FTC Enters Consent Agreement with Payment Processor for Opening Merchant Accounts for Fictitious Companies

On March 15, the Federal Trade Commission (FTC or Commission) released a consent agreement with Electronic Payment Systems and its owners John Dorsey and Thomas McCann (collectively, EPS) for allegedly opening credit card processing merchant accounts for fictitious companies on behalf of Money Now Funding (MNF).

The complaint filed against EPS alleges that it had opened 43 different merchant accounts for fictitious businesses on behalf of MNF, which aided that company in laundering millions of dollars of consumers’ credit card payments. Moreover, the complaint alleges that EPS knew these merchant accounts were fake and aided MNF in its illicit activities.

In 2015, MNF settled allegations with the FTC that it had telemarketed worthless business opportunities to consumers and falsely promised that consumers would earn thousands of dollars in income. Thus, according to the FTC’s complaint, MNF engaged in credit card laundering by creating fictitious companies that, through a sales agent, submitted applications for merchant accounts to EPS, which then opened merchant accounts in the names of these fictitious companies. The alleged victims’ credit card charges were processed through those accounts, rather than through one merchant account in the name of MNF.

“Companies involved in payment processing can’t ignore red flags that fraudsters are using the system to steal people’s money,” said Samuel Levine, director of the FTC’s Bureau of Consumer Protection. “It’s urgent that our authority to get money to consumers be restored, but in the meantime, we’ll do everything we can to stop scammers and those who help them.”

The consent agreement will be subject to public comment, after which the Commission will determine whether to make the proposed consent order final. The FTC is unable to seek monetary redress due to the Supreme Court’s decision in AMG Capital Management v. FTC, discussed in our blog post here. However, under the consent agreement, EPS would be (1) prohibited from credit card laundering and any other actions to evade fraud and risk monitoring programs, (2) prohibited from providing payment processing services to any merchant that is, or is likely to be, engaged in deceptive or misleading conduct, as well as to any merchant that credit-card industry monitoring programs have flagged as high-risk for certain reasons, and (3) required to conduct detailed screening of potential merchants that conduct outgoing telemarketing or are engaged in certain activities that could harm consumers.

Troutman Pepper Take:  Although most payment processors do not engage in acts to aid in illicit behavior, this case is important because the FTC was not able to obtain monetary relief as it had in the past due to the Supreme Court’s AMG Capital Management decision. The FTC has been lobbying Congress to codify a statutory structure that will allow such damages, but Congress has failed to do so. We expect the FTC will continue lobbying Congress on this issue. We will continue to inform you about those efforts.