U.S. GOVERNMENT PUBLISHING OFFICE

31–425 PDF WASHINGTON : 2018

THE FEDERAL TRADE COMMISSION’S ENFORCEMENT OF OPERATION CHOKEPOINT–RELATED 

BUSINESSES 

JOINT HEARING 

BEFORE THE

SUBCOMMITTEE ON NATIONAL SECURITY 

AND THE

SUBCOMMITTEE ON 

GOVERNMENT OPERATIONS 

OF THE

COMMITTEE ON OVERSIGHT 

AND GOVERNMENT REFORM 

HOUSE OF REPRESENTATIVES 

ONE HUNDRED FIFTEENTH CONGRESS 

SECOND SESSION 

JULY 26, 2018 

Serial No. 115–99 

Printed for the use of the Committee on Oversight and Government Reform 

( 

Available via the World Wide Web: http://www.govinfo.gov 

http://oversight.house.gov 


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COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM

Trey Gowdy, South Carolina, Chairman 

John J. Duncan, Jr., Tennessee 

Darrell E. Issa, California 

Jim Jordan, Ohio 

Mark Sanford, South Carolina 

Justin Amash, Michigan 

Paul A. Gosar, Arizona 

Scott DesJarlais, Tennessee 

Virginia Foxx, North Carolina 

Thomas Massie, Kentucky 

Mark Meadows, North Carolina 

Ron DeSantis, Florida 

Dennis A. Ross, Florida 

Mark Walker, North Carolina 

Rod Blum, Iowa 

Jody B. Hice, Georgia 

Steve Russell, Oklahoma 

Glenn Grothman, Wisconsin 

Will Hurd, Texas 

Gary J. Palmer, Alabama 

James Comer, Kentucky 

Paul Mitchell, Michigan 

Greg Gianforte, Montana 

Michael Cloud, Texas 

Elijah E. Cummings, Maryland, Ranking 

Minority Member 

Carolyn B. Maloney, New York 

Eleanor Holmes Norton, District of Columbia 

Wm. Lacy Clay, Missouri 

Stephen F. Lynch, Massachusetts 

Jim Cooper, Tennessee 

Gerald E. Connolly, Virginia 

Robin L. Kelly, Illinois 

Brenda L. Lawrence, Michigan 

Bonnie Watson Coleman, New Jersey 

Raja Krishnamoorthi, Illinois 

Jamie Raskin, Maryland 

Jimmy Gomez, Maryland 

Peter Welch, Vermont 

Matt Cartwright, Pennsylvania 

Mark DeSaulnier, California 

Stacey E. Plaskett, Virgin Islands 

John P. Sarbanes, Maryland 

SHERIA CLARKE, Staff Director 

WILLIAM MCKENNA, General Counsel 

SHARON ESHELMAN, National Security Subcommittee Staff Director 

JULIE DUNNE, Government Operations Subcommittee Staff Director 

SHARON CASEY, Deputy Chief Clerk 

DAVID RAPALLO, Minority Staff Director 


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SUBCOMMITTEE ON NATIONAL SECURITY

Ron DeSantis, Florida, Chairman 

Steve Russell, Oklahoma, Vice Chair 

John J. Duncan, Jr., Tennessee 

Justin Amash, Michigan 

Paul A. Gosar, Arizona 

Virginia Foxx, North Carolina 

Jody B. Hice, Georgia 

James Comer, Kentucky 

Stephen F. Lynch, Massachusetts, Ranking 

Minority Member 

Peter Welch, Vermont 

Mark DeSaulnier, California 

Jimmy Gomez, California 

John P. Sarbanes, Maryland 

Vacancy 

Vacancy 

SUBCOMMITTEE ON GOVERNMENT OPERATIONS

Mark Meadows, North Carolina, Chairman 

Jody B. Hice, Georgia, Vice Chair 

Jim Jordan, Ohio 

Mark Sanford, South Carolina 

Thomas Massie, Kentucky 

Ron DeSantis, Florida 

Dennis A. Ross, Florida 

Rod Blum, Iowa 

Gerald E. Connolly, Virginia, Ranking 

Minority Member 

Carolyn B. Maloney, New York 

Eleanor Holmes Norton, District of Columbia 

Wm. Lacy Clay, Missouri 

Brenda L. Lawrence, Michigan 

Bonnie Watson Coleman, New Jersey 


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C O N T E N T S 

Page 

Hearing held on July 26, 2018 ............................................................................... 1 

WITNESSES 

Mr. Andrew Smith, Director of the Bureau of Consumer Protection, U.S. 

Federal Trade Commission 

Oral Statement ................................................................................................. 4 

Written Statement ............................................................................................ 6 

Mr. Jason Oxman, Chief Executive Officer, Electronic Transactions Association 

Oral Statement ................................................................................................. 18 

Written Statement ............................................................................................ 21 

Ms. Lauren Saunders, Associate Director, National Consumer Law Center 

Oral Statement ................................................................................................. 38 

Written Statement ............................................................................................ 40 


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THE FEDERAL TRADE COMMISSION’S ENFORCEMENT OF OPERATION CHOKEPOINT– 

RELATED BUSINESSES 

Thursday, July 26, 2018 

HOUSE OF REPRESENTATIVES, 

SUBCOMMITTEE ON NATIONAL SECURITY, JOINT WITH THE

SUBCOMMITTEE ON GOVERNMENT OPERATIONS, 

COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM, 

Washington, D.C. 

The subcommittees met, pursuant to call, at 10:30 a.m., in Room 

2154, Rayburn House Office Building, Hon. Ron DeSantis [chairman of the Subcommittee on National Security] presiding. 

Present from the Subcommittee on National Security: Representatives DeSantis, Amash, Foxx, Comer, Lynch, and Welch. 

Present from the Subcommittee on Government Operations: Representatives Meadows, Hice, Massie, Connolly, and Maloney. 

Mr. DESANTIS. The Subcommittees on Government Operations 

and National Security will come to order. 

Without objection, the presiding member is authorized to declare 

a recess at any time. 

Mr. Meadows is not here yet. He does have an opening statement. I think he is on his way. So if he wants to give it, we will 

obviously do that. 

I am second seat here, so I don’t have one. So what I will do is 

I will recognize the ranking member. 

Mr. Connolly is not coming, right? 

Mr. LYNCH. I know he is around, but I know we have a lot going 

on this morning. 

Mr. DESANTIS. Okay. So I will recognize the ranking member on 

my subcommittee, Mr. Lynch, and I will let him do his opening 

statement. 

Mr. LYNCH. Thank you very much. Mr. Chairman. I appreciate 

the courtesy. I want to thank you for holding this hearing, and I 

also want to thank the witnesses for helping us with our work. 

This hearing is to examine the anti-consumer-fraud efforts undertaken by the Federal Trade Commission following the end of 

Operation Chokepoint. I would also like to thank all of the staff on 

both sides for preparing this hearing. 

The Consumer Protection Branch at the Department of Justice 

initiated the investigative and enforcement program known as Operation Chokepoint in November of 2012. This operation examined 

efforts of fraudulent practices perpetrated through the U.S. banking system against bank customers by unscrupulous merchants, fiVerDate Nov 24 2008 15:58 Nov 02, 2018 Jkt 000000 PO 00000 Frm 00007 Fmt 6633 Sfmt 6633 H:\31425.TXT APRIL

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nancial institutions, and intermediaries referred to as third-party 

payment processors. 

As reported by the Department of Justice, fraudulent online merchants would typically unlawfully direct their payment processors 

to initiate debit transactions against consumer accounts and transmit the money back to them. 

In the most egregious cases, the payment processors had full 

knowledge that merchant clients were committing those fraudulent 

transactions and illegally siphoned money from customer accounts 

anyway as some banks simply looked the other way. 

In furtherance of Operation Chokepoint, the Department of Justice issued 60 administrative subpoenas from February 2013 

through August 2013 to entities that are believed to have evidence 

pertaining to consumer fraud schemes. 

One of the most recent settlements that arose out of this operation occurred in March of 2015 when the Department of Justice 

announced that it had reached a $4.9 million settlement with 

CommerceWest Bank of California. 

