MAC Workshop FTC Enforcement Update November 13, 2018

Transcription

1 MAC Workshop FTC Enforcement Update November 13, 2018 Zachary A. Keller Staff Attorney, Southwest Region Federal Trade Commission

2 2 Topics for Discussion What is the FTC? FTC Law Enforcement Telemarketing Sales Rule Business Opportunity Rule ROSCA How We Can Work Together to Combat Illegal Marketing

3 What is the Federal Trade Commission? The Federal Trade Commission ( FTC ) is an independent federal agency charged with overseeing consumer protection and competition. Created in 1914 by Congress to prevent unfair methods of competition in commerce as part of the battle to bust the trusts. In 1938, Congress broadened the powers to a broad prohibition against unfair and deceptive acts or practices. 3

4 Our Offices 4

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6 FTC Enforcement Actions Two General Investigation Types: In appropriate cases, the FTC will first contact a prospective defendant and try to negotiate a settlement of the FTC s claims prior to resorting to full-blown litigation. In cases involving significant fraud, however, there is a risk that assets will be dissipated or evidence destroyed if a prospective defendant has advance notice. Here, the FTC goes straight to court, files a lawsuit in federal court, and asks for an ex parte TRO and asset freeze. 6

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8 Federal Trade Commission Act 15 U.S.C. 45(a)(1) Otherwise known as Section 5. Prohibits deceptive or unfair acts or practices in or affecting commerce. 8

9 FTC Rules The FTC can issue trade regulations or rules that have the force of law. A violation of a rule is considered a violation of the FTC Act. The FTC enforces over 30 rules covering a wide range of topics. Telemarketing Sales Rule (Including Do-Not-Call). Business Opportunity Rule. 9

10 FTC and Payment Processors Since 1996, FTC has brought 25 actions against a variety of entities that help fraudulent merchants obtain payment processing for sales that violate the FTC Act. Conduct generally arises out of fraudulent conduct the FTC has challenged in a prior or pending FTC action. 10

11 FTC and Payment Processors Unfairness Authority. Practice causes or is likely to cause substantial injury to consumers. Not reasonably avoidable by consumers. For which the injury is not outweighed by countervailing benefits to competition or consumers. Telemarketing Sales Rule. Assisting and facilitating. Credit card laundering. 11

12 What is covered? Telemarketing Sales Rule 1. Any plan, program, or campaign to sell goods or services through interstate calls; 2. Inbound and outbound telemarketing calls; 3. Sellers who provide or arrange goods or services to consumers in exchange for payment; or 4. Third-party call centers making calls on behalf of exempt entities, such as marketers, financial institutions, or insurance companies. 12

13 Do Not Call Registry Telemarketers are required under the TSR to honor the Do Not Call Registry. 13

14 Telemarketing Sales Rule Must provide material information before a consumer pays for goods or services. Material information is anything that would be likely to affect the consumer s choice of goods or services or the person s decision to make a charitable contribution. Failure to provide material information truthfully in a clear and conspicuous manner either orally or in writing before the consumer pays for the goods is a deceptive telemarketing practice that violates the TSR. Civil penalty is up to $41,848 for each violation. 14

15 TSR Material Information Cost and Quantity. Material Restrictions, Limitations, or Conditions. No Refund Policy. Prize Promotion. Credit Card Loss Protection. Negative Option Features. Debt Relief Services. 15

16 TSR Prohibition of Misrepresentations Misrepresentations are prohibited. For example: You cannot falsely claim that you need a consumer s bank account number or credit card number only for identification purposes when, in fact, you will be using the number as payment. A seller of precious metals cannot induce anyone to invest by falsely claiming that the they are offering the metals at or near wholesale price. 16

17 Assisting and Facilitating It is a violation of the TSR to assist a seller or telemarketer substantially while knowing or consciously avoiding knowing that a seller or telemarketer is engaging in conduct that violates the TSR. Therefore, taking deliberate steps to ensure one s own ignorance of a seller or telemarketer s TSR violations is an ineffective strategy to avoid liability. 17

18 Assisting and Facilitating cont d The TSR prohibits providing substantial assistance to a seller or telemarketer when the person knows or consciously avoids knowing that the seller or telemarketer is violating the provisions of the TSR. The assisting and facilitating provisions typically apply to: Lead Generators or Data Brokers; Fulfillment Houses; Voiceblasters; and Payment Participants. Credit card laundering or factoring. 18

