By Theodore F. Monroe and Bradley O. Cebeci, TFMLaw

Recently, the criminal case against online merchant Jeremy Johnson in Utah that started back in June 2011 finally came to a close. After more than four years of litigation and six weeks of trial, the jury found Johnson guilty of eight counts of making false statements to a bank, but acquitted him on 78 other charges, including bank fraud, wire fraud, conspiracy and money laundering. By far the biggest legal spectacle involving card-not-present high-risk processing in more than a decade, the Johnson case poses a cautionary tale to banks and ISOs inclined to bend the rules in search of profits; and to merchants willing to “bend the truth” to get access to the payments system.

This is the last of four articles that will use the case to examine card-not-present fraud from a legal perspective. Part 1 described the case and some of the issues the decision turned on. Part 2 examined the involvement of CardFlex , one of the ISOs charged by the FTC of aiding Johnson in his alleged fraud. Part 3 looked at credit card laundering , one of the crimes Johnson was charged with. The last installment describes what a company can expect when it runs afoul of the FTC.

CNP Series: Lessons from a CNP Fraud Scheme – Part 4 Anatomy of an FTC Action

Most payment processors understand that certain classes of high-risk merchants are popular targets for scrutiny by the FTC and other regulatory authorities. Trial, free-to-pay conversions, recurring billing, onerous return policies, paid testimonials and unsubstantiated advertising claims are just a few of the most common sins that will land a merchant squarely in FTC’s crosshairs. In such cases, the agency will not hesitate to look past the merchant to every entity in the payment chain it deems knowingly or recklessly facilitated the merchant’s access to the payments system in the face of such red flags, or in violation of its own underwriting policies. One need only consider the FTC’s prosecution of Jeremy Johnson and the associated ISOs and sales agents that boarded his straw merchant accounts, or the commission’s more recent pursuit of CardReady in connection with its alleged role for helping to launder credit card transactions in connection with a massive debt relief scam.

Nonetheless, many banks and processors have no idea what an FTC lawsuit looks like until the merchant gets sued and the operating account and merchant reserves are already frozen. So, rather than leaving you to learn the hard way by experience, we offer you this brief primer on the anatomy of an FTC lawsuit.


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