Regulations That Matter For Third-Party Payment Processors. Jane Hennessy, Head of External Alliances, G2 Marsha Jones, President, TPPPA

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1 Regulations That Matter For Third-Party Payment Processors Jane Hennessy, Head of External Alliances, G2 Marsha Jones, President, TPPPA

2 What is A Third-Party Payment Processor? A Third-Party Payment Processor (TPPP) is a depository customer of a bank that processes payments, (debits and/or credits,) on behalf of other companies through the TPPP s bank. Payroll Processors are considered Third-Party Payment Processors. TPPPs customarily referred to processors that process ACH and/or remotely created checks (RCC). However, it has become more broadly known as: A party that has a contractual relationship with another company to process payments for that company through the TPPP s bank; and The bank does not have a contractual relationship with the company initiating the payment. TPPPs are known as Third-Party Senders (TPS) under the NACHA Operating Rules (First defined in December 2004).

3 Earliest Guidance on TPPPs OCC BULLETIN Risk Management Guidance: Automated Clearing House September 1, 2006 References Third-Party Senders OCC BULLETIN Risk Management Guidance: Payment Processors April 24, 2008 FIL Guidance on Payment Processor Relationships November 7, 2008

4 Evolution of TPPPs Many relationships with banks predated (sometimes by decades) the distinction TPPP or TPS. These relationships continued to be treated as direct originators of payments. TPPPs were often not advised of their expanded compliance responsibilities, primarily because the banks did not recognize the need to reclassify these relationships. TPPPs and banks historically focused on the credit, operational and fraud risks related to these relationships, consistent with direct merchants/originators. Recent regulatory enforcement actions emphasize compliance, legal and reputation risk.

5 A radical shift in policy, but what s the impact to payments?

6 Obama s Policy: Consumer Protection Working Group Unit within the Financial Fraud Enforcement Task Force First meeting on February 10, 2012 Formed to address several areas of concern, including payday lending and other high-pressure telemarketing or Internet scams, business opportunity schemes, for-profit schools that engage in fraud or misrepresentation, and fraudulent third-party payment processors that facilitate payments on behalf of other fraudsters without the permission of the customer. Members of the Consumer Protection Working Group included (among others): FTC, CFPB, DOJ and other law enforcement, Bank Regulators, FinCEN, Various States Attorneys General

7 FDIC Guidance: A Glimpse of a Shifting Policy Supervisory Insights Summer 2011 Managing Risk in Third-Party Payment Processor Relationships 1 st Publication of High Risk List FIL , Payment Processor Relationships, Revised Guidance References High Risk List FIL , FDIC Supervisory Approach to Payment Processing Relationships With Merchant Customers That Engage in Higher-Risk Activities FIL , FDIC Clarifying Supervisory Approach to Institutions Establishing Account Relationships with Third-Party Payment Processors High Risk List Disappears FIL , Statement on Providing Banking Services

8 Trump s Policy: Reduce Regulation Executive Order to Reduce Regulation Requires agencies to appoint regulatory reform task forces led by regulatory reform officers Mandate to identify regulations that: Eliminate jobs or inhibit job creation Are outdated, unnecessary or ineffective Have costs that outweigh their benefits Are inconsistent with regulatory reform initiatives Derive from since-rescinded executive orders Initial reports are due within 90 days

9 Regulations That Will Continue to Matter Federal Regulations BSA/AML Consumer Protection State Laws Consumer Protection o State Attorneys General Money Transmitter Licensing o Emphasis is Consumer Protection Payment System Rules

10 Consumer Protection Regulations Governing Electronic Payments Federal Trade Commission Act ( FTC Act ) 1914 Unfair or Deceptive Acts or Practices ( UDAP ) 1938 Regulation E Implementing Electronic Funds Transfer Act ( EFTA ) 1978 Enforced by the CFPB (formerly by FRB Board of Governors) Telemarketing Sales Rule (TSR) Implementing the Telephone Consumer Protection Act (1991) Enforced by the FTC Consumer Financial Protection Act ( CFPA ) 2010 Unfair, Deceptive, or Abusive Acts or Practices ( UDAAP ) Enforced by CFPB and States Restore Online Shoppers Confidence Act 2010 Enforced by the FTC violations are UDAP offense

11 Anti-Money Laundering and Terrorist Financing Anti-Money Laundering and Prevention of Terrorist Financing is Global Effort facilitated by multi-national cooperation Financial Action Task Force (FATF) Inter-governmental body established in 1989 Develops Recommendations that are implemented by FATF Members (FATF 40) Monitors Members adherence to Recommendations US was recently reviewed and criticized for lack of progress related to Beneficial Ownership (KYC) US AML/BSA and OFAC efforts will not diminish under Trump administration

12 Insights from Western Union Action Joint efforts of FTC, DOJ, FinCEN and States Alleges willfully failing to maintain an effective anti-money laundering program and aiding and abetting wire fraud against consumers Included both Anti-Money Laundering and Consumer Protection violations UDAP and TSR $586MM forfeited in FTC/DOJ Action $184MM in FinCEN penalties

13 Conclusion: Stay the Course BSA/AML/OFAC and Consumer Protection Regulations predated the Obama Administration Due Diligence and Know Your Customer element to both Both expect monitoring of merchants for suspicious activity on an ongoing basis FinCEN, FTC, Bank Regulators and State enforcements will continue with or without a CFPB Best practices are designed to address core compliance obligations that transcend administrations and shifting policy

14 Abraham Lincoln Character is like a tree and reputation like a shadow. The shadow is what we think of it; the tree is the real thing.

