For its role in processing payments for a telemarketer that engaged in a credit card interest rate reduction scam, Independent Resources Network Corp., doing business as IRN Payment Systems, agreed to a $3.48 million settlement with the Federal Trade Commission. The FTC said Westbury, New York-based IRN knowingly assisted and facilitated the scam of Innovative Wealth Builders Inc., which defrauded consumers of almost $10 million.
According to the FTC, IWB cold called consumers with the offer of reducing their credit card rates and saving them thousands of dollars. After obtaining credit card numbers, IWB then charged customers fees, ranging from $500 to $2,000, for services they never received.
IRN was reportedly IWB's exclusive payment processor for most of the time IWB operated its scam, from at least August 2009 through January 2013, when IWB was shut down. In June 2013, the FTC alleged in its amended complaint that IRN "facilitated IWB's scheme when IRN knew, or consciously avoided knowing, key facts about the illegal conduct of IWB's telemarketing scam in violation of the TSR [Telemarketing Sales Rule], and chose to continue profiting from processing IWB's credit card transactions."
Apparently, as part of IRN's alleged complicity in the scheme, the processor overlooked the high level of chargebacks associated with IWB's high-risk operation. The FTC said that, for violating the TSR, best known for its do not call registry, IRN would pay or relinquish $1.1 million, and the $3.48 million settlement would be suspended once IRN paid $400,000 of it, with an additional $700,000 in IRN reserve funds also forfeited.
IRN garnered industry goodwill for operating a charity-focused payment service called The Hope Process. And IRN's former president, Dino Sgueglia, founded the nonprofit organization Danny's Wish to honor his autistic son. At press time, the processor could not be reached for comment on the FTC settlement.
The FTC's evidence that IRN could not claim ignorance of IWB's activities is extensive. Since high chargeback rates are an indicator of high-risk activities, and potential fraud, the FTC focused on IWB's chargeback rates over the life of its processing relationship with IRN.
In the complaint, the FTC alleges that, in comparison to the average chargeback rate of below 1 percent for other IRN clients, the rate for IWB exceeded 1 percent in August 2009, 3 percent the next month and ballooned to a high of 11 percent that December.
Between January 2010 and January 2013, IWB's average chargeback rate exceeded 20 percent, the FTC said. And over the three-and-a-half year processing period, IWB's monthly chargeback rate exceeded 40 percent multiple times, according to the FTC.
"Throughout the time period that IRN processed for IWB, IRN received thousandsof copies of chargeback disputes initiated by dissatisfied consumers," the FTC stated.
IRN was apparently aware of other red flags associated with IWB, including a November 2010 investigation by the Florida Attorney General's Office and multiple fraud alerts raised by the card brands.
The FTC said, "IRN was aware since at least November 2010 that MasterCard identified IWB as being in the highest fraud category – 'tier 3' or 'high fraud alert' – under MasterCard's fraud control program because of IWB's number of fraudulent transactions, volume of fraudulent transactions, and ratio of fraud-to-dollar sales." And Discover Financial Services had also alerted IRN multiple times of potential fraud regarding IWB, the FTC added.
Additionally, the FTC said IRN reviewed IWB's website prior to becoming its processor, where IWB's debt reduction service is laid out. IRN had also been sent copies of such documents as IWB telemarketing scripts and samples of the IWB's "financial plan," and had knowledge of IWB's F rating with the BBB, the FTC alleged.
"Rather than cease processing for the IWB defendants after the illegal nature of their business was apparent, IRN chose to continue profiting from processing IWB's credit card transactions," the FTC said.
Payments attorney Paul Rianda said that, in the past, processors were never held liable for the actions of their merchants. But that changed in 2003 when the FTC charged the Electronic Financial Group for using the automated clearing house network to help a telemarketer drain funds from U.S. consumers' checking accounts.
Since then, payment processors have often been the target of FTC actions over the last decade, all in connection with telemarketing firms. In 2004, First American Processing Inc. and others were banned from processing payments for telemarketers that debited consumer accounts fraudulently.
In 2007, the FTC teamed with seven state attorney general offices to charge Your Money Access LLC and others with enabling numerous telemarketers and online merchants to debit consumer accounts. In 2008, the FTC had the assets of Ira Rubin, and associated corporate entities managed collectively as Global Marketing Group, frozen for helping to facilitate a Canadian telemarketer in selling non-existent credit cards to U.S. consumers.
In June 2009, InterBill Ltd. was fined $1,799,000 for processing payments for a phony enterprise known as "pharmacycards.com"; in 2005 another processor, Universal Processing Inc., was also charged by the FTC in the same fraudulent scheme.
Rianda said with the U.S. Department of Justice instituting Operation Chokepoint, which essentially holds all processors liable for facilitating transactions for fraudulent merchants, the federal government has shown it is serious about holding processors liable. "As a result, most processors have gotten much more discerning about who they do business with," Rianda said.
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