hile the ISO community was buzzing last year over the Federal Trade Commission action against Certified Merchant Services, Ltd., little notice was taken of a more recent action against Electronic Financial Group, Inc. (EFG), a Waco, Texas-based payment processor.

ISOs who may be processing for "fraudulent merchants" should be concerned with this case. In the past, when the FTC shut down merchants, ISOs were often stuck with losses incurred from chargebacks. When it seized the assets of companies it shut down, the FTC also contended that the associated ISO reserves were part of those assets; it attempted to seize those, too. Any incoming chargebacks and the prospect of legal fees make the possibility of not having a reserve account not very appealing.

The FTC says EFG provided assistance to fraudulent telemarketers. While this case involved ACH transactions, the same principles could potentially be used against acquirers for credit card transactions.

The FTC filed a complaint in U.S. District Court charging EFG and its principals with helping fraudulent telemarketers seeking to drain funds from consumers' checking accounts. The FTC alleges that the defendants violated the law by processing transactions for numerous fraudulent telemarketers through the Automated Clearing House network (ACH).

On July 8, 2003, the court entered a temporary restraining order against the defendants (EFG, EFG Card Services, Inc. and its principals, Paul McClinton, Jerry Federico and Randy Balusek). They are enjoined from making misrepresentations in the course of marketing or providing customer service for ACH transactions, debit cards and credit-related goods or services; processing ACH transactions or causing consumers' accounts to be debited when certain conditions are met, including when the debit purportedly was authorized as a result of telemarketing; and violating the Telemarketing Sales Rule (TSR). The court also appointed a temporary monitor over the corporate defendants, responsible for reviewing defendants' business practices and reporting back to the court.

The defendants processed ACH transactions on behalf of numerous fraudulent outbound telemarketing operations, a number of which the FTC previously sued as scams. Some of EFG's clients were telemarketing companies with whom EFG entered into a direct contractual agreement to provide ACH processing services.

The FTC's complaint alleges that the defendants violated the TSR by providing substantial assistance and support to numerous client telemarketers "whom they knew (or consciously avoided knowing)" were engaged in business practices that violated the TSR. By providing ACH payment processing services to merchants engaged in outbound telemarketing, the defendants engaged in an unfair practice by systematically breaching a contractual provision with its bank that required EFG to adhere to the NACHA Rules governing the ACH Network.

These include a rule that specifically prohibits the processing of ACH transactions on behalf of merchants engaged in outbound telemarketing to consumers with whom such merchants have no existing relationship. The FTC is seeking redress for consumers and disgorgement of fees unlawfully earned through EFG's processing for fraudulent telemarketers. On the FTC's Web site you can find more information on the allegations against the processor: www.ftc.gov/opa/2003/07/efg.htm .

The FTC recently investigated the following types of scams:

• Advance-fee loan
• Automatic debit
• Charity fraud
• Credit card protection
• Obtaining a credit card
• Bulk e-mail
• Cross-border phone fraud (especially from Canada)
• International lottery
• Magazine subscription and renewal notices
• Reloading
• Seminars
• Vitamins and weight loss
• Telemarketing recovery
• Telemarketing travel fraud
• Office supplies
• Work-at-home

The FTC Web site lists recent cases that can be helpful in recognizing whether a merchant might be fraudulent or in a high-risk business. ISOs/MLSs should be wary of these types of businesses during the underwriting process. Most processors have refused these types of businesses and for good reason. For more information, visit www.ftc.gov/bcp/conline/edcams/telemarkfraudenforcement/index.html .

Another FTC site is designed for consumers but can help sales agents understand the FTC's focus, as well as the scams that create risk and should be avoided. Visit www.ftc.gov/bcp/menu-tmark.htm .

The FTC site also provides a valuable tool for searching out companies or their principals that may be or have been under investigation. It also identifies products and services that the agency considers scams; enter names of companies or principals into the search feature to bring up any matches. The address is www.ftc.gov/search .

Business licenses can be helpful in investigating potential processing clients, and ISOs should encourage their agents to submit copies along with merchant applications. It is becoming more possible to verify these on governmental Web sites all the time. Additionally, there are other tools sales agents can use to establish the legitimacy of a business and its principals.

The Integrity Bankcard site (www.integritybankcard.net) includes a search function to verify the corporate existence of the merchant for each state. (Some states, such as Florida, allow searches by officer that will show the "corporate history" of principals.)

Search Systems (www.searchsystems.net) provides access to a large collection of free public records databases including the following:

• Business information (corporations, limited liability companies, limited partnerships, assumed business names)
• Licensing (dentists, physicians, real estate, therapists, etc.)
• Criminal records; sex offenders; inmates/offenders; missing children; unclaimed property
• Trade names/trademarks; state employee/department lookups; uniform commercial code filings and state codes.

For city and county levels, Search Systems provides links for:

• Local civil, criminal, probate, family and traffic court records
• Birth, death, and marriage records
• Assumed/fictitious business name filings
• Recorded documents
• County/city inmates
• Tax information

On the Better Business Bureau Web site (http://search.bbb.org/search.html) you can search for complaints filed against companies. Look at the information provided here carefully; much of it is compiled based on whether a complaint was answered by the business, rather than if the complaint was resolved. However, it will often include information on investigations being conducted by attorneys general and other agencies.

While it has never been prudent for reputable ISOs to work with these high-risk, fraudulent merchants, they always manage to find someone to process their credit card transactions. The FTC case against EFG now makes this even riskier for those processors who are willing to take on unscrupulous merchants.

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