According to Aesop, you are known through your companions. In the context of the FTC, you are known to the companies of which you are a customer. That’s the message of the $10 million settlement agreement with payment processing company BlueSnap, Inc. and related corporate defendants, former CEO Ralph Dangelmaier and Senior Vice President Terry Montieth.
Accepting credit and debit cards is the lifeblood of most businesses. As a processing service, BlueSnap helps businesses set up merchant accounts with financial institutions that are part of credit card networks such as Mastercard or Visa. BlueSnap marketed itself as an “all-in-one payment reconciliation platform,” but according to the FTC, the defendants played a sour symphony by processing payments for known scammers, violating telemarketing sales rules and engaging in credit card money laundering.
Card Network does not grant access to anyone. To prevent fraud, they impose rules on merchants and third-party companies like BlueSnap. For example, before accepting a merchant as a customer, a payment service provider has a due diligence obligation to ensure that the merchant’s business is legitimate and to screen out merchants engaged in potentially fraudulent or illegal activities. In addition, credit card networks have ongoing obligations to monitor merchant transaction activity for signs of fraud or deception.
One of the most obvious red flags is a high chargeback rate. Taking Visa as an example, if a merchant has 100 or more disputes in a single month, and the proportion of disputed transactions to total transactions (chargeback rate) reaches or exceeds 0.9%, Visa will include the company in a special monitoring plan. Visa also implements similar reviews when merchants experience fraudulent transactions of $75,000 or more in a month and the rate is 0.9% or higher. The merchant will continue to participate in the Visa program until its chargeback or fraud levels remain below the threshold for three consecutive months. If merchants continue to experience a high number of suspicious transactions, credit card networks may impose fines or ultimately deny them access to credit card systems.
Because these threshold numbers are an integral part of their anti-fraud programs, credit card networks are specifically prohibited from modifying the numbers to make a merchant’s chargeback rate appear misleadingly low. Merchants can attempt this by processing transactions through another company’s account (known as credit card laundering); hiding their identity from consumers, banks, and card networks; using shell companies; or hiding the true nature of their business.
This brings us to BlueSnap’s deal with a company called ACRO Services LLC. According to a 2022 FTC enforcement action, ACRO conducted a deceptive telemarketing scheme using the names Tri Star Consumer Group, Thacker & Associates International, Reliance Solutions, and two of our personal favorites (U.S. Consumer Advocates and Consumer Protection Organizations) Selling bogus debt relief service resources. As the FTC stated in its complaint against ACRO, “consumer rights” and “consumer protection” are the least of the defendants’ concerns. The trial court froze their assets, appointed a receiver, and ultimately enjoined the defendants from further violations of the FTC Act and the Telemarketing Rule.
Here’s a summary of BlueSnap’s assistance with the ACRO Services scam from the complaint:
Defendants knew or knowingly avoided knowing that ACRO Services and ACRO Owners were engaging in deceptive telemarketing and deceiving consumers. However, time and time again, the defendants ignored the warnings and continued to deal with ACRO services. Worse, the defendants took active steps to launder ACRO Services’ payments and hide the true nature of ACRO Services’ business so that they could continue to work on the scheme.
More specifically, the FTC said BlueSnap ignored consumer complaints, turned a blind eye to lawsuits alleging fraud or deception against ACRO Services, and ignored warnings from credit card companies, banks and other payment processors about ACRO’s practices. The FTC said the defendants committed this conduct despite high chargeback and fraud rates on ACRO accounts, which even resulted in a $75,000 fine from Visa. How high is the refund? Within a few months, the rate soared to 40%, an astronomical figure since a rate as low as 0.9% (in other words, less than 1%) is enough to draw scrutiny from credit card networks.
Additionally, the FTC stated that defendants knowingly took steps to help conceal ACRO Services’ illegal conduct. For example, according to the complaint, BlueSnap misclassified ACRO’s merchant accounts as low-risk business categories to avoid closer scrutiny, helped ACRO set up merchant accounts for a shell company, and continued to process other ACROs after the card network was closed. account. Even BlueSnap’s own director of fraud strategy described ACRO to one named defendant: “These guys are really rough. . . . [They] Definitely not running a legitimate business.
The complaint further alleges:
Even in the face of warnings and direct evidence of fraud, defendants’ support for the ACRO Services scam was not unusual. Instead, the defendants processed payments for other merchants that they knew or knowingly avoided knowing that these merchants might engage in fraudulent or illegal business practices, and that they received multiple warnings from upstream processors, card networks, and BlueSnap’s own fraud prevention team.
For example, the FTC said BlueSnap diverted payment traffic from merchants generating excessive chargebacks to its own “merchant of record” accounts, a practice known as load balancing that was designed to reduce the company’s high chargebacks by mixing them with other accounts. High refunds for “dilutive” companies. But this deceptive tactic backfired on Blue Snap, as chargeback rates from these merchants were so high that BlueSnap’s own Merchant of Record account exceeded monitoring thresholds.
Count One of the Complaint alleges that Defendants engaged in unfair payment processing practices in violation of the Federal Trade Commission Act. The second count charged them with aiding and facilitating violations of telemarketing sales rules. According to Count III, their credit card laundering also violated the TSR. The proposed settlement would require the defendants to pay $10 million to provide refunds to consumers. In addition to requiring stricter screening and monitoring of high-risk customers (such as companies selling money-making opportunities, nutritional supplements sold with negative options, and technology support services), the order prohibits the defendants from providing payment processing services for debt collection. Debt Consolidation and Debt Relief Company. Also prohibited: Processing payments for excessive chargebacks, fraud, money laundering, illegal transactions, or identity theft for companies participating in industry surveillance programs, and helping any customer evade fraud surveillance.
How would Aesop describe the moral of the BlueSnap fable?
Pay close attention to the red flags that arise during due diligence. Regardless of whether due diligence is a contractual requirement, savvy business people remain vigilant when taking on new clients. Don’t turn a blind eye if there are problems with a potential client’s scope of work or business model from the start. Run the other way.
Businesses are known for the companies they own. Card networks require payment providers to monitor the activity of their merchants for signs of fraud or deception, but this is sound advice for any business. If you notice suspicious behavior from an affiliate, insist that they take quick action to resolve the issue. If they don’t respond quickly and comprehensively, fire them. It certainly doesn’t help them continue or hide their practices.
The FTC’s telemarketing sales rules are broad. “We don’t do telemarketing, so we don’t need to be concerned about TSR. Correct? Wrong. Section 310.3(b) of the Rule prohibits assisting and facilitating others who engage in illegal telemarketing, as provided in Section 310.3(c) Credit card money laundering in the context of telemarketing is illegal.