The civil complaint in the case alleged that the bank had ignored 

a series of red flags and facilitated consumer fraud by permitting 

Las Vegas payment processors to make millions of dollars in unauthorized withdrawals from consumer bank accounts on behalf of 

fraudulent merchants. 

The warning signs included an extremely high rate of rejected 

debit transactions that were returned by customers and their 

banks as well as inquiries that CommerceWest received from other 

financial institutions about suspicious illegal activity involving its 

payment processor. 

I understand that some Members of Congress expressed concern 

that the Department of Justice, in cooperation with the financial 

regulators such as the Federal Deposit Insurance Corporation, was 

unlawfully targeting certain categories of legitimately operating 

businesses. In response, the House Financial Services Committee, 

the House Judiciary Committee, and this committee all conducted 

extensive investigations of Operation Chokepoint, beginning back 

in the 113th Congress. 

In December of last year, the House also passed H.R. 2706, the 

Financial Institution Consumer Protection Act, by a bipartisan vote 

of 395 to 2. I voted in favor of this legislation, which seeks to address concerns stemming from the facts surrounding Operation 

Chokepoint by prohibiting the FDIC and other financial regulators 

from terminating their relationship with specific customers without 

a valid and written justification. 

As underscored in a letter to Congress sent to the Department 

of Justice in August of 2017, quote, ‘‘All of the Department’s bank 

investigations conducted as part of Operation Chokepoint are now 

over. The initiative is no longer in effect, and it will not be undertaken again,’’ close quote. 

It is my understanding that the purpose of today’s hearing is to 

examine whether Operation Chokepoint has nevertheless continued 

at the Federal Trade Commission despite its official termination. 

I greatly appreciate the willingness of our witnesses to testify on 

this topic today. However, as ranking member of the Subcommittee 

on National Security, it is my sincere hope that during the remainVerDate Nov 24 2008 15:58 Nov 02, 2018 Jkt 000000 PO 00000 Frm 00008 Fmt 6633 Sfmt 6633 H:\31425.TXT APRIL

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der of the 115th Congress we will work together on a bipartisan 

basis to conduct meaningful oversight on those issues that are most 

pressing to the safety and security of the American people, our 

dedicated military and civilian personnel deployed overseas and 

our returning veterans. 

It simply does not serve the interest of national security when 

the principal oversight committee in the House has held more hearings on shark finning, believe it or not, shark finning, and red 

snapper fishing in the Gulf of Mexico than it has on the ongoing 

civil war in Syria—can you believe that?—which is now entering its 

eighth year. 

We currently have more than 2,000 American troops deployed in 

a destabilized country that just witnessed a massive offensive undertaken by the forces of Syrian President Bashar al-Assad to recapture the southwestern city of Daraa. The operation caused catastrophic damage to the city and displaced more than 300,000 Syrians to the Syrian-Jordanian border in the Golan Heights frontier. 

And just yesterday, Islamic State militants launched a series of coordinated suicide bombings across Sweida in southern Syria, killing 

more than 200 people. 

So this committee has not held a single hearing on our national 

security policy toward North Korea either. This issue demands robust oversight following the statement of principles on nuclear nonproliferation signed by President Trump and North Korean President Kim Jong-un at their Singapore summit in June and the initiation of diplomatic talks led by Secretary Pompeo. 

We have held zero hearings on the state of our counterterrorism 

operations in Africa, believe it or not. Our American Green Berets, 

U.S. Navy SEALs, and other commandos are currently on the 

ground in Africa under so-called section 127e special ops authority. 

These units are undertaking perilous counterterrorism raids with 

African partner forces in Nigeria, Somalia, Libya, Tunisia, Kenya, 

and other nations, and their safety necessitates rigorous oversight 

by this Subcommittee on National Security. 

And, of course, our ongoing military and counterterrorism operation in Iraq and Afghanistan, where we still have an estimated 

6,000 and 15,000 American troops deployed, respectively, should 

command our regular attention. While Iraqi Prime Minister Haider 

al-Abadi declared final victory over the Islamic State last December, the terrorist group is reemerging across Kirkuk, Diyala, and 

Saladin provinces through a wave of insurgent attacks and kidnapping. 

The security environment in Afghanistan also continues to deteriorate. This week alone, a suicide bomber carried out an attack 

near Kabul Airport, killing 14 and wounding more than 50 individuals. Earlier this morning, a Taliban suicide bomber attacked a security convoy of the Afghan National Intelligence Agency. 

So, Mr. Chairman, I respectfully request that we begin to work 

on those issues and conduct oversight of those issues and other 

critical national security issues going forward. 

And, with that, I will yield the balance of my time. Thank you. 

Mr. DESANTIS. The gentleman yields back. 

I am pleased to introduce the witnesses. We have Mr. Andrew 

Smith, the Director of the Bureau of Consumer Protection at the 


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FTC; Jason Oxman, chief executive officer of the Electronic Transactions Association; and Ms. Lauren Saunders, associate director of 

the National Consumer Law Center. 

Welcome to you all. 

Pursuant to committee rules, all witnesses will be sworn in before they testify, so if you guys can please stand and raise your 

right hand. 

Do you solemnly swear or affirm the testimony you about to give 

is the truth, the whole truth, and nothing but the truth, so help 

you God? 

All right. Please be seated. 

All witnesses answered in the affirmative. 

In order to allow time for discussion, please limit your testimony 

to 5 minutes. Your entire written statement will be made part of 

the record. As a reminder, the clock in front of you shows the remaining time during your opening statement. The light will turn 

yellow when you have 30 seconds left and red when your time is 

up. Please also remember to press the button to turn your microphone on before speaking. 

And, with that, Mr. Smith, you are recognized. 

WITNESS STATEMENTS 

STATEMENT OF ANDREW SMITH 

Mr. SMITH. Thank you, Mr. Chairman and Ranking Member 

Lynch. My name is Andrew Smith, and I am the Director of the 

Bureau of Consumer Protection at the Federal Trade Commission. 

My written statement submitted for the record represents the 

views of the Commission, but this opening statement represents 

my views alone and not necessarily the views of the Commission 

or of any individual commissioner. 

The FTC is the Nation’s primary consumer protection agency. We 

are a bipartisan and independent agency governed by five commissioners, and we are dedicated to pursuing law enforcement actions 

to stop unlawful practices, including fraud against consumers. 

In the last 10 years alone, the FTC has brought more than 600 

cases in Federal court against companies and individuals who engage in unfair and deceptive conduct, including countless cases 

challenging fraudulent telemarketers and online scammers. The 

FTC has returned hundreds of millions of dollars to American consumers while obtaining strong injunctive relief to protect consumers going forward. 

When we bring a case against a fraudster, we routinely look for 

others who knowingly facilitated the fraud, whether it be a telemarketing boiler room, a robocalling platform, a lead generator, or 

a payment processor who actively participated in the fraudulent 

scheme. 

In only 15 of these hundreds of fraud cases that we have brought 

since 2008—in only 15 of these cases have we seen fit to bring an 

enforcement action against a culpable payment processor. And 

these 15 instances weren’t the product of the FTC staff acting on 

its own whim. The bipartisan Commission, both Republicans and 

Democrats, approved each of these matters by a unanimous and a 

public vote. 


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As these numbers demonstrate, the FTC doesn’t take action 

against payment processors lightly, and the 15 cases that we have 

brought were not even remotely close calls. In each case, we had 

specific evidence that these payment processors were knowingly facilitating the misconduct of their merchants by actively evading the 

antifraud protections of the national payment system. 

For example, we have sued payment processors who have opened 

multiple, sometimes hundreds, of dummy merchant accounts to 

hide fraudulent transactions, dilute consumer complaints and 

charge-backs, and subvert the critical systems established by banks 

and the card networks to monitor for illegal activity. 

We also have seen payment processors that deliberately lie to 

banks and the payment networks about the line of business of their 

merchants, as well as payment processors engaging with merchants in a high volume of sham payment transactions to paper 

over the real but fraudulent transactions that resulted in consumer 

charge-backs. 

And I should note that the frauds perpetrated by the merchants 

in these 15 cases were of the most egregious sort, causing hundreds 

of millions of dollars of injury to consumers. These constituted 

sham business opportunities, credit card interest rate reduction 

scams, fraudulent online discount clubs in which consumers never 

enrolled, and ‘‘grandparent scams’’ harming older Americans. 

