FTC files Suit Against ISO, Merchant Processor

The FTC recently filed suit against Electronic Payment Solutions of America, Inc., et al., seeking to hold Independent Sales Organizations and their sales reps liable under the FTC Act (and other statutes). The case is significant because the FTC takes a stance against ‘Independent Business Organizations’ involvement in affiliate marketing operations, stating that: “[t]he practice of processing credit card transactions through another company’s merchant accounts is called “credit card laundering” or “factoring” in the credit card industry. It is strictly forbidden by the credit card companies and is illegal under the TSR.”[1]

The liability at issue in this case is largely based upon the alleged fraudulent scheme in a prior case, FTC v. Money Now Funding, LLC et al. The initial Complaint in that case alleges that from 2011 to 2013, the principals of Money Now Funding, LLC (“MNF”) operated a deceptive telemarketing scam, charging thousands of consumers more than $7 million for worthless business opportunities and related upsells.[2] In 2013, the FTC sued MNF for telemarketing worthless business opportunities to consumers and falsely promising that consumers would earn thousands of dollars in income.[3] In 2015, the court entered summary judgment and default judgments against certain MNF defendants, finding that MNF was a multi-million dollar scheme to defraud consumers.[4]

The MNF case is significant because the defendants in the present case of FTC v. Electronic Payment Solutions of America, Inc., et al. are alleged to have processed victim credit card charges through merchant accounts established in the names of MNF’s fictitious companies, rather than through a single merchant account in the name of MNF.[5] Specifically, in 2012 and 2013, Electronic Payment Solutions, LLC served as the ISO for the entities involved in the MNF scam.[6] MNF transactions were also alleged by the FTC to have been laundered through at least two merchant accounts set up in the name of companies created by defendants in the Electronic Payment Solutions of America, Inc., et al. case.[7]

The present case involves two groups of defendants: the “KMAWigdore Defendants” and the “EPS Defendants” (the two groups collectively the, “Defendants”). The KMA-Wigdore Defendants are three individuals who acted as Independent Sales Organization (“ISO”) sales agents to other Defendants, and four entities associated with these individuals. The EPS Defendants are the ISO, their two principals, and risk manager.

The FTC’s pleadings state that EPS Defendants marketed ISO and payment processing services to prospective merchants.[8] They also: (1) did the underwriting for MNF and (2) using the services of two payment processors, processed more than $5,895,035 in MNF transactions through these and other merchant accounts. [9] Furthermore, the Complaint alleges that EPS Defendants used ISO “sales agents” to market the processing services to merchants.[10] Three of these sales agents, Defendants Jay Wigdore, Michael Abdelmesseh, and Nikolas Mihilli, directly participated in the MNF credit card laundering scheme.[11] Defendant Wigdore submitted the merchant applications for the MNF fictitious companies to the EPS Defendants.[12] Once the EPS Defendants processed MNF’s transactions through the fictitious company accounts, the MNF sales revenues were transferred to companies controlled by the ISO sales agents and others.[13]

Most significant from this case is the conduct the FTC took issue with. The FTC is alleging the Defendants failed to sufficiently screen incoming merchants that were applying for merchant accounts with Merrick, the acquirer.[14] As an ISO for Merrick, the FTC claims that the EPS Defendants were contractually required to comply with Merrick’s underwriting rules for screening merchants, which included strict guidelines designed to verify the identity of the merchant and the legitimacy of the merchant’s business, and to screen out merchants potentially engaged in fraud.[15] The FTC is also alleging that the EPS Defendants had a duty to adequately monitor its merchants’ transactions, update merchant information in the merchant database, and ensure that its merchants complied with the card networks’ rules and various fraud monitoring programs.[16]

Thus, the FTC claims that, rather than verify its merchants’ identities, the EPS Defendants opened merchant accounts in the names of numerous fictitious companies for the same underlying merchant, and thereby falsely represented the true identity of the fictitious companies.[17] Additionally, the Commission asserts that the Defendants: (a) ignored obvious warning signs of fraud, including the likely presence of credit card laundering; (b) concealed from Merrick (the acquirer) and the card networks the true identity and nature of the MNF Fictitious Companies; and (c) made every effort to continue processing for the MNF Fictitious Companies, and other merchants related to the KMA-Wigdore Defendants, even after Merrick noticed signs of fraud and instructed EPS to stop.[18]

The FTC’s allegations in this case against merchant processing entities, and definition of “credit card laundering”, highlight the FTC’s level of scrutiny that ISOs and acquirers face moving forward. Regardless of how the case concludes, it shows a decreasing level of tolerance by the FTC for those that play even more passive/secondary/indirect roles in the traditional affiliate marketing operational structure.

[1] FTC v. Electronic Payment Solutions of America, Inc. Complaint ¶ 6.

[2] See e.g., Final Judgment and Order for Permanent Injunction and Equitable Monetary Judgment as to Defendant Leary Darling.

[3] See FTC v. Money Now Funding, LLC, et al., CV 13-01583-PHX-ROS (D. Ariz. 2013) Complaint

[4] See e.g., Final Judgment and Order for Permanent Injunction and Equitable Monetary Judgment as to Defendant Leary Darling.

[5] FTC v. Electronic Payment Solutions of America, Inc. Complaint ¶ 5.

[6] Id. at ¶ 12.

[7] Id. at ¶ 5.

[8] Id. at ¶ 10.

[9] Id. at ¶ 18.

[10] Id. at ¶ 12.

[11] Id.

[12] Id.