Federal Agencies Turn a Watchful Eye on Third-Party Payments Providers

Already the subject of new debit card regulations, the payments industry is coming in for more scrutiny from the federal government. A Federal Trade Commission official told attendees at a merchant-acquiring conference on Thursday that the government has formed a task force to monitor third-party payment-services providers. The feds’ goal is to prevent fraudulent merchants from getting merchant accounts and to shut down such merchants as quickly as possible if they defraud consumers.

The group will include officials from a host of governmental units besides the FTC, including the Justice Department, the Federal Bureau of Investigation, the U.S. Treasury Department’s FinCen anti-money-laundering unit, the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corp. Karen S. Hobbs, senior attorney in the FTC’s Division of Marketing Practices, revealed the existence of the task force at the Electronic Transactions Association’s Compliance Day conference in Chicago.

Hobbs, who is based in Washington, D.C., said the point of the new group is to ensure that law-enforcement officials and regulators quickly know when something is awry with third-party providers that may be connected to consumer fraud. For example, the FTC, which has no regulatory authority over banks, could use the task force to inform bank regulators at the OCC or FDIC about problems it finds when investigating consumer fraud involving third parties such as independent sales organizations that work with merchant-acquiring banks. “This is drilling down into the third-party payment-processing arena,” Hobbs tells Digital Transactions News. She says the task force is an offshoot of an existing inter-governmental group formed some years ago to monitor payments issues.

The FTC frequently sues and shuts down telemarketing boiler rooms and other fraudulent marketing companies that often generate their revenues through credit and debit card charges. Hobbs politely but firmly made it clear to her ETA audience that the FTC thinks ISOs and acquirers often fail to vet potentially fraudulent merchant applicants adequately. Providers might not check applicants’ chargeback histories if they have accounts with other acquirers, fail to check whether one business is applying for multiple merchant accounts for suspicious reasons, and verify the information on merchant-account applications, she said.

“We have found blatant misrepresentations on applications,” Hobbs said. Regarding one person trying to get multiple merchant accounts, she added, “We pay attention to little things that add up to the same person.” She noted that the FTC has seen cases of 20 to 50 descriptors tied to one account. The purpose of so many accounts ultimately held by a single entity is to keep chargebacks in any one account below Visa Inc. and MasterCard Inc. thresholds that would draw scrutiny and even account closure.

Hobbs spoke on a panel with Washington attorney Jeffrey D. Knowles, a partner with Venable LLP who has represented marketing companies. Knowles acknowledged the government’s interest in thwarting fraud, but noted that increased oversight could crimp legitimate business. A corporate entity can have legitimate purposes in setting up multiple merchant accounts, he said. But, he added, “It’s not always apparent what the marketer’s intent is.”

Knowles also said the payment industry’s processes for resolution of disputed charges can take longer than government officials like. “The FTC wants it fixed yesterday … I think payment processors are at risk for not moving quickly,” he said.

Hobbs also made it clear that the government believes the reserves that acquirers and ISOs require merchants to set aside to cover disputed transactions can be used, after being frozen on court order, to compensate consumers rather than to cover processors’ losses or expenses.