n Miami in July, the Drug Enforcement Administration (DEA), Florida's Attorney General and Commissioner, and the Florida Department of Law Enforcement announced Florida's biggest prosecution of an organization involved in filling Internet orders for pharmaceutical controlled substances.

Nine people, eight arrested in south Florida and one in Texas, were involved in filling orders for painkillers and other medications, without prescriptions or pharmacists.

They were arrested pursuant to Florida state arrest warrants for "trafficking in hydrocodone; racketeering; conspiracy to traffic in hydrocodone; dispensing prescription drugs without a pharmacist license; dispensing without a prescription; forgery of a prescription drug label; sale of an adulterated or misbranded drug; and adulterating a drug intended for distribution," the DEA reported.

In Minneapolis in August, a federal grand jury indicted Christopher William Smith, the former owner of Xpress Pharmacy Direct, an online pharmacy business; Dr. Philip Mach; and Bruce Jordan Lieberman, the Department of Justice reported.

Smith and Mach were charged with conspiracy to distribute and dispense controlled substances, wire fraud, unlawful distribution and dispensing of a controlled substance, and introducing misbranded drugs into interstate commerce.

Smith and Lieberman were charged with money laundering. The grand jury alleged that Smith provided prescription drugs without making sure that customers had valid prescriptions. Smith gathered orders for prescription drugs through spam e-mail, Web sites and telemarketing.

He worked with Mach to issue purported prescriptions. Mach, whose only active license to practice medicine was issued by the State of New Jersey, was the sole physician who would issue purported prescriptions for Xpress Pharmacy Direct customers in the United States.

Other than through the online questionnaire, Mach had no face-to-face, telephone or e-mail contact with customers, nor did he contact the customers' primary care physicians. They dispensed drugs without obtaining patient medical history, verifying medical complaints, performing exams, testing, or monitoring customers' responses to the medication.

The grand jury alleged that Lieberman, Smith's former accountant, assisted Smith in credit card processing services and aided Smith in a money laundering transaction of funds derived from the scheme.

These indictments show what online pharmacies cannot do under the law. Visa U.S.A. and MasterCard International regulations require that members submit only legal transactions into their payment systems. This applies equally to the activities of cardholders and merchants.

To prevent illegal sales from entering the Visa payment system, members should have controls in place to monitor merchant and cardholder activity. Members that sign merchants selling illegal products such as prescriptions sold over the Internet should take extra precautions to ensure that their merchants comply with state and federal laws.

At about the same time as these indictments were handed down, the card Associations were at a meeting hosted by the Department of Justice to educate the financial services industry on the risks presented by online pharmacies. The message was that the financial institutions need to take meaningful action to prevent processing transactions for illegal activities.

Subsequently, Visa has sent a letter to the acquiring members that process for online pharmacies. These members were required to conduct an investigation on each of their online pharmacies that included providing a copy of the pharmacy's license and a statement that the merchant's sale activity is in compliance with all applicable laws.

They were also required to provide proof that valid prescriptions are required before medications are dispensed, proof that only prescriptions from licensed physicians are accepted, and the documentation used to determine that the online pharmacy is compliant with all applicable laws.

The federal government has numerous agencies with rules and regulations that must be followed, particularly in the area of prescribing controlled substances. These agencies include the Food and Drug Administration, DEA, and Federal Trade Commission (FTC). Since pharmacies and physicians are licensed by each state with laws that generally apply to prescriptions written by physicians licensed in that state and filled by state licensed pharmacists/pharmacies, it can be quite a burden to show compliance with all applicable laws.

ISOs should also be concerned about processing illegal transactions in light of a recent FTC announcement concerning a settlement with payment processor, Universal Processing Inc., and its principal, Rey Pasinli (see "FTC Has ISOs in Its Sights," The Green Sheet, Sept. 26, 2005, issue 05:09:02). Universal allegedly attempted to process more than $1.2 million in unauthorized charges on consumer checking accounts, even though it knew or should have known that consumers did not authorize the debits. The settlement bars the defendants from processing payments without ensuring that the charges are authorized; making false claims to other payment processors in an effort to enlist processing services for clients; and processing payments when they know that their client does not have a business relationship with the consumer.

Universal made the unauthorized debits on behalf of a business known as Pharmacycards.com. In May 2004, the FTC charged Pharmacycards with electronically debiting thousands of consumers' accounts for $139, without consumers' knowledge or consent.

In the complaint naming Pasinli and Universal, the FTC alleges that they arranged for consumers' accounts to be debited without meeting with the Pharmacycards operators or requiring that they complete their standard payment processing application.

According to the complaint, "They agreed to use their entree to the banking system to debit consumer checking accounts on behalf of two individuals they had never met, purportedly from England, purportedly with a corporation chartered in Cyprus, who were using a Montreal customer service center, free, untraceable e-mail accounts, an unsecure Web site hosted in India, a Vancouver, British Columbia, mailing address, and who directed that the proceeds be sent to a bank in Cyprus."

The agency alleges that when the defendants processed the charges they knew or avoided knowing that the charges were unauthorized. The FTC charges that in doing so, the defendants engaged in unfair practices that violate the FTC Act.Clearly, both Visa and MasterCard rules prohibit the processing of any illegal transactions. Both have fined members for processing "illegal" gambling, prescription drugs, pornography and the sale of cigarettes over the Internet.

A lot of online pharmacies have been terminated as a result of card Association and member bank pressure, and they are out there looking for new processors. Don't let the lure of a big residual get you into trouble with the card Associations and the Feds, and the likelihood of getting huge chargeback hits if online merchants are shut down while you are their processor.

David H. Press is Principal and President of Integrity Bankcard Consultants Inc. Phone him at 630-637-4010, e-mail dhp@integritybankcard.com or visit www.integritybankcard.com .