Crimes of Persuasion

Schemes, scams, frauds.

Factoring of Credit Card or ACH Transactions for Fraud

Many 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:

Except as expressly permitted by the applicable credit card system, it is a deceptive telemarketing act or practice and a violation of this Rule for:

(1) A merchant to present to or deposit into, or cause another to present to or deposit into, the credit card system for payment, a credit card sales draft generated by a telemarketing transaction that is not the result of a telemarketing credit card transaction between the cardholder and the merchant . . . .

A Key Factor in Prize Promotion 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.

Credit Card Laundering

If, without the express permission of the applicable credit card system, defendants have:

a. Presented to or deposited into, or caused another to present to or deposit into, the credit card system for payment, a credit card sales draft generated by a telemarketing transaction that is not the result of a telemarketing credit card transaction between the cardholder and defendants;
b. Employed, solicited, or otherwise caused a merchant, a representative, employee or agent of the merchant, to present to or deposit into the credit card system for payment, a credit card sales draft generated by a telemarketing transaction that is not the result of a telemarketing credit card transaction between the cardholder and the merchant; or
c. Obtained access to the credit card system through the use of a business relationship or an affiliation with a merchant, when such access is not authorized by the merchant agreement or the applicable credit card system.

Defendants will have thereby violated Section 310.3(c) of the Telemarketing Sales Rule, 16 C.F.R. § 310.3(c).

Articles on Factoring in the Money Laundering Process