On July 26, 2018, the FTC testified before two subcommittees of the U.S. House Committee on Oversight and Government Reform regarding the FTC’s continued focus on payment processors. Andrew Smith, the Director of the FTC’s Bureau of Consumer Protection testified before the House Subcommittees on National Security and Government Operations about the FTC’s anti-fraud program and the 25 actions taken by the FTC against payment processors since 1996. 15 of the 25 cases were filed in the last 10 years.
While lawsuits against payment processors represent a small number of the total cases filed by the FTC, the FTC testified that it views the payment processor’s role as “an integral part” of the agency’s anti-fraud program because their services may facilitate fraudulent schemes. Specifically, the FTC explained that on multiple occasions, the payment processor was identified as an enforcement target because it provided services for multiple entities that were parties to other FTC, SEC or state actions.
The FTC relies on two key legal theories in bringing claims against payment processors. The first theory is that the payment processor allegedly engages in unfair conduct under Section 15(n) of the FTC Act, 15 U.S.C. § 45(n), by allegedly facilitating fraud. The second theory is that the payment processor allegedly violates the FTC’s Telemarketing Sales Rule in two ways. First, the FTC may allege that the payment processor was “assisting and facilitating” a violation of the Rule by providing services to another entity that the processor knows or consciously avoids knowing is violating the Rule. Second, the FTC may allege that the payment processor has engaged in “credit card laundering” by submitting a credit card transaction to the credit card network when the transaction is not between the cardholder and the actual merchant, such as when a shell company is used to hide the identity of the true merchant.
The FTC is not alone in attempting to pursue payment processors for allegedly facilitating consumer fraud. In 2015, the CFPB filed suit against alleged “phantom debt” collectors and various companies alleged to have provided services to the debt collectors, including payment processors. The CFPB claimed that the payment processors facilitated the alleged scheme by enabling the debt collectors to accept credit and debit card payments by engaging in deficient underwriting and failing to appropriately monitor the debt collectors’ accounts, such as by ignoring signs of fraud, such as high chargeback volumes. Last year, the court dismissed the CFPB’s claims against the payment processors as a discovery sanction for failure to produce a knowledgeable witness for deposition, although the case remains pending against the other parties.
The FTC’s testimony indicates that payment processors will continue to remain a potential target in the FTC’s ongoing anti-fraud program. In particular, any payment processor that provides services to a merchant (or multiple merchants) alleged by the FTC, SEC, or other federal or state regulator to have engaged in consumer fraud could itself come under scrutiny by the FTC.