Payment processor/facilitator Allied Wallet, its CEO, and two other corporate officers, recently agreed to settle Federal Trade Commission (FTC) charges that they assisted or knowingly processed fraudulent transactions for merchant-clients. This action indicates that enforcement actions against payment processors are alive and well, despite the FTC’s previously announced end of “Operation Chokepoint,” which, among other goals, targeted payment processors and facilitators whose merchant clients engaged in activities perceived to be fraudulent.
The FTC alleged that Allied Wallet and the other defendants violated Section 5(a) of the FTC Act, 15 U.S.C. § 45(a), which prohibits “unfair or deceptive acts or practices in or affecting commerce.” According to the allegations, Allied Wallet, through its payment processing business, knowingly processed payments for merchant-clients engaged in fraudulent and criminal activities. The FTC alleged that the payment processor, in concert with its vendor, failed to adhere to rules and monitoring standards that would have prevented the criminal activity.
Allied Wallet’s business, in part, involved enabling e-commerce merchant-clients to accept card payments from consumers. A merchant account is a special type of business bank account that allows a business to accept different types of payment, typically debit and credit card payments. In order to setup payment processing, various merchants entered into agreements with Allied Wallet, which acted as an intermediary between the merchant and financial institutions known as an acquiring bank or “acquirer.” Allied Wallet’s payment processing model consisted of Allied Wallet acting as a “payment facilitator,” meaning that it was an authorized merchant registered by acquirers to process transactions on behalf of other merchants engaged in e-commerce who did not have merchant accounts of their own.
The FTC alleged that Allied Wallet failed to adequately vet merchants before acting as a payment facilitator for them. Specifically, the FTC alleged that merchants using Allied Wallet as a payment facilitator misidentified their locations, annual sales volume, and revenue transfers. The FTC also alleged that Allied Wallet failed to have an adequate compliance monitoring system in place to detect certain patterns that would indicate a merchant was engaging in fraud or criminal activity.
The FTC also emphasized that Allied Wallet continued to accept referrals from an entity run by an individual who had previously been convicted of various payment processing violations. Importantly, the FTC did not act to restrain this bad actor from acting as a referral source for payment facilitators, and the company this individual was currently running had no investigations or convictions against it. Nonetheless, the FTC suggested that Allied Wallet should not have used such a referral source, despite no per se rule against such an arrangement.
Under the stipulated final order, Allied Wallet, its affiliates, and its CEO agreed to a $110 million equitable monetary judgment. Another executive was subject to a $320,429.82 equitable monetary judgment, and Allied Wallet’s COO was hit with a $1 million fine and a lifetime ban in the industry.
The action serves as another stark reminder to mind the company you keep and to monitor card payments being processed on behalf of others.