The FTC doesn’t intend to impose on payment processors the responsibility to police their customers, but we do expect payment 

processors to follow the well-established rules of their industry, and 

they must abide by the law. So when we see evidence that a payment processor is knowingly facilitating a fraudulent scheme, we 

will not hesitate to act to protect consumers. 

As the law enforcement numbers show, this isn’t a game of 

‘‘gotcha’’ for us at the FTC. We sue payment processors sparingly 

and only where we have powerful evidence of their complicity in 

the underlying fraud. 

Thank you for the opportunity to testify. I welcome your questions. 

[Prepared statement of Mr. Smith follows:] 


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Prepared Statement of 

The Federal Trade Commission 

on 

The Federal Trade Commission's 

Enforcement of Operation Chokepoint-Related Businesses 

Before the 

Committee on Oversight and Government Reform 

Subcommittee on National Security and Subcommittee on Government Operations 

United States House of Representatives 

Washington, D.C. 

July 26,2018 
7 


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Chainnan DeSantis, Ranking Member Lynch, Chaitman Meadows, Ranking Member 

Connolly, and members of the Subcommittees, lam Andrew Smith, Director ofthe Bureau of 

Consumer Protection at the Federal Trade Commission ("Commission" or "FTC"). 1 I appreciate 

the opportunity to appear before you today to tell you about the Commission's law enforcement 

program to fight consumer fraud and the Commission's actions against payment processors that 

facilitate this fraud. 

I. Consumer Protection Mission 

As the nation's primary consumer protection agency, the FTC has a broad mandate to 

protect consumers from unfair, deceptive, or fraudulent practices in the marketplace. It does this 

by, among other things, pursuing law enforcement actions to stop unlawfhl practices, and 

educating consumers and businesses about their rights and responsibilities. The FTC targets its 

effmts to achieve maximum benefits for consumers, which includes working closely with 

federal, state, international, and private sector partners on joint initiatives. Among other issues, 

the FTC addresses fraud, combats illegal robocalls, protects privacy and data security, and helps 

ensure that advetiising claims to consumers are truthful and not misleading. 

Fighting fraud is a major focus of the FTC's law enforcement. The Commission's antifraud program stops some of the most egregious scams that prey on U.S. consumers-often, the 

most vulnerable Americans who can least afford to lose money. For example, the FTC brings 

actions against fraudsters who pose as imposter government agents (including the IRS and even 

the FTC), family members, or well-known companies in order to trick consumers into sending 

1 \Vhile the views expressed in this statement represent the views of the Commission, my oral presentation and 

responses to questions are my own and do not necessarily reflect the views of the Commission or any individual 

Commissioner. 
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them money. Fraudsters also target small businesses, sometimes cold-calling businesses to 

"collect" on invoices they do not owe. 

During the past year, the FTC joined federal, state, and international law enforcement 

partners in announcing "Operation Tech Trap," a nationwide and intcmational crackdown on tech 

support scams that trick consumers into believing their computers arc infected with viruses and 

mal ware, and then charge them hundreds of dollars for unnecessary repairs. 2 Just last month, the 

FTC announced "Operation Main Street," an initiative to stop small business scams. The FTC, 

jointly with the offices of eight state Attorneys General, announced 24 actions targeting fraud 

aimed at small businesses, as well as new education materials to help small businesses identify 

and avoid potential scams3 

Illegal robocalls also remain a significant consumer protection problem and consumers' 

top complaint to the FTC. In FY 2017, the FTC received more than 4.5 million robocall 

complaints4 The FTC is using every tool at its disposal to fight these illegal calls. 5 Because part 

2 FTC Press Release, FTC and Federal, State and International Partners Announce Mqjor Crackdmvn on Tech 

Support Scams (May 12, 20 17), https:i iwww. ftc.govlncws-eventsipress-releases/20 17 105/ftc-federal-stateinternational-partners-announce-major-crackdown. 

'FTC Press Release, FTC. BBB, and Law Enforcement Partners Announce Results of Operation Main Street: 

Stopping Small Business Scams Law Enforcement and Education Initiative (June 18, 2018), 

https: i i\vww. ftc. oov/ news-events/press- relea~es/20 18t06iftc-bbb-law-cnforcement -partners-announce-res.u ltsoperation-main. 

4 Total unwanted-call complaints for FY 2017, including both robocall complaints and complaints about live calls 

from consumers whose phone numbers are registered on the Do Not Call Registry, exceeded 7 million. See Do Not 

Call Registry Data Book 2017: Complaint Figures for FY 2017, https:/.vvww.ftc.gov/reports/national-do-not-callregistry-data-book-fiscal-vear-20 17. 

5 S'ee fTC Robocall Initiatives, https:i/w\vw.consumer.ftc.govfteatures/feature-0025-robocalls. Since establishing 

the Do Not Call Registry in 2003, the Commission has fought vigorously to protect consumers' privacy from 

unwanted calls. Indeed, since the Commission began enforcing the Do Not Call provisions of the Telemarketing 

Sales Rule ("TSR") in 2004, the Commission has brought 138 enforcement actions seeking civil penalties, 

restitution for victims of telemarketing scams, and disgorgement of ill-gotten gains against 454 corporations and 367 

individuals. As a result of the 125 cases resolved thus far, the Commission bas collected over $121 million in 

equitable monetary relief and civil penalties. See Enforcement oft he Do Not Call Registry, 

https://www.ftc.e:ov/news-events/media-resourcesido-not-call-registaienforcement. Recently, the FTC and its law 

enforcement partners achieved an historic win in a long-nmning fight against unwanted calls when a federal district 

court in Illinois issued an order imposing a $280 million penalty against Dish Network~the largest penalty ever 

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of the increase in robocalls is attributable to relatively recent technological developments, the 

FTC has taken steps to spur the marketplace to develop technological solutions. For instance, the 

FTC led four public challenges to incentivize innovators to help tackle the unlawful robocalls 

that plague consumers. 6 The FTC's challenges contributed to a shift in the development and 

availability of technological solutions in this area, particularly call-blocking and call-filtering 

products.7 ln addition, the FTC regularly works with its state, federal, and international partners 

to combat illegal robocalls, including co-hosting a Joint Policy Forum on Illegal Robocalls with 

the Federal Communications Commission, as well as a public expo featuring new teclmologies, 

devices, and applications to minimize or eliminate the number of illegal robocalls consumers 

receivc8 

II. The FTC's Legal Actions against Payment Processors 

Since 1996, the FTC has brought 25 actions against a variety of entities that help 

fraudulent merchants obtain payment processing for sales that violate the FTC Act. Each of these 

cases was approved by a unanimous vote of the bipartisan Commission. These lawsuits against 

issued in a Do Not Call case. US. v. Dish Network. L.L.C., No. 309-cv-03073-JES-CHE (C.D. Ill. Aug. 10, 2017), 

https: 1 'www. ftc. gov / cnf()rccmcnti cases-proceedings/0 52-3 167 I dish-network -llc-united-states-america-federal-trade. 

6 The first challenge, aJlllounced in2012, called upon the public to develop a consumer-facing solution to block 

illegal robocalls. One of the winners, "NomoRobo," was on the market within six months after the FTC selected it 

as a winner. NomoRobo, \vhich reports blocking over 600 million calls, is being offered directly to consumers by a 

number of telecommunications providers and is available as an app on iPhones. Sec FTC Press Release, FTC 

Announces Robocall Challenge Winners (Apr. 2, 2013), https://wv .... w.ftc.govinews-events/prcssreleases/20 l3/04/ftc-announccs-robocall-challenge-winners; see also FTC Press Release, FTC Awards $25,000 Top 

Cash Prize for Contest-Winning Mobile App That Blocks ll/egal Robocalls (Aug. 17, 2015), 

https:/:'www. ftc. uov/news-events/press-re leascs/20 l5i08iftc-awards-2 5000-top-cash-prize-contest -winning -mobileapp-blocks; FTC Press Release, FTC Announces Winners of '"Zapping Rachel"' Robocal/ Contest (Aug. 28, 2014), 

https:/ /www. ftc. gov/news-cvcnts,' press-re leascs.1

20 14/08 -'ftc-announces-winners-zappin g-rachel-robocall-contest. 

