he announcement of two recent out-of-court settlements with federal agencies should be a warning to Merchant Level Salespeople to pay attention to what type of merchants they sign.

The PayPal settlement makes processing for offshore gambling even more dangerous. The Leasecomm settlement opens the risk of processing for "get-rich-quick schemes" and other merchants who sell worthless products that have been targeted by the FTC.

PayPal, Inc. Pays $10 Million for Aiding Illegal Offshore Gambling

The U.S. Department of Justice announced that PayPal, Inc. and eBay, Inc., its parent company, have entered into a $10 million settlement agreement to settle allegations that it aided in illegal offshore and online gambling activities.

The civil settlement agreement, filed in the Eastern District of Missouri, states that PayPal, Inc. illegally transmitted millions of dollars in funds derived from criminal offenses.

The uncontested allegations of the settlement agreement establish that PayPal's conduct occurred between approximately mid-June 2000 and November 2002, in the Eastern District of Missouri and elsewhere.

The settlement agreement states that PayPal illegally transmitted monies that violated the federal Wire Wager Act as well as various states' statutes prohibiting online gambling.

The $10 million settlement represents an agreed-upon amount of forfeitable proceeds derived by PayPal from the processing of the illegal gambling transactions. The settlement agreement also provides that PayPal maintain a corporate compliance program for at least two years.

The agreement specifically stipulated that it "does not limit the federal government from pursuing any other entities or individuals responsible for these or any other alleged violations of federal law."

U.S Attorney Raymond Gruender said, "Offshore sports books and online casino gambling operations which do business in the United States generally do so in violation of federal criminal laws. Therefore, we will continue to investigate and pursue such activity."

The statutory basis for the forfeiture rests upon allegations that PayPal had violated the USA Patriot Act and the Wire Wager Act by providing its services to offshore gambling sites in violation of Title 18, U.S. Code, Section 1960, which prohibits the transmission of funds "derived from a criminal offense."

By facilitating wagers, PayPal also was accused of violating Title 18, U.S. Code, Section 1084, which led to the $10 million payment, defined by both parties as "forfeitable revenue" from processing the transactions.

Additional information:

www.usdoj.gov/usao/moe/press%20releases/archived%20press%20releases/2003%20press%20release/july/paypal.html

The use of the USA Patriot Act combined with state statutes prohibiting online gambling make the processing of online gambling a risk that should be too great for acquirers.

The combination of substantial chargeback exposure for non-payment of winnings and cardholder fraud along with the card association restrictions may signal the end of credit card processing for online gambling.

Leasecomm Settles with FTC for Deceptive Practices

Leasecomm, which was accused of using shady agents, deceptive contracts and false claims to target thousands of would-be entrepreneurs, will cancel $24 million in judgments allegedly obtained through deception and will reform all business-opportunity financing contracts to settle charges filed by the FTC and an eight-state task force.

The law enforcement agencies charged that Leasecomm, a MicroFinancial, Inc. subsidiary, financed the purchase of business opportunities such as work-at-home operations using business opportunity sellers as its agents.

According to the FTC, the contracts contained provisions purporting to waive consumers' defenses and allowing Leasecomm the right to sue consumers in Massachusetts, where it is based, rather than where consumers lived and purchased the business opportunity.

The FTC alleged that most consumers could not afford to travel to Massachusetts to contest Leasecomm's charges and had default judgments entered against them in the Massachusetts court.

If they didn't pay, Leasecomm resorted to aggressive collection measures such as wage garnishment and property attachment to collect even though Leasecomm knew or should have known that its vendors used deceptive practices to sell their business ventures and promote the financing, according to the FTC.

"Leasecomm's customers got a one-two punch," said Howard Beales, Director of the FTC's Bureau of Consumer Protection. "Leasecomm used sellers of highly suspect business opportunities to sell its financing and then claimed it had no responsibility for their deception.

"Companies that try to hide behind the fine print in contracts and lie to consumers about what they're were signing, whether directly or through agents, simply do not pass muster.

"Leasecomm knowingly participated in a scheme that used the 'get-rich-quick' allure of selling products on the Internet to take advantage of thousands of consumers who were ultimately forced into debt."

According to the FTC, the scheme worked as follows: Leasecomm financed business opportunities, including Internet Web malls, multilevel marketing programs, medical billing software, coupon clipping programs and similar, often worthless, get-rich-quick schemes sold by third-party vendors. Consumers typically made little or no up-front payments but signed a contract, which Leasecomm called a lease, requiring payments ranging from $3,000-4,000 over a three- or four-year period.

While consumers thought the contracts covered many items included as part of a business venture - training, Web site design, and consumer leads, for example - they didn't. They covered only one small part of the venture - a "virtual terminal," for example.

Leasecomm drafted its contracts to ensure that customers paid even when the vendors used misrepresentations or fraud, or when the products or services failed to perform as represented, according to the FTC complaint.

The FTC alleges that Leasecomm knows or should know that many of its vendors engage in deceptive practices to sell their business ventures.

According to the FTC, when consumers failed to pay, Leasecomm sued them. The FTC alleges that Leasecomm has sued more than 27,000 consumers in the past three years in Massachusetts courts.

As of January, the company had 2,200 suits pending.

Additional information:

www.ftc.gov/opa/2003/05/leasecomm.htm

The similarity with the FTC complaint against Certified Merchant Services, Inc. in many respects, may raise the signal that ISOs could be hit if merchant processing agreements allow for suing merchants in foreign jurisdictions.

Remember, it is important to avoid FTC scrutiny in the first place by clearly disclosing all fee and expense information and not just burying them in fine print, and never orally misrepresenting fees and savings to merchants.

Another concern raised by the Leasecomm case is the responsibility placed on Leasecomm for the "worthless, get-rich-quick schemes sold by third-party vendors." Acquirers have been held responsible for knowingly processing for "scam" operators in the past, and it is likely that this may be the FTC's next step.

Payment by credit cards plays a large part in the various scams that the FTC is targeting. This should be considered when signing up merchants with worthless products that have been under the FTC microscope, such as weight loss and vitamins, lower interest credit cards, college scholarships, make money working from home, travel packages, magazine subscriptions, etc.

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