f you violate a card Association rule, your residuals don't necessarily have to be terminated for life. Most ISO and merchant level salesperson (MLS) agreements do, technically, permit a processor or ISO to terminate all residuals to the responsible party in the event of a rule violation or a fine from an Association. Even so, rule violations don't have to be the end of the world.

The most common form of rule violation I have seen is ISOs or MLSs using incorrect marketing materials when promoting merchant services: for example, nonregistered ISOs or MLSs selling under their own names and not stating they are agents of certain banks or ISOs. This kind of rule violation can get everyone from agents on up into trouble. Even acquiring banks can be sanctioned for this.

Despite good intentions, rule violations occur. The challenge for ISOs and MLSs negotiating their agreements is to understand how to deal with them. Here are tips for negotiating the rule violation clause in your agreement:

You can't bypass the entity above you

Some agents have unrealistic expectations of what their ISOs or processors can do for them in the event of a rule violation. When negotiating with an ISO, remember that a clause in the ISO's agreement probably gives the ISO's processor or bank the right to terminate said agreement if one of the ISO's agents violates a rule.

Sometimes, all you can do is let the entity above you in the payments stream hierarchy navigate through a rule violation situation and bring as little harm to you as possible.

Rule violation is not the end

Most agreements permit the party above to terminate the entity below if a rule violation occurs, but this doesn't mean it will happen every time.

A rule violation is a good indicator of whether the offending party is suitable for this industry. However, just like when you're nailed for a traffic violation, the attitude of the attending officer plays a significant role in deciding the violation's repercussions. If you breach a rule and get caught, consider whether the party that pays you has been affected by your actions, and propose a plan for amelioration right away.

Beware of abuse

Some ISOs or MLSs who haven't violated any rules are occasionally accused of doing so because the party paying them is looking for an excuse to stop paying.

Whenever you think you are being unjustly accused of a rule violation, demand to see documentation from the Association that found the breach, and make sure there is objective proof that it was actually your fault.

Some processors, even some large and well-known ones, prefer to fine an ISO or MLS who has the means to pay rather than target the agent who is truly responsible for the violation.

If you believe you have been wronged by a registered ISO, processor or bank, send an e-mail to this Visa tip address: agentregistration@visa.com . Don't expect any action or even a reply. It's worth reporting, though, because bad habits that can give our industry a bad name should be broken.

Get documentation of fines

Fines for rule violations are imposed by the card Associations on member banks. They are, theoretically, to be passed along to the processor, ISO and, finally, to the agent responsible. Whenever you are asked to pay an Association fine, you should demand to see an original copy of the document from the Association levying the fine.

You should also see proof that the fine was paid by the entity asking you to pay it back. But don't get your hopes up; this kind of information is hard to acquire. But if there is ever to be a shred of procedural justice in the Association's fine machinery, ISOs and MLSs must demand proof of the actual origins of fines, together with reasons and copies of the rules that have been violated.

Many processors and ISOs will use an Association fine as an excuse to stop paying residuals, even after they have recouped the full amount of the fine.

Try to have the parties to your agreement stipulate that your residuals will be turned back on after you pay a fine for which you are deemed responsible. While this isn't always possible, it's always worth attempting in any agent or ISO negotiation.

Be curious

I cannot emphasize enough the importance of obtaining verification of rules and rule interpretations from the organization that pays you.

For example, always get your marketing materials approved by your upstream entities, and stay in close touch with your upstream relationship manager. That person should be the first to know about any changes in your business name and marketing strategies.

Be sure to send hard copies of all your marketing collateral as well as your Web site address to the firm that pays you, and demand a written interpretation that indicates whether your material is in compliance. The last thing you want is for that entity to come across materials it hasn't previously approved and then surprise you by decreeing the materials are noncompliant.

Protest

In the card Association "House of Representatives," the only representatives are banks. However, ISOs and MLSs carry weight in the banking industry. You are serving and increasing the portals through which cardholders can make use of their cards, something the banks relish. Your voice counts.

When you are at tradeshows and when you correspond with banks and card Associations, speak with them about making rule and fine administration a more equitable and open process, with rights of information and appeal for ISOs and MLSs. The current system is wholly inconsistent with the values of honesty and fairness that the banks expect ISOs and agents to uphold.

There is no guarantee you won't ever violate card Association rules; however, if you keep the suggestions provided in mind, you might avoid some obvious problems with rules and fines. As a general practice, be very careful with your marketing material and what you say to prospective merchants.

In publishing The Green Sheet, neither the author nor the publisher is engaged in rendering legal, accounting or other professional services. If you require legal advice or other expert assistance, seek the services of a competent professional. For further information on this article, e-mail Adam Atlas, Attorney at Law at atlas@adamatlas.com or call him at 514-842-0886.