t the beginning of last year, I predicted that a hot issue for the ISO community in 2005 would be hefty fines levied by Visa U.S.A. and MasterCard International for system breaches (whether the ISO's system or a merchant's) that would result in the compromise of cardholder data.

Unfortunately, given what occurred at CardSystems Solutions Inc. and others, I was correct, and now the ISO community is scrambling to become compliant.

In 2006 ISOs better do something to address the card companies' Payment Card Industry (PCI) Data Security Standard. The compliance process takes time. Don't forget that large merchants may also need to conform to the PCI Standard.

Following are some issues related to card Association requirements and back-office procedures that ISOs should also expect to address in 2006:

"Illegal" Transactions

Both Visa and MasterCard rules prohibit the processing of any illegal transactions such as those from online casinos, pharmacies, and many pornography and tobacco merchants. Both card companies have issued fines for doing so.

Several online pharmacy accounts, in fact, were recently terminated as a result of card Association and member bank pressure. Prudent ISOs should not process for any of these merchants.

If ISOs do process for online pharmacies, they should remember that it is required that the member bank (which usually means the ISO) conduct an investigation for every online pharmacy.

This will include providing a copy of the pharmacy's license, a statement that the merchant's sales activity is in compliance with all applicable laws, proof that valid prescriptions are required before medications are dispensed and proof that only prescriptions from licensed physicians are accepted.

The position of the Bureau of Alcohol Tobacco and Firearms (ATF) is that "Internet Cigarette Vendors" are in violation of numerous federal provisions including IRS _ 5762(c), which makes it unlawful for any person to refuse to pay any federal cigarette excise tax, or to attempt, in any manner, to evade or defeat the payment of a federal cigarette excise tax.

Other violations include the Cigarette Labeling and Advertising Act, The Tariff Act, various smuggling laws, the Cigarette Trafficking Act, the Jenkins Act and various wire fraud and money laundering provisions.

In 2006 expect the card Associations to continue to enforce their rules that prohibit the processing of any illegal transactions.

Offshore Merchants

U.S.-based merchants that sell products primarily to Americans and process transactions offshore have been on the card Associations' radar for some time, but I expect a heightened level of scrutiny in this area in 2006.

Chargebacks

Expect the card Associations to put more pressure on merchants selling products with restrictive terms and conditions and who have a high chargeback or return rate, as well as on companies using "free gift sites" to get customer referrals. These businesses operate incentive programs for which consumers receive a gift after fulfilling the participation requirements.

These merchants tend to have a lot of returns because customers don't really want their product; they really want the "free" plasma TV, computer or iPod that they get for signing up for any number of specified products and referring others to do so.

They usually cancel as soon as they either receive their free product or believe that they were scammed and will never receive it. The merchants generate a huge number of refunds.

As part of its Excessive Chargeback Program, MasterCard can count refunds like chargebacks (and impose a $25 fine for each credit processed).

The Wrong MCCs

I also expect that the card Associations will issue more fines when they find that ISOs/members have been using incorrect Merchant Category Codes (MCC).

Generally merchants should be assigned the correct MCC that best describes what they sell. Merchants classified under MCC 5966 and 5968 are considered high-risk and must be registered with the Visa High-Risk Telemarketing Merchant Registration Program.

David H. Press is Principal and President of Integrity Bankcard Consultants Inc. Phone him at 630-637-4010, e-mail dhpress@ibc411.com or visit www.ibc411.com .