A payment processor and two of its principals are banned from processing electronic payments under a settlement with the Federal Trade Commission, resolving charges that they debited, or tried to debit, millions of dollars from tens of thousands of consumers’ bank accounts without their consent. 

The settlement against Automated Electronic Checking Inc. (AEC) and principals John P. Lawless and Kenneth Mark Turville, requires that AEC pay $950,000 it earned from processing for EdebitPay and Platinum. That money will be returned to consumers harmed by AEC’s actions.

The order further bans AEC, Lawless and Turville from processing payments. Lawless may work for a financial institution, but only if his job does not involve providing, selling or arranging payment processing. 

In addition, the order:

    •    prohibits the defendants from billing consumers, or telling them they owe money, for telephone-billed transactions that have not been authorized by the consumers;
    •    bars the defendants from referring defendants’ payment-processing clients to other processors for money; and
    •    prohibits the defendants from selling or otherwise benefitting from customers’ personal information.

According to the complaint, AEC’s violations of the FTC Act specifically involve processing payment for two merchants, EdebitPay LLCand Platinum Online Group, both operated by Dale Paul Cleveland and William Richard Wilson. From February 2008 to November 2010, AEC processed more than $49.8 million for EDebitPay and Platinum. 

During this period EdebitPay and Platinum had consistently high return rates. The banks notified AEC of the specific reasons for the high return rates, and AEC knew that the principals of both companies were already subject to an earlier FTC order.

The complaint alleges the defendants processed payments by using remotely created payment orders (RCPOs), a method that allows a processor to reach into and debit a consumer’s bank account. Unlike some payment mechanisms, such as credit cards, RCPOs are not subject to much oversight, making them vulnerable to abuse. As a result, the FTC alleges, they became an attractive payment method for merchants and processors engaged in fraud and unauthorized debiting.

AEC encouraged merchants to use RCPOs as a way to avoid the scrutiny other payment methods provide, according to the complaint. It processed payments for clients through banks whose risky practices had gotten them into trouble with banking regulators, including First Regional Bank in Century City, Calif.; Metro Phoenix Bank in Phoenix; SunFirst Bank in St. George, Utah; and First Bank of Delaware in Wilmington, Del.

The FTC charges that AEC ignored excessively high return rates – the rate of transactions that were rejected and returned by consumers or their banks. AEC also instructed its clients on ways to avoid detection and ignored consumer complaints, according to the FTC.

Payment processors enable merchants to obtain customer payments for products and services via electronic banking. Processors provide a link between merchants and consumers’ banks. They are compensated by receiving a fee for each consumer transaction that they process.

According to the FTC’s complaint, AEC knew, or should have known, that some of its client merchants got consumers’ financial account information through deceptive means and lacked consumers’ authorization to debit their accounts. 

For example, the FTC alleged that many consumers thought they were applying for a credit line through one of AEC’s client merchants, but instead they were enrolled in an online “shopping club” with hefty fees. The FTC has also charged that AEC often debited the accounts of consumers who had never heard of its client merchants, had never knowingly bought anything from them, and could least afford unauthorized debits, which resulted in the additional burden of bank overdraft charges.

Several related actions were recently brought against First Bank of Delaware, one of the banks through which AEC processed debit transactions on behalf of its client merchants.

In November 2012, the Department of Justice announce a $15 million settlement with First Bank of Delaware.

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