Regulators' Fraud Probe Unfairly Squeezes Processors: House GOP

The House Oversight Committee, which earlier this year admonished the Department of Justice over its tactics for combating fraud in the payments system, has turned its focus to the role of the Federal Trade Commission in the ongoing crackdown.

The Republican-led committee is currently reviewing documents that the FTC provided in response to a panel inquiry, according to a source familiar with the matter. The committee’s chairman, Rep. Darrell Issa, requested the documents in a letter sent in late June.

Issa’s letter, which was also signed by GOP Rep. Jim Jordan, chairman of the regulatory affairs subcommittee, focused on the FTC’s interest in companies that process payments for merchants suspected of defrauding consumers. Specifically, Issa expressed concern that authorities are punishing payment processors rather than the businesses committing the crime.

“The Committee is concerned that Operation Choke Point and corresponding initiatives by collaborating agencies impose wholly unreasonable burdens on banks and payment processors, effectively punishing them in lieu of the actual perpetrators of fraud,” wrote Issa and Jordon.

The two lawmakers said that “any FTC policies derived from Operation Choke Point will have a chilling effect on honest and legitimate businesses.”

The FTC’s efforts dovetail with Operation Choke Point, a Justice Department-led probe into the role that both banks and payment processors may have played in enabling fraud. The probe has led to pushback from the industry, including acquirers and trade groups.

A spokeswoman for the House Oversight Committee did not respond to requests for comment. Peter Kaplan, an FTC spokesman, declined to comment.

The FTC has responded in writing to some concerns raised by House Republicans. FTC Chairwoman Edith Ramirez said in a Sept. 3 letter to Rep. Lee Terry, R-Neb., that her agency’s efforts have focused on processors where there is evidence of misconduct, and not on the payment processing industry as a whole.

Issa’s letter to the FTC echoes concerns raised by people in the payment processing industry, who are particularly worried about a new FTC tactic that opens them to substantial financial exposure.

In a lawsuit filed July 30, the FTC is seeking to recover more than $26 million from the payment processing firm Cardflex.

That’s the total amount of unauthorized charges made by Cardflex’s former client, Utah-based iWorks, which is accused of selling bogus Internet services to consumers, according to the FTC. Cardflex is accused of helping iWorks by advising the company on how to employ numerous tactics designed to evade Visa and MasterCard fraud monitoring programs. Cardflex and other defendants in the case have filed a motion to dismiss the suit.

The FTC’s effort to recover unauthorized charges from Cardflex contrasts with the approach taken by the Justice Department in a suit against Four Oaks Bank.

In that case, which was part of Operation Choke Point, Four Oaks paid a $1.2 million penalty, rather than the amount charged to consumers by alleged fraudsters, a sum that might have been substantially higher.

Jason Oxman, chief executive officer of the Electronic Transactions Association, decried the FTC’s effort to extract from payment processors money that was collected by merchants.

“It’s absurd because payment processors don’t actually keep the money that they process,” he said. “And it’s not the processor’s role – it never has been the processor’s role – to serve as a backstop for consumers.”

The line between the DOJ’s Operation Choke Point and the FTC’s enforcement actions is unclear. The Justice Department’s probe has largely focused on the role of banks, but it has also resulted in subpoenas of payment processors.

Meanwhile, the FTC’s efforts seem focused on payment processors, but have also dragged in banks, according to Jeffrey Knowles, a partner at Venable.

“While they’re actively bringing enforcement actions against non-bank payment processors,” Knowles said, referring to the FTC, “they’re also using their subpoena powers to gather information from banks.”

In May, the House Oversight Committee, after collecting hundreds of pages of documents from the Justice Department about Operation Choke Point, released a report that called for the probe’s dismantling.

“If the administration believes some businesses should be out of business, they should prosecute them before a judge and jury,” Issa said in a news release at the time. “By forcibly conscripting banks to do their bidding, the Justice Department has avoided any review and any check on their power.”

Many in the financial industry hoped the congressional pressure would lead to Operation Choke Point’s demise. But an industry lawyer said Friday, “Everyone’s predicted its death, and it’s survived.”