7 Consumers can access information about potential solutions available to them at 

https://\V\\'\V.consumer.ftc.gov/features/how-stop-un\vanted-calls. 

8 FTC Press Release, FTC and FCC to Host Joint Policy Forum on lllegal Robocalls (Mar. 22, 2018), 

W\I..'W. ftc. govinews-events/press-re leases/ ~0 18/0 3/ftc-fcc- host-joint -policy-tOnLm-illegal-robocalls; FTC Press 

Release, FTC and FCC Seek Exhibitors/or an Expo Featuring Technologies to Block Jllegal Rohocalls (Mar. 7, 

20 l 8 ), www. ftc. gov /news-events/press-releases; 20 1810 3/fk-fCc-seek -exhibitors-expo-featuring-tee hnologies-b lockillef!aL 

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payment processors generally arise out of fraudulent conduct the FTC has challenged in a prior 

or pending FTC action. On some occasions, we have observed the same processor providing 

services for multiple different entities that were defendants in FTC, 9 SEC, or state cases. 

Processors control access to the financial system and unscmpulous processors can allow 

the underlying fi·auds to inflict harm on thousands of consumers. Where appropriate, challenging 

processors is a critical component of the FTC's eff01is to fight fraud and illegal robocalls while 

halting hundreds of millions of dollars of consumer injury. Payment processors engaged in 

illegal conduct hann not only consumers; they hann legitimate industry players and undem1ine 

confidence in the financial system. This testimony will briefly summarize how the payments 

system works, explain the bases of the FTC's legal authority, and describe a few representative 

enforcement actions the Commission has filed against payment processors. 

To accept credit card payments from consumers, a merchant must establish an account 

with an acquiring bank ("the acquirer") because acquiring banks have direct access to the credit 

9 See, e.g., FTC v. Landmark Clearing, LLC, No. 11-cv-00826 (E.D. Tex. Dec. 29, 2011) (Stip. Penn. lnj.), 

https:/ iwv.rw. ftc.gov/enforcemenecases-procecdings/ll231l71landmark-clearing-inc-larrv-\vubbena-eric-loehr 

(allegedly processed payments for defendants in at least two FTC law enforcement actions); FTC,._ Edebitpay, LLC, 

No. 07-cv-4880 (C.D. Cal. Jan. 17, 2008) (Stip. PemL lnj.) (online marketers charged with deceptive sales of 

reloadable debit cards and unauthorized debiting of consumers' accounts); FTC v. Direct Benefits Group, No. 11-cv01186 (M.D. Fla. Aug. 12, 2013) (Final Judgment) (found liable for debiting consumers' bank accounts without 

consent and failing to adequately disclose that financial infotmation from payday loan applications would also be 

used to charge consumers for enrollment in unrelated products and services)); FTC, .. Automated Electronic 

Checking. No. 13-cv-0056 (D. Nev. Mar. 11, 2013) (Stip. Perm. Inj.), https:liwww.ftc.gov/enforcementicasesproceedingsil22-31 02/automated-electronic-chccking-et-al (allegedly processed payments for Edebitpay defendants 

just weeks after Edebitpay entered into a stipulated pennanent injunction with the FTC and processed for Elite 

Debit, one of the named defendants in FTC v. I Works. Inc., No. 1 0-cv-2203 (D. Nev. Aug. 26, 2016) (Stip. Penn. 

lnj.) (a massive internet fraud that caused more than $280 million in harm by luring consumers into trial 

memberships for bogus government-grant and money-making schemes)); see also FTC v. Your }Jon(!_}' Access, No. 

07-cv-5147 (E.D. Pa. Dec. 6, 2007), https://www.ftc.govienforcement/cases-proceedings/052-3122/vour-moneyaccess-llc-et-al-ftc-state-illinois-state-iowa; FTC v. First American Payment Proce.'i·sing, Inc., No. 04-cv-0074 (D. 

Ariz. Jan. 3. 2004), https:l iwww.ftc.gov'enforcement/cases-proceedings/032-3261/first-american-pavmentproeessing-inc-ct-al: FTC''· Electronic Financial Group, Inc., No. 03-cv-211 (W.D. Tex. July 7, 2003), 

https:; /www. ftc. go vi enforcement/ cases-proceedings/() 3 ~- 306 I /electronic-financial-group-inc-et-a 1. 

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card networks, such as MasterCard and VISA. IO Acquircrs commonly enter into contracts with 

third parties called Independent Sales Organizations ("ISOs") who solicit and sign up merchant 

accounts on behalf of the acquirers. ISOs, in tum, will often usc other smaller ISOs ("sub-ISOs") 

or independent sales agents to solicit and refer prospective clients. We use the tenn "payment 

processor" to refer collectively to ISOs, sub-ISOs, and independent sales agents. 

The card networks require the banks, which in turn require their payment processors, to 

comply with detailed rules to ensure that their system is not being used to process fraudulent 

transactions. These rules include requirements for payment processors to underwrite merchants 

before opening accounts in order to determine whether they arc legitimate businesses, and to 

monitor existing merchants to make sure that their processing activity is not indicative of fraud. 

For example, merchants with high rates of transactions returned by consumers ("chargebacks") 

or merchants with unusual spikes in their processing volume, may be subject to further review. 

The FTC has brought actions against a variety of payment processors that have assisted 

fraudulent merchants to help them perpetuate the fraud, avoid the scrutiny of acquiring banks 

and credit card networks, and cause significant hann to consumers. The FTC's law enforcement 

cases against payment processors advance two bases oflcgalliability. First, the FTC's 

"unfaimess authority" prevents payment processors from engaging in practices: (I) that cause or 

are likely to cause substantial injury to consumers, (2) that could not be reasonably avoided by 

consumers, and (3) for which the injury is not outweighed by countervailing benefits to 

consumers or competition. II Second, the FTC brings actions against payment processors under 

the Telemarketing Sales Rule ("TSR") when the underlying fraudulent merchant has engaged in 

10 The FTC does not have jurisdiction over banks. See Section 5(a)(2) of the FTC Act, 15 U.S.C. § 45(a)(2). 

11 See Section 15(n) of the FTC Act, 15 U.S.C. * 45(n); see also FTC Policy Staiement on Unfairness, 

https: : www. ftc.gov~ public-statements/ 19 80/ 12/ftc-po licv-statement -unfairnes~. 

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telemarketing. 12 In these cases, the FTC uses the TSR's prohibitions on "assisting and 

facilitating" and "credit card laundering." Payment processors violate the TSR's "assisting and 

facilitating" provision when they provide substantial assistance to an entity while knowing or 

consciously avoiding knowledge that the entity is engaged in specified violations of the Rule. 13 

Payment processors are liable for "credit card laundering" when they cause a transaction to be 

submitted to the credit card networks when the transaction is not the result of a transaction 

between the cardholder and the actual merchant. 14 One such example is where the payment 

processor or the merchant submits the transaction in the name of a shell corporation in order to 

mask the identity of the tme merchant. 

III. Illustrative FTC Enforcement Cases 

The Commission's law enforcement actions against payment processors represent a small 

fraction of the cases filed, 15 but they are an integral part of the agency's robust anti-fraud 

program. The FTC pursues payment processors that know or consciously avoid knowing that 

they are facilitating fraudulent telemarketing operations; engage in tactics to evade anti-fraud 

monitoring measures aimed at preventing and detecting fraudulent merchants; and launder credit 

card transactions through the merchant accounts of shell companies. 

For example, in FTC v. E.M. Svstems & Sen•ices, the Commission and the Office of the 

Attorney General for the State of Florida charged a nationwide debt relief telemarketing scam 

12 16 C.F.R. § 310 et. seq. 

13 16 C.F.R. § 310.3(b). 

14 16 C.F.R. § 310.3(c)(l)-(2). 

15 Since 2008, the Bureau of Consumer Protection has filed 639 Jaw enforcement cases in federal district court 

seeking consumer redress or civil penalties for violations of the FTC Act and rules enforced by the Commission. Of 

those cases, 15 (or 2.35%) involved allegations that a payment processor engaged in unlawful conduct. 

