company that acts as an intermediary between banks that are members of credit-card organizations (such as Visa and MasterCard) and merchants (including telemarketers) who accept credit-card payments from their customers. According to the complaint, ECHO processed credit-card sales for its merchant clients which enabled them to convert credit-card sales into accessible cash, charging them a percentage of sales for the service. Given the risk of high chargebacks in the telemarketing industry, telemarketers turn to ISO's such as ECHO because they often are not able to get a merchant account with a bank without the assistance of an ISO. The complaint alleged that since March 1992, during the time ECHO was processing the credit-card transactions for these telemarketers, which generated a large percentage of their volume, it also conducted audits of their businesses, regularly monitored their sales, customer service and verification departments, and sometimes advised them on how to reduce their high chargeback rates. They also indemnified banks against any losses arising from them. Among other things, the proposed settlement would prohibit ECHO from assisting any prize-promotion telemarketer and require it to conduct monthly investigations of each telemarketer with whom it does business (or seeks to do business) and whose credit card transactions total $30,000 or more per month, and to terminate any who are engaging in fraudulent, deceptive or unfair practices. NOTE: This consent decree is for settlement purposes only and does not constitute an admission by the defendants that they violated the law. Consent decrees have the force of law when signed by the judge. 12/21/93 Former Decatur bank official wanted for taking bribes By Dawn Kent - Decatur Daily A former Decatur Compass Bank vice president accused of participating in a telemarketing credit-card scam did not show up for his arraignment Thursday in federal court in Birmingham. A warrant was issued for the arrest of Jean Pierre Harper, 37, of Frisco, Texas, in connection with criminal activity that occurred in Decatur from mid-2000 to early 2001, said Assistant U.S. Attorney Michael V. Rasmussen. While Harper worked at Compass Bank's credit-card processing center on Beltline Road Southwest, he took bribes to allow telemarketers operating out of Las Vegas to process credit-card charges at Compass Bank, according to U.S. Attorney Alice Martin. The action, which violated bank policy, exposed the bank to numerous possible losses, authorities said. "The crimes that (Harper) is charged with are the kind that enable questionable telemarketers and similar businesses to obtain money by soliciting payment in the form of credit card charges and to process those charges at unsuspecting banks, putting such banks at risk when and if charge-backs occur," Martin said in a statement. Harper faces a 46-count indictment that includes charges of conspiracy, bank fraud, making false entries in bank records, and soliciting and accepting bribes. He could receive a maximum sentence of five years in prison on the first count and 30 years for each of the remaining counts. He faces a maximum possible fine of more than $35 million. July
10, 2003 The Federal Trade Commission (FTC) Wednesday continued its summer campaign against Internet fraud when it filed a complaint in U.S. district court charging Electronic Financial Group, Inc. (EFG) and its principals with providing assistance to fraudulent telemarketers seeking to drain funds from consumers' checking accounts. The FTC alleges that the defendants violated the law by processing transactions through the Automated Clearing House Network (ACH Network) for numerous fraudulent telemarketers and by engaging in the deceptive marketing of their own advance-fee debit cards. On Tuesday, the court, after a contested hearing, the court entered a temporary restraining order enjoining the defendants from making misrepresentations in the course of marketing or providing of customer service for ACH transactions, debit cards, and credit-related goods or services. The defendants are also barred from processing ACH transactions or causing consumers' accounts to be debited when certain conditions are met, including when the debit purportedly was authorized as a result of telemarketing, and violating the Telemarketing Sales Rule (TSR). The court also appointed a temporary monitor over the corporate defendants who is responsible for reviewing defendants' business practices and reporting to the court prior to the preliminary injunction hearing. According to the FTC, the Waco, Texas-based EFG provides a variety of electronic payment services to clients in the U.S. and Canada. Among its services, EFG processes electronic debits and credits to consumer bank accounts through the ACH Network, a nationwide electronic funds transfer system that provides for the rapid interbank clearing of electronic payments. The FTC claims the defendants processed ACH transactions on behalf of numerous fraudulent outbound telemarketing operations, a number of which the FTC previously sued as scams. Some of EFG's clients are telemarketing companies with whom EFG enters into a direct contractual agreement to provide ACH processing services. Other EFG clients are other ACH processors, who in turn have contractual relationships with the telemarketers. The FTC's complaint alleges that the defendants violated the TSR by providing substantial assistance and support to numerous client telemarketers whom they knew (or consciously avoided knowing) were engaged in business practices that violated the TSR. In addition, the FTC charges that EFG assisted and facilitated at least four client telemarketers engaged in deceptively selling advance-fee credit cards, and a fifth client engaged in deceptively selling a lottery scam. The complaint also claims that in providing ACH payment processing services to merchants engaged in outbound telemarketing, the defendants engaged in an unfair practice by systematically breaching a contractual provision with its bank that required EFG to adhere to the National Automated Clearing House Association Operating Rules (NACHA Rules) governing the ACH Network. The NACHA Rules include a rule specifically prohibiting the processing of ACH transactions on behalf of merchants engaged in outbound telemarketing to consumers with whom such merchants have no existing relationship. Federal Trade Commission v. Electronic Financial Group, Inc. et al. Credit Card LaunderingIf, without the express permission of the applicable credit card system, defendants have:
Defendants will have thereby violated Section 310.3(c) of the Telemarketing Sales Rule, 16 C.F.R. § 310.3(c).
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