New Law Enforcement Tactic Could Snare ISOs and Acquirers in Quest To Catch Bad Merchants

A historical shift in how some federal financial law-enforcement agencies view the payments industry is under way, and it’s not one that bodes well for the industry, Jason Oxman, chief executive of the Electronic Transactions Association, told attendees at the Southeast Acquirers Association conference this week in Atlanta.

Dubbed Operation Choke Point, the effort is designed to hold banks and payment processors responsible for any illegal acts by a merchant or independent sales organization, Oxman said.

The feds are zeroing in on the payments industry because of its pivotal role in facilitating, unwitting or not, fraudulent transactions. “The reason that we are focused on financial institutions and payment processors is because they are the so-called bottlenecks, or choke points, in the fraud committed by so many merchants that victimize consumers and launder their illegal proceeds,” said Michael J. Bresnick, executive director of the Financial Fraud Enforcement Task Force, a coalition of 20 federal agencies and 94 U.S. Attorneys’ offices, in a 2013 speech.

Many of the complaints come from consumers, and cover a wide swath of fraud, including elder fraud, identity theft, unfair competition, and mass-marketing/telemarketing fraud.

“The choke point in Operation Choke Point is us,” Oxman said. “There are bad merchants out there. In many cases, these merchants are in categories that the federal government, law enforcement, doesn’t like. They’re not illegal, but are areas they have decided are where consumers are harmed.” That includes payday lenders, pharmaceuticals, ammunition, and weight-loss programs, Oxman said. “Our industry has no interest in having criminals on the payments network.”

What Operation Choke Point signals is a shift in federal law-enforcement thinking, Oxman said. “Historically, law enforcement has viewed our industry as partners,” he said. It now has a different approach where it believes that payment companies are complicit when merchants behave badly. That assumes the payment entity knew or should have known about the merchant’s misdeeds, Oxman said. The message is take care of this problem or law enforcement will, Oxman said. “Essentially, they have deputized us.”

But that is not a role for which the payments industry is well-suited, says Adam Atlas, a Montreal attorney who works with U.S. and Canadian independent sales organizations, money transmitters, and other payments-industry clients.

“Processors are not law enforcement and do not have enough detectives to test if every merchant is telling the truth about what they sell,” Atlas tells Digital Transactions News. “The extent of processor due diligence is driven primarily by commercial interest, that is to say, the interest in knowing if they will be defrauded. This does not always extend into a deep analysis of the products actually sold.” Payment processors can earn large profits from businesses that are not illegal, but almost illegal, Atlas says, which makes them enviable merchants.

Oxman said the ETA hopes to send two messages to federal regulators. One is to ask them to pause their efforts to unduly entangle payment companies, and the other is to show that the industry wants to work with them. The ETA is playing host to an Operation Choke Point event at Transact 14, its annual conference beginning April 8 in Las Vegas.