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with violations of the TSR. 16 In the course of discovery, staff uncovered evidence of a credit card 

laundering scheme orchestrated by E.M. Systems' payment processor, CardReady, and 

CardReady's executives. 17 Staff discovered that, after E.M. Systems was unable to open 

merchant accounts in its own name, CardReady created shell companies, recruited "straw men" 

to be the oftieers of the shell companies, and fabricated merchant accounts in the names of these 

shell companies that E.M. Systems could use to process its transactions. The evidence indicated 

that CardReady then assisted in spreading the scam's revenues and chargebacks across at least 26 

different merchant accounts, circumventing industry fraud controls and hiding the true identities 

of the scam's perpetrators, which allowed the scam to continue for at least two years. To settle 

the case, the CardReady defendants agreed to permanent injunctions, including aS 12,365,371 

judgment, representing the net sales volume (total sales volume less refunds and chargebacks) 

processed through the merchant accounts. The judgment was suspended based upon defendants' 

financial condition, provided they made payment of$1,800,000 for consumer redress. 18 

In FTC v. WV Universal Management cl/bla Treasure Your Success, the Commission 

charged the Treasure Your Success ("TYS") defendants with deceptively marketing credit card 

interest rate reduction services to consumers using illegal robocalls, outbound calls, and unlawful 

16 FTC v. E.M. Systems & Sen•s., LLC, No. 15-CV-1417 (M.D. Fla. June 16, 2015) (granting ex parte temporary 

restraining order, asset freeze, and appointment of receiver against defendants charged with falsely promising cashstrapped consumers that they would save consumers money and illegally charging up-front fees ranging up to 

$1 ,400). Relevant court filings arc available at https:/iw\vw.ftc.gov/enforccment·cascs-proceedings/152-3155/emsvstems-services-llc. 

17 FTC v. E.M. Systems & Servs., LLC, No. 15-CV-1417 (M.D. Fla. Dec. 21, 2015) (amended complaint charging 

payment processor defendants with violations of the TSR's prohibition against assisting and facilitating unla\vful 

telemarketing and credit card laundering). 

18 For a complete description of settlements reached with various defendants, see FTC Press Release, Debt Relief 

D(fendants Agree to Telemarketing and Financial Services Ban and Payment Processors Agree to Pa,vment 

Processing Ban to Settle FTC Action (Nov. 30, 20 16), https://www.ftc.gov/news-cvcnts/pressrcleascs/20 16; ll idcbt-relief-defendants-agrce-telemarketing-financial-services-ban. 

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up-t!-ont fees. 19 Here too, following discovery, the Commission amended the complaint to charge 

payment processors Newtek (a division of Universal Processing of Wisconsin, LLC ("UPS")), its 

then-president, Derek DePuydt, and sales agent, Hal Smith, with violating the TSR. The payment 

processors opened and approved TYS for a merchant account without perfonning customary 

reviews (such as obtaining telemarketing scripts, as required by their own procedures) and 

despite clear indicia of fraud (including inconsistent infonnation on the merchant application, 

poor credit scores, unusually high chargeback rates, and fraud notices from MasterCard). 20 The 

court entered summary judgment against UPS and Smith, finding them jointly and severally 

liable for substantially assisting the TYS defendants while knowing or consciously avoiding 

knowing that TYS was violating the TSR21 The court awarded the Commission $1,734,972, 

representing the full amount processed through the TYS merchant accounts (less refunds and 

chargebacks)2 " On appeal, UPS did not dispute liability, and instead challenged only the court's 

finding of joint and several liability for $1.7 million. 23 On appeal after remand, 24 the Eleventh 

Circuit affinned the monetary award, held that joint and several liability is appropriate, and 

19 FTC,._ WV Unh·ersal Management, LLC, No. !2-cv-1618 (M.D. Fla. Oct. 29. 2012) (court entered an ex parte 

TRO, asset freeze, and appointment of a receiver, and later converted the TRO into a preliminary injunction). 

"'FTC,._ WV Universallvfanagemen/, LLC, No. 12-cv-1618 (M.D. Fla. June 18, 2013) (Amended Complaint). The 

TYS defendants, DePuydt, and other named defendants entered into settlements with the Commission. For a 

complete description of settlements reached with various defendants, see FTC Press Release~ Court Finds 

Defendants in FTC's 1i·easure Yow· Success "Rachel Robocalls" Case Liahlefor $1.7 Million (May 20, 2015), 

https:/;\vww.ftc.gov/ne"\-Vs-events/press-releases/20 l5,-05r'court-finds-defendants-ftcs-treasure-your-success-rachcl. 

"FTC v. WV Universal Management, LLC. eta/., No. 12-cv-1618. 2014 WL 6863506 (M.D. Fla. Nov. 18, 2014) 

(entry of summary judgment on liability against payment processor defendants for violations of the TSR). 

22 FTC v. WV Universa/lvfanagement, LLC, et al., No. 12-cv-1618, 2015 WL 916349 (M.D. Fla. Feb. 11, 2015) 

(finding of joint and several liability for $!.7 million). 

FTC\'. HES Merchant Sen·ices Company, Inc., 652 Fed. Appx. 837 (! Hh Cir. June 14, 2016) (vacating in part, 

affirming in part, and remanding for clarification the district courl's finding ofjoint and several liability for $1.7 

million). 

24 FTC v. HES Merchant Se1Ts. Co .. Inc. et. a/, No. 12-cv-1618, 2016 WL 10880223 (M.D. Fla. Oct. 26, 2016) 

(decision on remand, clarifying court's detcm1ination of joint and several liability). 

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expressed confidence that the "requirement of a culpable mind ... [means] that joint and several 

liability will not result in collateral damage to innocent third parties."25 

Although much of the FTC's work has focused on payment processors servicing credit 

cards as the payment instrument, the FTC also brings action against other payment entities that 

help dishonest merchants obtain payments from consumers. In 2017, the FTC entered into a 

settlement with Westem Union, alleging that massive fraud payments flowed through its money 

transfer system for many years, including payments in which complicit Westem Union agents 

processed the fraud payments in return for a cut of the proceeds. 26 Even in the face of evidence 

that many of its agents were involved in the frauds, Western Union allegedly failed to properly 

address the problem, looked the other way, and even rewarded some complicit agents for their 

high volume of business. As alleged, many of these frauds hanned older adults. For example, 

from 2004 to 2015 Westem Union received more than 41,000 complaints totaling nearly $75 

million in losses for "emergency scams and grandparent scams.'.27 Concomitant with the FTC's 

action, Westcm Union entered into a Deferred Prosecution A6'feement with the Department of 

Justice ("DOJ") in which the company admitted to criminally aiding and abetling wire fraud and 

violations of the Bank Secrecy Act, 28 and agreed to settle related civil charges brought by the 

25 FTC v. fVV Universal Management. LLC. 877 F.3d 1234, 1242 (11th Cir. Dec. 13, 20 17), cert. denied by 

Universal Processing Services of Wisconsin, LLC v. FTC,--- S.Ct. ----, 2018 WL 1367543 (2018). 

26 FTC v. The Western Union Co., 17-cv-00110 (M.D. Pa. Jan 19, 2017). https:i/www.ftc.Qovienforccmentfcasesproccedings/l22-3208/westem-union-companv. 

Grandparent scams involve a scammer calling other adults and pretending to be a grandchild who has a desperate 

need for immediate financial help, such as to pay medical bills or bail. 

'" United States v. The Western Union Co., No. 17-cr-0011 (M.D. Pa. Jan. 19, 2017). 

httos:/i\vww.justice.goviopru'pf/\vestem-union-admits-anti-moncy-laundermg-and-consumer-fraud-violationsforfeits-586-million. 

