ayments fraud is a bit like a water balloon. Exert pressure on one area, and the water (the fraud problem) moves somewhere else. But fraud (or at least the threat of fraud) never seems to go away and just about everyone is vulnerable to it.

A recent case in point: Waco, Texas-based Electronic Financial Group (EFG). EFG was one of a handful of companies riding the wave of increased ACH activity brought on by e-checks. E-checks are checks that get truncated (e.g. at the point of sale) and processed as electronic payments through the ACH system.

E-checks provided a nice boost to EFG's business-little known before 1998. The company reported triple-digit growth rates in its transaction totals for 1999 and 2000. Unfortunately for EFG, fraudulent telemarketers initiated some, if not many, of those transactions. Or at least that's what the government claims. Today, the company and its principals stand accused of helping four telemarketing firms that they knew ("or consciously avoided knowing") were crooks, according to the federal government's consumer protection lawyers.

A court-ordered injunction, initiated at the request of the Federal Trade Commission (FTC) in August 2003, comes down hard on EFG, stipulating among other things that EFG no longer process e-checks for telephone and Internet sales.

Jerry Federico, an EFG principal, declined to discuss the action, except to say that EFG denies the allegations and is working with the FTC to resolve things.

That the FTC went after EFG is significant on several counts. It's one of the first payment processing companies taken on by the federal watchdog agency. More significantly, though, the FTC might never have had a case against EFG were it not for industry self-regulation.

Michael Herd, a spokesman for NACHA (the ACH rules group), says NACHA and its member banks "spent a great deal of time" collecting data and other supporting information for the FTC's case.

Unscrupulous telemarketers are always looking for new ways to collect money from unsuspecting victims. So it stands to reason that the ACH system attracted their gaze with roll outs of e-check applications. Soon after the introduction of two e-check applications specifically targeting payments initiated via the Internet or telephone, Herd says NACHA began noticing an increase in ACH return items.

Now ACH returns (such as returned checks) can be triggered by various events, including non-sufficient funds (NSF) or claims that the payment was unauthorized. While a transaction can be considered unauthorized for any number of reasons, NACHA uses the number of claims of unauthorized transactions as a "proxy" for the incidence of fraud using the ACH, says Herd. When those numbers began to climb, in mid-2002, NACHA sprung into action. With the help of Wells Fargo Bank, which maintains a sophisticated ACH data archive, NACHA was able to discern that a disproportionate share of returns were for Internet or telephone sales, and eventually traced the transactions back to the sources. Not surprisingly, they were telemarketers.

At about the same time, the FTC noticed an increase in consumer complaints about telemarketing fraud where payments were processed through the ACH. The two organizations pooled information and were able to identify EFG and several telemarketing cons, a number of which the FTC says it had sued in the past for similar scams.

One of the cons involved a bogus lottery; three others involved advanced-fee credit cards.

The advanced-fee credit cards that were being sold were really stored-value (debit) cards; marketing them as credit cards is deceptive and illegal, says Jim Davis, an FTC attorney. Consumers were also deceived by claims telemarketers made that implied use of the cards would help consumers repair bad credit ratings.

The FTC took EFG to task for aiding and abetting the cons, in violation of NACHA rules. NACHA has strict rules about the ACH's telemarketing applications, including a prohibition against using the ACH to process payments from outbound telemarketing calls unless there's an existing relationship with the customer. In its complaint, the FTC specifically cites EFG's breech of these ACH rules. "One reason the FTC action in the EFG case is significant is that it shows that the NACHA rules are enforceable in court against non-banks, and that the FTC will pursue enforcement of NACHA rules when it determines there has been harm to consumers," Herd says.

Now, I've been known to take pokes at the ACH, but this is one time that it proves its mettle. The work done by NACHA and its member banks to ferret out these fraudsters should be an example to others in the payment arena. But let's not fool ourselves into thinking this is the last we'll hear from fraudulent telemarketers. They'll just find another way to collect payments from their scams. NACHA reports that since it began cracking down on telemarketers' improper use of e-checks, banks have seen a dramatic drop in claims of unauthorized e-check transactions.

For the third quarter, the unauthorized return rate for ACH payments was 0.025% (or, 25 for each 100,000 ACH payments). That's down 60% since Q3 2002, when the unauthorized return rate peaked at 1.27%, according to NACHA.

"With new monitoring, alert and rule enforcement mechanisms that NACHA has put permanently in place, the risk of unauthorized ACH telephone payments is greatly reduced," boasts NACHA CEO Elliott McEntee.

New NACHA rules that took hold in June provide NACHA with the right to obtain transaction records from any originating bank when one of its telemarketing customers has an e-check return rate exceeding 2.5%. The result: fraudulent telemarketers are turning to demand drafts-check-like documents that can be initiated by verbal agreement and drawn against a customer's checking account. So, telemarketing fraud hasn't gone away; the fraudsters have simply shifted to another payment mechanism. But the check mechanism may not work to their advantage for long. The Check 21 Act, signed into law in late October 2003, has these folks squarely within its sights.

The Check 21 Act encourages nationwide check truncation by removing legal impediments, such as the need to present cancelled checks for proof of payment. Check 21 eliminates that impediment by creating a new "Substitute Check" with the same legal status as a paper check written from the buyer's checkbook.

Substitute Checks can be provided with monthly statements, or upon request, when the original checks are truncated.

Truncated checks are digitally imaged and processed electronically as checks. E-checks, are checks that are converted to electronic payments. This is an important distinction to understand.

ACH rules, for example, put a lot of emphasis on consumer protection. Check laws have their basis in commerce, and for the most part establish a greater burden of proof in dispute situations. Banks really like truncation because it expedites the clearing process, which means banks can spot fraudulent transactions quicker and reverse those transactions, sparing banks and merchants billions of dollars in annual check fraud losses. Add truncation to the banking industry's existing arsenal of check fraud weapons (such as positive pay), and fraudulent telemarketers could be scared off. I can't help but wonder, though, what these guys will come up with once they're scared off of e-checks and demand drafts. Or should I say, which direction the fraud problem will move within the confines of the payments water balloon.

Patti Murphy is Contributing Editor of The Green Sheet and President of Takoma Group. She can be reached at patti@greensheet.com