Factoring of Credit
Card or ACH Transactions for Fraud
Many telemarketing businesses rely almost exclusively on credit
card purchases but in order to conduct credit card sales, a legitimate
business must first enter into a merchant account agreement with
a bank which agrees to process their credit card transactions.
In most retail credit card transactions, the business provides
the merchant bank with a sales slip (draft) representing the customer's
credit card information and signature authorizing the charge.
The bank then transfers this amount into the business's merchant
account. The business may then draw from that amount or transfer
the money to other accounts. The merchant bank then contacts the
issuer of the customer's credit card (issuing bank), presents the
sales draft and requests reimbursement.
The card-issuing bank then bills the customer for the purchase.
If the customer returns the purchased item or challenges the charge,
a "charge-back" results and the issuing bank credits
the customer's account and asks the merchant bank for a refund.
The merchant bank is then only entitled to recoup its loss from
the "business", not the credit card customer. If the
business refuses, lacks sufficient funds, or is no longer functioning,
the merchant bank absorbs the loss.
One bank review revealed that a single telemarketing operation
deposited almost $1,000,000 into various merchant accounts. As
a result of charge-backs, the bank lost $663,456 resulting from
multiple sales credits of $399.50.
Due to the high charge-back ratios and lack of signed sales slips
prevalent with fraudulent telemarketing companies it is difficult
for the scammers to find merchant banks willing to accept their
credit card transactions.
This restriction led to the development of "factoring" where
the telemarketer uses a "reputable" third-party, non-telemarketing
business (factoring merchant) as a conduit for depositing credit
card sales for a percentage fee of around 15%. This factoring merchant
processes the transaction either through his account or through
a separate one created for the telemarketing company.
Telemarketers will induce acquaintances, friends and reputable
merchants to open a merchant account with promises of easy money,
neglecting to mention the personal liability involved. They may
advise them not to deposit too substantial an amount of sales in
a single day, or deposit too many sales using the same dollar amount,
as this may raise suspicion at the bank.
Section 310.3(c) of the Telemarketing Sales Rule, which
prohibits credit card laundering or factoring, provides that:
Except as expressly permitted by the applicable credit card
system, it is a deceptive telemarketing act or practice and a
violation of this Rule for:
(1) A merchant to present to or deposit into, or cause another
to present to or deposit into, the credit card system for payment,
a credit card sales draft generated by a telemarketing transaction
that is not the result of a telemarketing credit card transaction
between the cardholder and the merchant . . . .
A Key Factor in Prize Fraud
Electronic Clearing House, Inc. (ECHO) agreed
to settle FTC charges that it aided and abetted deceptive prize-promotion
telemarketers, including four against whom the FTC has filed lawsuits
-- Pioneer Enterprises, Sierra Pacific Marketing, Legacy Unlimited,
and Fitness Express -- by continuing to process their credit-card
sales even when it knew, or should have known, about their deceptive
ECHO, a Nevada corporation with offices in Las Vegas and in Agoura
Hills, California, is an independent service organization (ISO)
-- a company that acts as an intermediary between banks that are
members of credit-card organizations (such as Visa and MasterCard)
and merchants (including telemarketers) who accept credit-card
payments from their customers.
According to the complaint, ECHO processed credit-card sales
for its merchant clients which enabled them to convert credit-card
sales into accessible cash, charging them a percentage of sales
for the service.
Given the risk of high chargebacks in the telemarketing industry,
telemarketers turn to ISO's such as ECHO because they often are
not able to get a merchant account with a bank without the assistance
of an ISO.
The complaint alleged that since March 1992, during the time ECHO
was processing the credit-card transactions for these telemarketers,
which generated a large percentage of their volume, it also conducted
audits of their businesses, regularly monitored their sales, customer
service and verification departments, and sometimes advised them
on how to reduce their high chargeback rates. They also indemnified
banks against any losses arising from them.
Among other things, the proposed settlement would prohibit ECHO
from assisting any prize-promotion telemarketer and require it
to conduct monthly investigations of each telemarketer with whom
it does business (or seeks to do business) and whose credit card
transactions total $30,000 or more per month, and to terminate
any who are engaging in fraudulent, deceptive or unfair practices.
NOTE: This consent decree is for settlement purposes only and
does not constitute an admission by the defendants that they violated
the law. Consent decrees have the force of law when signed by the
Former Decatur bank official wanted for taking bribes
By Dawn Kent - Decatur Daily
A former Decatur Compass Bank vice president accused of participating
in a telemarketing credit-card scam did not show up for his arraignment
Thursday in federal court in Birmingham.
A warrant was issued for the arrest of Jean Pierre Harper, 37,
of Frisco, Texas, in connection with criminal activity that occurred
in Decatur from mid-2000 to early 2001, said Assistant U.S. Attorney
Michael V. Rasmussen.
While Harper worked at Compass Bank's credit-card processing
center on Beltline Road Southwest, he took bribes to allow telemarketers
operating out of Las Vegas to process credit-card charges at Compass
Bank, according to U.S. Attorney Alice Martin. The action,
which violated bank policy, exposed the bank to numerous possible
losses, authorities said.
"The crimes that (Harper) is charged with are the kind that
enable questionable telemarketers and similar businesses to obtain
money by soliciting payment in the form of credit card charges
and to process those charges at unsuspecting banks, putting such
banks at risk when and if charge-backs occur," Martin said
in a statement.
Harper faces a 46-count indictment that includes charges of conspiracy,
bank fraud, making false entries in bank records, and soliciting
and accepting bribes. He could receive a maximum sentence of five
years in prison on the first count and 30 years for each of the
remaining counts. He faces a maximum possible fine of more than
Credit Card Laundering
If, without the express permission of the applicable credit
card system, defendants have:
- a. Presented to or deposited into, or caused another to present
to or deposit into, the credit card system for payment, a credit
card sales draft generated by a telemarketing transaction that
is not the result of a telemarketing credit card transaction
between the cardholder and defendants;
- b. Employed, solicited, or otherwise caused a merchant, a representative,
employee or agent of the merchant, to present to or deposit into
the credit card system for payment, a credit card sales draft
generated by a telemarketing transaction that is not the result
of a telemarketing credit card transaction between the cardholder
and the merchant; or
- c. Obtained access to the credit card system through the use
of a business relationship or an affiliation with a merchant,
when such access is not authorized by the merchant agreement
or the applicable credit card system.
Defendants will have thereby violated Section 310.3(c) of the
Telemarketing Sales Rule, 16 C.F.R. § 310.3(c).
Articles on Factoring in the Money Laundering Process