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Financial Crimes Enforcement Network29 The separate FTC and DOJ settlements resulted in 

$586 million in redress for consumer victims. 30 

The overwhelming majority of payment processors abide by the law and provide 

substantial benefits to the marketplace. But, as the cases above highlight, when unscrupulous 

payment processors violate the law, they also cause significant economic hannlo consumers and 

legitimate businesses. In such circumstances, Commission action, including law enforcement 

action, ensures consumers are protected and the nation's payment system continues to operate 

effectively and efficiently. When a payment processor helps a fraudulent merchant take money 

from consumers-either by actively helping the merchant hide its fraudulent conduct from the 

acquiring banks and payment networks or by turning a blind eye to the merchant's fraud-the 

Commission will pursue appropriate law enforcement, to protect consumers and competition. 

29 In the Matter of Western Union Financial SerFs., Inc., No. 2017-01 (Jan. 19, 2017) (assessment of civil money 

penalty), https://www. tinccn.gov 1sites/default/filcs/enforcement action/ 2017-0 l19i\VUFSI%20Assessment~{,20of'%20Civi1%20Money%~20Penalty-%20 l-19°/o20-%2020 17 .pdf. 

30 The Commission~s cases frequently provide a foundation for actions brought by its la\v enforcement partners. See, 

e.g., United States v. First Bank ofDelaware, Civ. No. 12-6500 (E.D. Pa. Nov. 19, 2012) (settlement of case 

alleging defendant bank originated more than 2.6 million remotely created check transactions totaling approximately 

$123 million on behalf of payment processors, including payment processing defendants in FTC v. Landmark 

Clearing, No. 11-cv-00826 (E.D. Tex. Dec. 15, 20 II) (Stip. Penn. lnj.) and FTC v. Automated Electronic Checking, 

No. 13-cv-00056 (D. Nev. Feb. 5, 2013) (Stip. Pem1. lnj.) that were actively facilitating fraudulent internet and 

telemarketing merchants sued by the FTC). 

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Andrew Smith 

Director, Bureau of Consumer Protection 

BIOGRAPHY 

Andrew Smith is Director of the FTC's Bureau of Consumer Protection. He came to the FTC from the law 

firm of Covington & Burling, where he co-chaired the financial services practice group. Earlier in his 

career, Mr. Smith was a staff attorney at the FTC, where he led the agency's efforts to make several rules 

under the Fair Credit Reporting Act Mr. Smith has written extensively on consumer protection and 

financial services issues, served as the Chair of the American Bar Association's Consumer Financial 

Services Committee, and is a Fellow of the American College of Consumer Financial Services Lawyers 

and the American Bar Foundation. He earned a bachelor's degree in history from Williams College, and a 

J.D. from William & Mary Law School, where he served as Professional Articles Editor of the William & 

Mary Law Review. 
18 

Mr. DESANTIS. I thank the gentleman. 

Mr. Oxman, you are up for 5 minutes. 

STATEMENT OF JASON OXMAN 

Mr. OXMAN. Thank you, Mr. Chairman. 

I am here representing ETA, the Electronic Transactions Association. We are the trade association for the payments industry, 

representing over 500 companies that offer electronic transaction 

processing products and services to merchants. 

ETA supports the enforcement of existing laws and regulations 

by Federal agencies, including the Federal Trade Commission, to 

stop fraud. But what we are deeply troubled about is the FTC’s use 

of Operation Chokepoint-style tactics to hold payment processors 

responsible for fraud committed by bad merchants. 

The Department of Justice ended Operation Chokepoint in 2017 

following congressional scrutiny and criticism. That scrutiny demonstrated that holding payment processors liable for merchant 

fraud has serious adverse consequences, including processors abandoning lawful categories of merchants disfavored by the government as well as higher prices for consumers. 

Now, again, the payments industry is dedicated to fighting fraud 

and ensuring that consumers have access to safe, convenient, and 

affordable payment services. Consumers choose electronic payments, indeed, because they have zero liability for fraud. 

ETA has worked hard as an industry representative to develop 

guidelines on merchant and ISO underwriting and risk monitoring. 

These guidelines provide more than 100 pages of best practices to 

detect and halt fraudulent actors. ETA has shared these draft 

guidelines with the Federal Trade Commission, which has encouraged us to strengthen anti-fraud efforts. 

The FTC’s targeting of the payments industry actually predates 

Operation Chokepoint and, indeed, exceeded the Department of 

Justice’s efforts in scope but somehow has managed to fly under 

the radar until today. 

Many of our member companies receive what are called civil investigative demands, CIDs, from the FTC asking for dozens of categories of information about dozens of different merchants. Many 

of our payment processor members receive multiple CIDs a year, 

often part of a broader fishing expedition around a particular industry. 

Now, even though processors do their part to fight fraud through 

robust underwriting and monitoring, payment processors simply 

are not law enforcement. The fact is that sometimes processors 

miss red flags or make unintentional mistakes. But it is a big leap 

to suggest that a processor was intentionally aiding and abetting 

a merchant in fraud and should be left to cover the total cost of 

consumer injury caused by the merchant. And that is exactly what 

the Federal Trade Commission does. 

Specifically, the FTC seeks to hold payment processors and even 

individual owners and employees financially responsible for the 

total volume of sales transactions processed for a bad merchant, 

even where the processor made just a penny on the dollar for such 

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Emboldened by a recent but misguided decision in the 11th Circuit entitled ‘‘Universal Processing,’’ the FTC’s aggressive use of 

joint and several liability threatens to put targeted processors out 

of business or even to bankrupt individuals based on the conduct 

of a single bad merchant out of a processor’s entire portfolio. 

It is important to understand that the FTC uses the same aggressive tactics in all cases, even where a processor cooperates with 

the FTC to assist law enforcement activities. The FTC’s insistence 

on joint and several liability for payment processors makes it financially impossible for a processor to try to defend itself in court. A 

small processor that earns a few thousand dollars processing for a 

merchant can’t take the risk of litigating a case where the FTC 

seeks to hold the processor liable for millions of dollars. 

When the FTC sends a CID to a processor regarding a merchant, 

it tells the processor to maintain confidentiality and to continue 

processing for the merchant. But then the FTC inevitably turns on 

the processor and seeks to hold it financially liable for all of the 

volume processed and all of the merchant’s sales, including those 

after the CID was issued. 

Similarly, where a court appoints a receiver to manage a merchant’s assets, the FTC pressures the receiver to take possession 

of a processor’s reserves for the merchant, even though those reserve accounts belong to the processor, not the merchant. The processor is then forced to cover consumer charge-backs out of its own 

funds. 

The FTC refuses to discuss settlement of a case against a processor until the processor or its individual owner provides financial 

information. 

The FTC also engages in aggressive prosecution of individual officers and employees for assisting and facilitating the conduct of a 

merchant employee, even where they had no control over that conduct. 

And the FTC regularly uses its CID process to request information from third parties, when that information is regularly available to the FTC itself. 

The results of this enforcement approach is that payment processors will have no choice but to increase prices for services to merchants and, even worse, restrict access to payment systems to certain categories of merchants to avoid exposure for liability. 

There is, however, a better path forward. Congress should encourage the FTC to review and reconsider its overly aggressive use 

of CIDs and questionable discovery and enforcement tactics. 

Former FTC Chairman Ohlhausen in 2017 announced just such an 

effort. That effort should continue. 

Congress should include a provision in the FTC’s budget authority limiting the FTC’s ability to seek joint and several liability 

against payment processors except where the processor is actually 

an active part of a common enterprise with merchants. 

Congress should direct the FTC to halt enforcement actions 

against processors until they engage in a public discussion of Operation Chokepoint. 

And Congress should support the FTC to encourage additional 

industry self-regulation. 


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Thank you for the opportunity to appear here before you today, 

and I look forward to your questions. 

[Prepared statement of Mr. Oxman follows:] 


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eta <cmeo"' 

TRANSACTIONS 

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Statement for the Record of 

2028282635 

electran.org 

The Electronic Transactions Association 

Before the 

Committee on Oversight and Government Reform 

Subcommittee on National Security and Subcommittee on 

Government Operations 

Hearing on 

"The Federal Trade Commission's Enforcement of 

Operation Chokepoint-Related Businesses" 

July 26, 2018 
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ASSOCIATION 

Chairman DeSantis, Ranking Member Lynch, Chainnan Meadows, Ranking Member 

Connolly, and members of the Subcommittees on National Security and Government Operations, 

the Electronic Transactions Association ("ETA") appreciates the opportunity to submit this 

statement for the hearing on "The Federal Trade Commission's Enforcement of Operation 

Chokepoint-Related Businesses." 

