As the Federal Trade Commission continues what it describes as an "ongoing crackdown on payment processors" allegedly engaged in fraudulent or deceptive practices, the merchant acquiring industry is ratcheting up efforts to respond to the ongoing enforcement actions and proactively address future oversight.

Recent FTC lawsuits have targeted both the direct and indirect actions of independent sales organizations, forcing industry groups to reexamine all aspects of their business practices.

“It has been made clear that the FTC is looking at our industry closely and we probably have not seen the end of their actions,” says Deana Rich, president of Van Nuys, Calif.-based Deana Rich Consulting.

A pair of lawsuits the FTC filed in June against Independent Resources Network Corp. and Newtek Merchant Solutions alleges that the ISOs knew, or should have known, that their merchant clients' "alarmingly high chargeback rates" were "clear warning signs of fraud."

The lawsuits have sparked concerns from the Electronic Transactions Association, which sees the FTC's actions as a misguided attempt to make ISOs guilty by association for providing transaction services to alleged merchant fraudsters, says Jason Oxman, CEO of the Washington, D.C.-based group.

“The FTC has been attentive of late to ISOs and processors,” he says, and in response, the ETA is developing industry standards for its members to screen merchants before providing them services and improve the process of monitoring merchants' subsequent behavior.

The initiative, which the association hopes to complete by the end of the year, should also demonstrate to law-enforcement agencies that the group’s members are not necessarily complicit in wrongdoing by merchants, Oxman says.

The guidelines should prove particularly helpful to small ISOs, he observes, adding that larger companies may have already put these sorts of standards in practice.

The ETA retained Deana Rich Consulting, which specializes in strategic risk management for the payments industry, to lead the initiative. “The goal is to build a best-practice policy that will ensure that rogue merchants do not enter the payments ecosystem,” Rich says.

She’s forming a working group of about 20 industry leaders to develop the guidelines and expects to hold the first meeting via telephone before the end of the month.

To ensure the guidelines reflect the interests of all facets of the acquiring industry, Rich is contacting the card brands and asking the leaders of diverse ETA committees for the names of one or two volunteers each to take part in the working group.

“This has to be a collaborative product because if it’s not it won’t take hold,” Rich says of the guidelines.

The ETA committees involved represent much of the industry. They include the Large Processors Council; Education; Government Relations; Industry Relations; ISO Practices; and Risk, Fraud and Security, Rich says.

The idea of creating best-practices guidelines arose in the Large Processors Council, she notes.

Besides huddling with volunteers from those committees, Rich anticipates working with Oxman and Mary Bennett, ETA’s director of government and industry relations.

Some members of the working group that’s charged with honing the guidelines won’t come from the ETA committees, Rich says. One such member, Donna Embry, a senior vice president at Louisville, Ky.-based Payment Alliance International, serves as president of the Midwest Acquirers Association.

Embry views the guidelines as an educational project for ISOs and emphasizes the importance of working with the FTC to help the agency’s staff understand the industry.

Embry and Holli Targan, an attorney who’s a partner in the Southfield, Mich., office of Jaffe, Raitt, Heuer and Weiss and is serving as ETA’s president-elect, warned of the FTC’s newfound interest in the acquiring industry during a “sound-off” session at last month’s MWAA annual conference.

Both ISOs are accused of supplying transaction services to call centers even though they knew or should have known that the call centers were engaged in fraud. But the ISOs may have been going about business as usual in the acquiring industry, Targan suggested at last month’s MWAA meeting.

“They think they’re doing the right thing and get caught sideways,” Embry says of ISOs and the law.

That’s why the FTC should work with ISOs instead of suing them, says Barrie VanBrackle, an attorney and partner at Washington-based Manatt, Phelps and Phillips, who has also joined the working group.

“It’s better to stop such cases at the outset, rather than hit them later,” VanBrackle says. “That’s just not right.”

In addition to the lawsuits alleging ISOs ignored fraud perpetrated by merchants, the FTC is also suing an ISO it says misrepresented itself to merchants. The FTC's lawsuit against Merchant Services Direct (which also operates under five other names) alleges that the ISO misled merchants by claiming to be their current service provider, or a representative of Visa, MasterCard or a bank when making sales calls to potential clients.

A judge recently denied the FTC's motion for a temporary restraining order that would have shut down the Spokane, Wash.-based company.

The case also alleges that the ISO misled merchants by falsely claiming that payments terminals were out of date, overstated the amount of money it could save merchants on transaction services and told merchants that the contracts they signing were merely applications for services.

That type of malfeasance made a list of the most common ISO scams that Bill Pirtle, editor of the book “Credit Card Processing for Sales Agents,” compiled for an ISO&Agent Weekly article.

The FTC failed to substantiate those allegations at the hearing before Judge Thomas O. Rice in U.S. District Court for the Eastern District of Washington, says VanBrackle, who is not directly involved in the case.

“The judge ruled that the FTC didn’t do its homework, made their motion stale information and there were not enough complaints about the business,” she says.

The ruling supports VanBrackle’s contention that the FTC should contact ISOs and inform them of alleged wrongdoing and give them an opportunity to correct the situation before initiating court cases, she says. Instead, the FTC plans to pursue the case, VanBrackle notes.

“They lost the battle and are going to proceed to the war,” she says.

But such cases usually fall to state attorneys general or the Better Business Bureau — not the FTC, says VanBrackle. Consequently, the industry is reacting strongly to the FTC’s charges in all three cases, as they could be just the tip of the iceberg in terms of regulatory action against acquirers and lends urgency to the working group’s project.

“It’s the right time, we’re putting together the right group and it’s going to be a very useful document,” Rich says.

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