Citing Fraud Risk, the FTC Seeks to Bar Telemarketers from Using Four Payment Methods

If the Federal Trade Commission has its way, all telemarketers will be banned from using remotely created checks and three other payment methods in any transaction.

The sweeping ban, which the FTC posted this week in a proposed rulemaking, would also prohibit telemarketers from collecting payment via remotely created payment orders, remittances, and authorization codes for prepaid cards. Interested parties have until July 29 to send comments on the rule.

The proposed rule is technically an amendment to the regulator’s Telemarketing Sales Rule (TSR), which implemented the 1994 Telemarketing and Consumer Fraud and Abuse Prevention Act. The proposal would also prohibit telemarketers from charging an advance fee for so-called recovery services that purport to restore money to consumers who have been previously defrauded.

Though aimed at curbing telemarketing fraud, the rule would apply to all telemarketing transactions, effectively shutting off a sizable market for payment processors that handle any of the four targeted payment methods. Though FTC officials have warned in remarks at payment-industry trade shows for some time that they were losing patience with the extent of fraud connected to these methods, the rulemaking doesn’t state an estimate for how much these losses amount to beyond saying they total to “hundreds of millions” of dollars.

In the most recent known case of such fraud, First Bank of Delaware six months ago paid $15 million in civil fines to settle a lawsuit brought against it by the U.S. Department of Justice. It also paid $500,000 to cover consumer claims. The bank, which worked with a number of independent sales organizations to process remotely created checks, allegedly ignored return rates exceeding 50%. One of these ISOs, Landmark Clearing Inc., was sued by the FTC in a separate case for allegedly processing remotely created payment orders for suspect merchants that generated an 83% return rate. Landmark later settled with the FTC. First Bank ended up dissolving itself and selling most of its assets and deposits to Bryn Mawr Bank Corp., Bryn Mawr, Pa.

“Payment processors play an indispensable role in furtherance of their clients’ fraudulent and deceptive schemes,” says the FTC rulemaking in a stinging rebuke of ISOs that it sees enabling telemarketing fraud through the four payment methods it wants to ban. The Electronic Transactions Association, a Washington. D.C.-based trade group for ISOs and other payment processors, said it is consulting with its membership on the FTC’s proposed rule and did not immediately have a comment.

Processors create and print remotely created checks at the behest of merchants that are supposed to have received authorization from consumers. The checks may then be imaged and clear the banking system as would any other check. Remotely created payment orders are the same thing but are created in the first place as electronic images. Telemarketers favor these payment types, says the FTC, because they are faster than obtaining checks from consumers and are subject to less regulation than are cards and automated clearing house transactions.

Much the same is true of remittances, also known as  money transfers and prepaid authorization codes. With the latter, consumers typically hand over cash to a retailer to buy the code, which they can later use to load the funds onto a prepaid card. Telemarketers instruct consumers to give them the code so they can load the funds.

Again, statistics on the extent of fraud linked to these transfers are hard to come by. The rulemaking cites surveys indicating a high incidence of fraud in cross-border remittances. The document also cites cases of fraud related to authorization codes. “[T]he Commission, consumer advocates, [the American Association of Retired Persons], and the Better Business Bureau have observed a significant incrase in the number of scams involving cash reload mechanisms,” it says.”These schemes have involved payments made to cover taxes on purported lottery winnings, settle phony debts, pay for advertised goods and services, and obtain advance fee loans.”

Both forms of cash transfer have enabled too much fraud, the FTC says. “The Commission’s experience in combating telemarketing fraud operators that use these transfers to pocket consumers’ money, and pursuing the third parties that assist and facilitate them, suggests that the use of these transfers in telemarketing is an unfair practice, and that prohibiting them would serve the public interest,” the FTC says in the rulemaking.

Interested parties can comment on the proposed rule here.