ETA is the leading trade association for the payments industry, representing over 500 

companies that offer electronic transaction processing products and services. ETA's members 

include financial institutions, payment processors, and all other parts of the payments ecosystem 

(collectively "payment processors"), as well as non-bank online lenders that make commercial 

loans, primarily to small businesses. 

This hearing comes at a critical time for the payments industry. Although ETA supports 

the enforcement of existing laws and regulations by federal agencies to stop fraud by unscrupulous 

merchants, we are deeply troubled by the Federal Trade Commission's (''FTC's'') increasingly 

aggressive use of Operation Choke Point-type tactics to hold payment processors and even 

individua1 owners and employees of processors financially responsible for fraud committed by 

merchants. The FTC has been targeting payment processors for over 20 years, and while the FTC's 

actions have received less scrutiny than those of other agencies, it has escalated the frequency of 

its enforcement and severity of its tactics in recent years. 

The continued use of the discredited Operation Choke Point enforcement theory is 

concerning given that the Department of Justice ("DOT') ended its own Operation Choke Point in 

2017 fOllowing years of Congressional scrutiny and criticism. That scrutiny demonstrated that 

imposing liability on payment processors for merchant fraud and misconduct has serious adverse 

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eta ELECTRONIC 

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consequences, including processors fearfully abandoning lawful industries disfavored by the FTC, 

and higher prices for consumers. 

To be sure, ETA recognizes that there have been a few, isolated instances when a payment 

processor actively participated in merchant fraud, and we support the FTC in protecting consumers 

in those rare cases, But while the FTC justifies its targeting of the payments industry based on 

these handful of cases, the Commission's testimony does not address the dozens of nonpublic 

investigations and overly burdensome and costly investigative requests it launches each year 

against payment processors that did not engage in egregious conduct Responding to these 

investigations can cost processors millions in legal fees and lost productivity. Also left 

unaddressed is the fact that the FTC has been ratcheting up the aggressiveness of its discovery and 

investigation tactics in recent years to place additional pressure on payment processors. The in 

terrorem effect of the FTC's efforts has been for legitimate processors to abandon providing 

services to certain types of lawful merchants that the FTC staff disfavors. This forces merchants 

to use overseas processors taking jobs overseas and often leaving consumers with fewer 

protections. 

For the remainder of this statement, I would like to highlight the efforts of ETA members 

and the payments industry to combat fraud. discuss the flawed premise underlying the FTC's 

approach to enforcement, along with examples of enforcement overreach and abuse, and explain 

why a collaborative approach between government and industry- as opposed to an enforcement 

approach- is the best way to protect consumer interests while encouraging innovation and growth 

in the critically-important payments industry, 

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1620 L Street NW, Su1te 1020 

Wasnmgton, DC 20036 

2028282635 

e!ectranorg 

The Payments Industry's Active Role in Fighting Fraud 

The payments industry is dedicated to using innovation to fight fraud and ensure that 

consumers have access to safe, convenient, and affordable payment services. Our members, for 

example, arc service provides that work on behalf of sponsor banks to set up merchants with 

payment processing accounts so that consumers can purchase goods and services in person, online, 

or through a mobile phone. Indeed, consumers choose electronic payments over cash and checks 

because they have zero liability for fraudulent charges. making electronic payments the safest and 

most reliable way to pay. In most cases, payment processors bear financial responsibility for fraud 

involving payment systems under federal law and payment network rules. When it comes to credit 

cards, for example, a consumer can submit a chargeback request to its card issuing bank disputing 

a particular card transaction. This process serves to protect consumers and ensures that the 

acquiring bank or merchant bears ultimate responsibility for fraudulent transactions. Thus, our 

industry has a strong interest in making sure fraudulent actors do not gain access to payment 

systems. 

In addition, the payments industry has a long-history of fighting fraud through the 

implementation of robust underwriting and monitoring policies and procedures. With the benefit 

of decade._.::; of expertise, ETA members have developed effective due diligence programs to prevent 

fraudulent actors from accessing payment systems, monitor the usc of those systems, and then 

terminate access for network participants that engage in fraud. In 2014, ETA published its 

"Guidelines on Merchant and ISO Undcnvriting and Risk Monitoring" ("ETA Guidelines''), which 

was updated earlier this year. This document provides more than 100 pages of best practices to 

detect and halt fraudulent actors. Similarly, in 2016. ETA published "Payment Facilitator 

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Guidelines." which provide underwriting and diligence guidance tailored for payment facilitators, 

including infommtion on registration, funding, anti-fraud tools, security, and related issues. These 

two documents were developed by ETA's member companies and other industry stakeholders 

through months of collaborative discussions and sharing of techniques to prevent fraud. 

Throughout this process, ETA shared preliminary draft guidelines with, and sought comments 

from, the FTC, which had encouraged the industry to strengthen its anti-fraud efforts. 

The ETA Guidelines, in particular, provide a practical approach to combating fraud on 

payment systems. ETA members already have a strong commitment to, and financial interest in, 

keeping fraudulent actors off payment systems, and the targeted nature of the ETA Guidelines 

gives members enhanced tools to improve the effectiveness of their practices and help ensure that 

law-abiding merchants do not unfairly lose access to payment systems due to overly broad anti~ 

fraud protections. ETA continues to actively encourage its members and companies across the 

payments ecosystem to make use of the Guidelines, cspcciaBy smaller companies that may not 

have the resources to develop such advanced practices on their own. 

These efforts have helped to keep the rate of fraud on payment systems at remarkably low 

levels. In 2016, there was $31.878 trilllon in credit, debit, and prepaid card transactions across the 

world, but only $22.80 billion in fraud losses (which were covered by the card acquirers and 

mcrchants). 1 This equates to a fraud rate of .07% of all global card transactions. 

1 The Nilson Report (Oct 2017). 

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eta Tll:ANSACTIONS "''"o"" ASSOCIATION 

The FTC's Increasingly Aggressive Targeting of Payment Processors 

The FTC has been bringing enforcement actions against payment processors since 1996, 

and has continued to bring numerous cases almost every year since. In this regard, the FTC's 

targeting of the industry actually predates DOl's Operation Choke Point and exceeds the DOl's 

efforts in scope, but has somehow managed to fly under the radar. While the DOJ abandoned 

Operation Choke Point in 2017 in response to Congressional scrutiny, the FTC has forged ahead, 

taking on more cases and, as explained below, engaging in even more aggressive enforcement 

tactics to bully the payments industry. 

According to the FTC it has brought 25 enforcement actions against various types of 

payments companies since 1996. Although these cases involved allegations of egregious conduct, 

the FTC does not address the many non-public investigations that it launches against the pa)'1ncnts 

industry each year. These investigations fall into several categories, including investigations of 

merchants, en lire industries, and processors themselves. In the case ofinvcstigations of merchants, 

our members frequently receive ClDs from the FTC asking for dozens of categories of information 

about dozens of different merchants. It takes significant staff time, and often outside counsel legal 

assistance, to collect, organize, and produce these materials to the FTC. And many of our 

processors receive multiple CIDs a year, often part of a broader FTC fishing expedition around a 

particular industry, such as businesses providing education to consumers on how to make money. 

In addition, the FTC ignores that payment processors often serve thousands or even 

millions of customers, the vast majority of which arc the type oflaw-abiding, small businesses that 

serve as the backbone of our economy. Even though processors do their part to fight fraud through 

robust underwriting and monitoring, they are simply not equipped (nor could they be) with the 

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same resources or expertise as law enforcement to root out all potential fraud. And, studies have 

sho\\11 there is "no basis for believing that a processor's ability to monitor return and chargeback 

transactions, and to do financial underwriting on the basis of such data, translates into the ability 

to make meaningful inferences about law enforcement matters" or to discern legitimate businesses 

from frauds. 2 The fact is that sometimes processors miss red flags or make mistakes, but when 

they do, it's a big leap to suggest that the processor was intentionally aiding and abetting a 

merchant in fraud and should be left to cover the total amount of consumer injury caused by the 

merchant or even put out of business. 

