House GOP Investigating Payment Fraud Allegations

It was only earlier this year that the House Oversight Committee cracked down on the Department of Justice with regards to its tactics to combat fraud in the payment processing industry, so it comes as no surprise that the House is now focusing on the role that the Federal Trade Commission had in the fight against payment fraud.

The committee is led by Republicans and is currently in the review process; checking out documents provided by the FTC in response to a recent panel inquiry, according to a source very familiar with these matters. The chairman of the committee, Representative Darrell Issa requested these documents in an official letter sent back in June.

The letter from Issa, which was also signed by GOP Representative Jim Jordan, the current chairman of the regulatory affairs subcommittee, focuses on the FTC’s interest in certain companies that provided payment processing services to merchants that were suspected of fraudulent financial practices. Issa specifically expressed his concern that authorities were punishing payment processing companies instead of businesses that were actually committing crimes against consumers.

Issa and Jordan wrote in the letter, “The Committee is concerned that Operation Choke Point and corresponding initiatives by collaborating agencies impose wholly unreasonable burdens on banks and payment processors, effectively punishing them in lieu of the actual perpetrators of fraud.”

Issa and Jordan said, “any FTC policies derived from Operation Choke Point will have a chilling effect on honest and legitimate businesses.”

The crackdown efforts from the FTC came about in relation to the infamous Operation Choke Point, a probe led by the Justice Department to gather information about the roles played by both payment processing companies and banks that may have enabled fraud.

A spokeswoman for the House Oversight Committee received requests for a response, but thus far she has declined to make any comments.

The FTC has officially responded to some of the concerns that the House Republicans voiced in the letter. Edith Ramirez, the FTC Chairwoman said that the FTC’s efforts were focused on payment processing companies that displayed evidence of financial misconduct, and not on the entire payment processing industry.

The letter Issa fired off to the FTC seems to echo concerns that were raised by payment processing professionals who are concerned about the possibility that the new FTC tactic opens their companies up to substantial financial exposure.

The FTC filed a lawsuit in July to recover more than $26 million from a payment processing company called Cardflex. That staggering amount covers the total amount of unauthorized charges made by the Utah-based company, iWorks – a former client of Cardflex. It is alleged that Cardflex helped iWorks by advising the firm on how to use shady tactics to evade fraud monitoring programs put in place by Visa and MasterCard. However, Cardflex and other defendants have filed motions to dismiss this lawsuit.

The efforts of the FTC stand in stark contrast to the approach that the Justice Department used in a lawsuit against Four Oaks Bank. That case, which was part of Operation Choke Point, Four Oaks paid a penalty of $1.2 million, instead of the amount charged to consumers by alleged fraudulent financial professionals, a sum that more likely than not would have been significantly higher.

Many people who work in the financial industry expressed hopes that the pressure from congress would lead to the ultimate downfall of Operation Choke Point. An industry lawyer, however, said, “Everyone’s predicted its [Operation Choke Point] death, and it survived.” Financial professionals who have felt pressure from Operation Choke Point can only hope that Operation Choke Point is put to an end sooner rather than later.