19 Real World Example: Tax Club and Bluefin The Tax Club scam: Defendants telephoned consumers regarding potential home-based businesses, falsely claiming affiliation with other companies that did business with the consumer. Defendants then sold tax return preparation, individualized tax advice, customized business planning and counseling, and business credit development services by misrepresenting that that these services were essential for the business to succeed. Most of victims were elderly retirees, who lost thousands sometimes tens of thousands of dollars. Often, Defendants failed to provide the promised services. Defendants had an unworkable refund policy and pressured consumers not to cancel. FTC, the State of Florida, and the State of New York v. The Tax Club, et al. The enterprise encompassed 12 interrelated corporate entities, doing business under dozens of names controlled by four individuals. Complaint filed in 2013 sought a permanent injunction and monetary relief. Defendants settled in 2014 for $15 million. 19

20 Real World Example: Tax Club and Bluefin During the investigation of Tax Club, FTC staff found that Tax Club had an ISO named Capital Payments LLC (d/b/a Bluefin ). Upon further review, staff determined that [o]ver the course of more than three years, [Bluefin] ignored a series of red flags regarding Tax Club s deceptive telemarking scheme. Bluefin ignored: [A] high number of returns and chargebacks, [N]umerous chargeback complaints from consumers stating they were victims of fraud, and [A]lerts by other financial institutions that Tax Club was engaged in fraudulent or deceptive practices. 20

21 Real World Example: Tax Club and Bluefin FTC v. Capital Payments LLC (Bluefin). After an investigation, FTC reached a settlement with Bluefin. Bluefin opened / maintained 20+ merchant accounts on behalf of Tax Club despite red flags. Bluefin collected monthly merchant account fees from nearly 700 consumer victims, despite evidence demonstrating no operational business or sales. 21

22 Terms of Settlement Order Bluefin is banned from payment processing or acting as an ISO for several categories of clients and prohibited from assisting or facilitating any merchant it knows or should know is violating the FTC Act or TSR. Bluefin must screen prospective clients that meet certain criteria, monitor their sales activities to detect indications of deceptive conduct, and terminate contracts with those engaged in deceptive conduct. $2.6 million judgment that was suspended based on financial situation. Bluefin paid $750,

23 FTC v. Treasure Your Success After the FTC took action against WV Universal Management, LLC, d/b/a Treasure Your Success, for engaging in illegal robocalls. Universal Processing Services of Wisconsin, LLC also a named defendant: Violated the TSR by providing substantial assistance to Treasure Your Success. Eleventh Circuit applied joint and several liability to Treasure Your Success s unjust gains. Eleventh Circuit rejected defendants argument that amounts paid directly to the processor and the telemarketer should be separated. The harm to each consumer defrauded by the TYS scheme is indivisible in each case, the whole amount was caused by the actions of both the TYS defendants and Universal together. 23

24 Business Opportunity Rule Applies when a seller solicits a buyer to enter into a new business. The prospective purchaser makes a required payment. The seller expressly or by implication makes certain types of claims relating to a purported opportunity. 24

25 Business Opportunity Rule, con t Typical examples of business opportunity scams: Internet-based work at home business opportunities. So-called kits, where buyer is provided everything to set up a business. Package mules. 25

26 Legal Requirements Buyers must be provided a one-page disclosure document, and it must be provided seven days before the buyer signs a contract or pays any money for the business opportunity. If you make an earnings claim, you have to give the prospective buyer a separate document that says, across the top, EARNING CLAIM STATEMENT REQUIRED BY LAW. You have to comply with general truth in advertising principals including avoiding deceptive practices. 26

27 Five key pieces of information: Disclosure Documents Identifying information. Company s name, business address, phone number, the sales person name, and the date you gave the document over. Legal actions. Whether the company or its executives have been the subject of civil or criminal actions involving misrepresentations, fraud, violations of the securities laws, or any unfair or deceptive practices within the last ten years. Cancellation or refund policy. If you have a policy, you have to attach it. Earnings. If you have stated how much can be earned, you must attach it. References. A list of at least 10 people, who have bought a business opportunity from your company, has to be attached. 27

