The Federal Trade Commission (FTC) last month charged seven defendants with illegally processing credit card payments on behalf of a massive Internet scam that allegedly bilked millions of dollars from consumers by repeatedly charging them for “trial” memberships they never ordered.
According to a complaint filed by the FTC, the defendants arranged for a deceptive operation known as I Works to obtain and maintain merchant accounts that allowed it to process more than $26 million in illegal credit and debit card payments through the Visa and MasterCard payment networks.
In December 2010, the FTC charged I Works with scamming consumers out of more than $275 million via deceptive “trial” memberships for bogus government-grant and money-making schemes. A federal court subsequently froze I Works’ assets and placed them under the control of a court-supervised receiver. The I Works litigation is ongoing.
The FTC now says CardFlex, Blaze Processing, Mach 1 Merchanting – illegally provided the access to payment networks that I Works needed to carry out its deceptive scheme.
The FTC alleges that the defendants knew I Works had been placed on industry lists of high-risk merchants numerous times due to high chargeback rates. In spite of this, the defendants provided I Works with unfettered access to payment networks and failed to engage in their contractually required underwriting process when they opened accounts for I Works, according to the FTC’s complaint.
In fact, the FTC charged, the defendants helped I Works evade the credit card networks’ fraud monitoring programs to help keep I Works’ merchant accounts open. The defendants opened at least 293 accounts in the names of 30 separate shell corporations on I Works’ behalf, and implemented a system that enabled I Works to divide its sales transactions between these accounts in order to avoid reaching the thresholds necessary for its accounts to be monitored by the credit card networks.
According to the FTC’s complaint, CardFlex, as an Independent Sales Organization (ISO), was paid for referring merchants to banks and their payment processors and it received payments based on the volume of transactions processed as well as for processing reversals of charges to credit cards or debits to bank accounts, known as chargebacks. Blaze Processing and Mach 1 Merchanting were sales agents that managed the relationship between CardFlex and I Works.
Blaze Processing and Mach 1 Merchanting have agreed to settle the FTC’s charges. The suit against CardFlex is ongoing.
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