The Federal Trade Commission ("FTC") continues to crack down on companies engaged in credit card laundering. Credit card laundering is the practice of processing credit card transactions for one company through the merchant processing account of another company. Credit card laundering can be used to bypass the monitoring practices and volume thresholds of credit card associations and payment processors. A new complaint and a settlement of a prior case highlight the effort that the FTC is devoting to this area.
On November 14, 2018, the FTC filed a complaint against Apex Capital Group, LLC and others, alleging an international network of corporations and individuals that marketed "free" trial offers to consumers for personal care products and dietary supplements, only to charge consumers the full price for the products. The Defendants also allegedly engaged in credit card laundering. The FTC alleged that the Defendants used dozens of shell companies and straw owners to obtain merchant accounts and process charges through these accounts in furtherance of their scheme.
On December 11, 2018 the FTC announced a settlement of charges against certain defendants in the Money Now Funding ("MNF") scam regarding their role in laundering transactions for MNF. The FTC previously settled with two other defendants in March 2018. Both settlements led to a ban on acting as payment processors, independent sales organizations, or sales agents, a prohibition on credit card laundering, and a monetary judgment owed to the FTC.
Historically, the FTC pursued laundering cases under the Telemarketing Sales Rule (the "TSR") which specifically outlaws credit card laundering related to telemarketing transactions. Past cases against Paybasics, Inc., Jamie White, and CardReady, LLC alleged violations of the TSR. In MNF, the FTC alleged violations of both the TSR and an unfairness count under Section 5 of the FTC Act. However, in Apex, because the underlying conduct did not involve telemarketing, the FTC could not pursue these violations under the TSR. Instead, the FTC relied solely on its broad unfairness authority to challenge credit card laundering. The FTC alleged that the Defendants falsely represented that (1) the shell companies listed as applicants on the merchant applications were the true merchants applying for accounts, and (2) the individual signors listed as principal owners on merchant applications were the actual principal owners applying for the merchant accounts. According to the FTC, these acts violate the elements of the unfairness doctrine because these actions caused or were likely to cause substantial injury to consumers that consumers could not reasonably avoid and the injury is not outweighed by countervailing benefits to a consumer or competition. The Defendants' false statements to the banks enabled them to process consumer payments and bypass credit card networks' monitoring practices, increasing the opportunity for consumer injury. As more of the conduct that the FTC challenges moves from telemarketing to the Internet, expect the FTC to use its unfairness authority to challenge credit card laundering for those lines of commerce.
It is also worth remembering that credit card laundering can have criminal consequences. In 2016, Jeremy Johnson, the founder of iWorks, settled with the FTC for $280.9 million. Then, in a separate action by the Department of Justice, Johnson was sentenced to 11 years in prison for making false statements to a bank on numerous merchant account applications. While merchants may understandably chafe at the limits that processors put on the volume that they can process or their inability to open merchant accounts, credit laundering can make that chafing turn into a vicious rash. Be careful.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.