28 Real World Example: Money Now Funding and Electronic Payment Solutions 28

29 FTC v. Money Now Funding ( MNF ) (2013) MNF (and individual defendants) lured consumers into thinking they could make $3,000 per month working at home by referring small businesses to obtain loans or cash advances. Consumers paid between $ for the business opportunity. After purchasing the opportunity, consumers had to purchase leads to obtain the contact information for those small businesses. Those leads ended up being worthless. Total charges for leads often exceeded $10,000. MNF charged more than $7 million for worthless business opportunities. MNF operated through a web of interrelated companies, including Rose Marketing. When consumer complaints mounted, defendants created new companies. 29

30 FTC v. Electronic Payment Solutions ( EPS ) (2017) FTC filed complaint against EPS, an ISO, and individual ISO sales agents working for it. ISO sales agents devised a scheme of applying for a large number of fraudulent merchant accounts, each under a fictitious name. Phony companies did not engage in any business. Complaint alleges credit card laundering. EPS failed to screen incoming merchants sufficiently, who were applying for merchant accounts with Merrick, the acquired. Instead, EPS: Ignored obvious warning signs of fraud, including likely credit card laundering; Concealed from Merrick the true identity and nature of MNF; and Made every effort to continue processing for MNF even after Merrick noticed signs of fraud and instructed EPS to stop. 30

31 Restoring Online Shopper s Confidence Act (ROSCA) ROSCA prohibits initial merchants from disclosing purchasers financial accoun0t numbers or other billing information to third-party sellers. In addition, for all online transactions with a negative option feature (both initial sales and post-transaction sales), the Act requires the seller to: Disclose clearly all material terms, Obtain the consumer s express informed consent to the charge, and Provide a simple means for consumers to stop recurring charges. 31

32 Real World Example: FTC v. Anasazi Management Partners Defendants operated several retail websites for selling teeth whitening and other personal care products. They drove traffic to their websites through affiliate networks, including via s inviting consumers to fill out surveys. Consumers would sign up to free trials of teeth whitening products, only paying for the shipping. But undisclosed to consumers was a negative option. Consumers unwittingly signed up for $99-$199 teeth whitening kits which were shipped only eight days later. Defendants operated through 78 companies 59 active and 19 inactive. This was done to prevent chargeback issues and detection by law enforcement. Some of the entities were merchant entities, some holding companies, some service providers. Defendants had a single warehouse, and shared mailbox locations that forwarded to two office locations. FTC filed a complaint in August 2017 and obtained court orders banning defendants from negative option sales. 32

33 2017 settlement with FTC and DOJ: FTC v. Western Union Alleging that massive fraud payments flowed through the money transfer system for many years. Included payments in which complicit WU agents processed the fraud payments in return for a cut of the proceeds. Even in the face of evidence that many of its agents were involved in the frauds, WU allegedly failed to address the problem, looked the other way, and even rewarded some complicit agents for their high volume business. Many of these frauds harmed older adults. From , WU received more than 41,000 complaints totaling nearly $75M in losses. 33

34 o Chargeback rate; o Refund rate; Factors We Consider o Consumer narratives in chargeback documents; o Publicly available information about the merchant and the merchant s business practices; o The existence of any prior, public law enforcement action against the merchant; o Information in the underwriting file; o Communication between the merchant and the sales agent/iso/processor; and o Other relevant evidence. 34

35 How Can I Avoid Seeing My Name on an FTC Lawsuit? Know Your Customers. Engage in meaningful due diligence. Don t ignore warning signs. Comply with industry best practices, such as the ETA Payment Facilitator Guidelines. Don t bury your head in the sand. 35

36 Due Diligence Review marketing materials (scripts, ads, FAQs). Review the merchant application and beware of inconsistencies. Pay attention to high chargeback rates and fraud notices from MC/Visa. Multiple accounts for the same person? Same company? Same address? Shell companies? Are they actually doing business? What type of business? Review their online BBB records and monitor it. Ask that they send complaints from the BBB, register with the CFPB (if financial related) and forward you any complaints. 36

37 Can We Be Friends? FTC and payments industry have mutual interest in stopping bad actors that facilitate deceptive and fraudulent business practices. Make sure you are compliant. Report violators to us. Don t do business with companies who engage in illegal marketing practices. Thank you for the strides you ve taken to improve your industry keep it up! 37

38 Questions? Zachary A. Keller