15 Case Studies

16 Case of Maria Duval What Happened Convinced millions she was psychic Solicited the sick and the financially desperate Governments around the world, for decades, tried shutting her down The indifference of the payment processor and at least one bank allowed money laundering and mail fraud to occur

17 Duval s Mail Scam Send in money and through Duval s psychic abilities Start seeing improvements in your future

18 Victim s of Maria Duval

19 US v. CommerceWest Bank WHAT HAPPENED CommerceWest Bank charged with ignoring clear warning signs that one of its third-party payment processors V Internet was committing consumer fraud V Internet operated a network of websites offering payday loans Over 750,000 Remotely Created Checks created and deposited totaling $22MM in unauthorized debits Resulted in $4.9MM settlement for CommerceWest Bank Source:

20 Hundreds of Consumer Complaints on Ripoff Report Fastloanfast stole $30 dollars out of my account without me asking for their services or ever going to their website (which along with their phone # does not work). Truthfully do not know if this is the only time. Also their check process customer service # is just a voic box that is full. This is a payday loan company and they withdrew from my account $30.00 for a loan which I did not apply for or authorize this withdrawal. I checked my bank statement today and saw a $30 charge that I DID NOT Authorize! I will be talking to my bank in the morning! Source: Ripoff Report

21 Examples from a US Bank Challenges G2 Solution Bank is unaware of reputation issues of their customers and their customers customers Reputation Monitoring Information gaps interfere with monitoring Regulators increasingly focused on reputation issues Using multiple sources create a holistic approach

22 Outcome for US Bank Results Several customers with poor ratings and/or CFPB complaints Ongoing monitoring Impact Review ratings and CFPB complaints Exit relationships with poor reputation or reputational changes Reduce probability of regulatory fines 193 Ripoff Report Complaints 425 Complaint Board Complaints 176 CFPB Complaints

23 They Wrote The Book on Afghanistan This business customer was the best-selling author of a book on Afghanistan The authors were entrepreneurs, offering security services ranging from consulting to provision of heavily armed bodyguards But there was a cloud hanging over their operations Did selling the book amount to profiting off of past misdeeds?

24 And Promoted It Best Selling Author

25 Past Wrongdoing After pleading guilty to conspiracy and a scheme to defraud the US government in Afghanistan, the authors opened an account to accept payments for their book, speaking tours, and consultancy telling their version of events

26 US FI Discovers Client Violating Consumer Protection Laws Bank concerned about CFPB expanding UDAAP laws States enforcing Dodd-Frank States own UDAP laws...and the risk of law-breaking clients G2 finds Injunction from TX Attorney General Bank is able to act on this alert investigate other suspect businesses avoid regulator penalties

27 The Wrath of Conn s: The Appliance Store That Ignored The Times New CEO Ultimately, at the end of the day, the only way to grow our business is to have a great name and a great reputation.

28 Goodbye Feds, Hello States State AGs abhor a vacuum, and will fill the void opened by a retreat of the CFPB California, Virginia, Oregon, and Texas AGs, as well as banking regulators in fourteen states, are already partnering with the CFPB on sharing complaint information. Director Cordray urged every attorney general to take advantage of this technology. A well-functioning FTC, in conjunction with state authorities, can handle consumer protection and anticompetitive issues. Mark Jamison, on Trump transition team assigned to FCC CFPB Monitor, Feb 26, 2014 Under Dodd-Frank Section 1042, a state AG or regulator is authorized to bring a civil action to enforce provisions of Dodd-Frank Title 10

29 Goodbye Feds, Hello States History has demonstrated that states, not the federal government, have the requisite knowledge and experience to effectively regulate nondepository financial service providers and guard against predatory and abusive practices. NY DFS Superintendent Maria T. Vullo [State AGs] have been going after financial services industries in the name of protecting consumers and there s been really no pushback on the federal side The federal government might not like it, but it won t stop them. Former MD AG Douglas Gansler

30 Holistic Reputation Monitoring Adjust frequency based on risk level Pinpoint business customers with declining reputation or negative news hits Consult multiple leading sources of consumer complaints Check over 100,000 unique sources of negative news

31 Best Practices Regularly review features of consumer products and services. Evaluate product features and promotional materials and determine if any terms fall within the broad definition of UDAAP. Evaluate new products for features that could be misunderstood or ones that have been omitted. Evaluate written and oral methods of communicating product features to consumers. Review third-party service provider agreements to develop a clear understanding of the services surrounding the service being provided. Review all bank policies and procedures for practices that suggest unfair, deceptive or abusive practices. Create a consumer-friendly culture within your organization. Evaluate customer complaints for signs of more systemic problems. Source:

32 Learn More White Paper White Paper Case Study Why Reputation Monitoring Matters for Strong KYC Managing TPPPs and TPSs in the Current Regulatory Environment The Inattentive Payment Processor: How Fraud Went Unchecked

33 Thank You! Jane Hennessy, Head of External Alliances G2 Web Services Marsha Jones, President Third Party Payment Association