Perhaps most concerning is that the FTC continues to hold payment processors, and even 

individual ovmers and employees responsible for the total volume of sales transactions processed 

for a merchant~ even where the processor made just pennies on the dollar for such transactions. 

Emboldened by the recent, but misguided, Eleventh Circuit decision in Universal Processing v. 

FTC, the FTC's aggressive use of joint and several liability represents a tremendous shift of the 

regulatory burden for merchant fraud to payment processors and individual owners and employees, 

in some cases. 

This tactic essentially conscripts payment processors to police and insure the behavior of 

their merchant clients, a function that payment processors are iB~positioned to pcrfonn. It also 

threatens to put targeted processors out ofbusiness or to bankrupt individuals based on the conduct 

of a single bad merchant out of the processor's entire portfOlio. And, as discussed in greater detail 

below, the FTC has made it impossible for the industry to protect against this new financial risk 

2 Jeffrey A. Eisenach, Economic Effects of Imposing Third Party Liability on Payment Processors, NERA 

Economic Consult!ng (July 2014), at 7, available at WNW.electran.org/wp~contentl uploads/Exhibit-ANERA-Study.pdf 

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because the FTC aggressively seizes any reserves that a processors withholds to cover chargebacks 

and consumer refunds. 

As a result, processors are left with an unfair responsibility to "guarantee" their merchant's 

conduct, but without any means to protect themselves financially. In this regard, one is reminded 

of the fTC's unfairness doctrine, which aims to protect consumers from harms they could not 

themselves have reasonably have avoided. The same is happening here, except that the FTC has 

imposed a regulatory burden on payment processors that they carmot reasonably address. There is 

no insurance available to processors to protect against this risk, and they cannot reasonably be 

expected to '·police" their portfolios to the same standards as a regulator. Yet even a single misstep 

by a processor in failing to catch a clever fraudster can result in an FTC enforcement action that 

forces the processor to shut down operations. 

Examples of FTC Enforcement Overreach and Process Abuses 

The DOJ announced the end of Operation Choke Point in 2017, but the FTC continues to 

charge ahead relatively unnoticed. In fact, the FTC appears to have gone several steps beyond 

Operation Choke Point in targeting the industry through the use of aggressive some might say 

abusive- investigation, discovery, and enforcement tactics. This is a deeply troubling development 

for several reasons, including that the FTC's aggressive posture threatens the payments industry's 

long history of cooperation and success in fighting fraud. 

The following examples arc just a few ofthc scorched earth, winner take all tactics that the 

FTC has and continues to press against the payments industry. It is important for Congress to 

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understand that the FTC uses the same aggressive tactics in all cases, even where industry 

cooperates to assist in the FTC's law enforcement activities. 

1. The FTC's insistence on joint and several liability for payment processors makes it 

almost financially impossible for a processor to try and defend itself in court. In tenns of simple 

economics, a small processor that cams a few thousand dollars processing for a merchant cannot 

take the risk of litigating against the FTC when the FTC seeks to hold the processor liable for 

millions of dollars. Likewise, in cases where the FTC looks to hold a processor's individual owner 

or employees financially responsible for the entire volume of a merchant's sales transactions, the 

individual has no realistic choice but to settle, which usually involves the individual having to tum 

over all of his or her assets (and family possessions) to the FTC after invasive financial discovery. 

2. When the FTC sends a CID to a processor or bank regarding a merchant, the CID 

will advise the processor or bank to maintain contldcntiality and continue processing for the 

merchant that is the target of the investigation. This threes banks and processors to continue 

processing transactions for merchants that arc under active investigation, which increases the 

processor's liability vvhen the FTC inevitably turns on the processor and seeks to hold it financia11y 

liable for the merchant's sales. And often, as noted, the FTC sends CIDs to processors that blanket 

an entire industry of merchants. 

Similarly, in cases in which a court appoints a receiver to manage a merchant's assets, the 

FTC fi·eezes reserve accounts and then pressures the receiver to take possession of a processor's 

reserves for the merchant. This practice is questionable given that the receiver is supposed to stand 

in the place of a merchant, which has no contractual right to demand access to the reserves until 

all chargebacks and other liabilities are paid out by the processor and bank. Again, the result of 

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having to relinquish the reserves is that a processor is forced to cover chargebacks out of its own 

funds, which creates financial instability for the processor. 

3. The FTC refuses to discuss settlement of a case against a processor until the 

processor or its individual owner provides financial disclosures to the FTC, which the FTC then 

uses as a financial floor for settlement discussions, irrespective of the economics of the underlying 

case. This is nothing more than a shake down designed to ensure that the FTC extracts every dollar 

possible from a processor or individual owner for the wrongful conduct of a merchant. This risks 

putting processors out of business or bankrupting individual owners, who are often forced to 

liquidate or hand over to the FTC almost every asset they own. 

4. The FTC engages in aggressive prosecution of individual officers and employees 

at processors for ''assisting and facilitating·· the conduct of a merchant customer, even when the 

employee or officer had little or no control over the alleged unlawful conduct In certain instances, 

the FTC has banned individuals from making a living in their chosen profession simply to send a 

message to the industry as a whole. 

5. Almost all CIDs issued to merchants in connection with FTC investigations seck 

infOrmation on the merchant's payment processors. Once this information is obtained, the FTC 

routinely sends CIDs to all of the merchant's processors and banks for information on the merchant 

and its processing activities. In many cases, it appears that the FTC may also be sending CIDs to 

processors without having opened up a formal investigation of a merchant ETA understands the 

need for the FTC to obtain infonnation in connection with investigations, but the FTC should not 

use the payments industry as an lnfom1ation resource except where there is a legitimate, identified 

need for specific infonnation. Responding to CIDs is an expensive and time consuming process, 

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and the FTC must take these costs into account before sending out CIDs with dozens of requests 

for information about dozens of merchants to processors. 

6. The FTC regularly uses its CID process to request infonnation from third parties 

when that information is readily available from the target ofthe investigation. \Ve can think of no 

justification for this tactic other than an attempt by the FTC to intimidate banks, processors, and 

other key service providers into terminating their relationships with the target of the investigation. 

For example, in a confidential ongoing investigation, the FTC sent CIDs to every financial 

institution that was connected in any way with the target or its principals, even where those 

institutions had nothing to do with the conduct being investigated, or the information requested 

was not necessary to determine whether any law had been violated. These C!Ds have unnecessarily 

threatened the target's banking and processing relationships. In doing so, the fTC staff appears to 

be attempting to choke off the ability of an entire legal industry it disfavors to access banking and 

payments services. 

Moreover, the C!Ds to the banks and processors continued atler the target learned of the 

investigation, agreed to cooperate, and had received its own CID. Importantly, the FTC did not 

request that the target produce the type of information that the FTC had requested from the third 

parties, even though the target could have easily provided the infbm1ation. \Vhilc it may be 

appropriate for the FTC to engage in such conduct when it does not want a company to know it is 

being investigated, in the instant case the motive seems to be to damage the target's business 

relationships before the FTC has even brought an enforcement action. 

7. The FTC is increasingly reaching out to the card networks through CIDs and even 

infonnal means to obtain infonnation on processors and their merchants, which has resulted in 

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card network scrutiny of processors - even where the FTC does not bring an investigation. Our 

payment processor members have noticed a frequent conclation between when they receive an 

FTC CID regarding a merchant in a particular industry, and a subsequent notice from a card 

network related to an audit or request for information on the processor's merchants in the same 

industry. There is a significant financial cost to processors in responding to these inquiries. 

8. In a number of recent cases the FTC has pushed beyond its territorial jurisdiction 

by targeted foreign banks, processors, and merchants, even though the FTC lacks extraterritorial 

jurisdiction over such activities under the Sate \Veb Act amendments to the FTC Act. As part of 

these efforts, the FTC has grabbed foreign processors' reserves that are meant to protect them and 

their foreign consumers that initiate chargebacks. 

* * 

One of the challenges for payment processors, as noted above, is that the FTC's insistence 

on joint and several liability makes it near impossible for payment processors to defend themselves 

in court. Where the FTC cites to a handful of C!:,rregious cases in its testimony to support its 

approach, there are relatively few ·'public" examples of overreach because of the FTC's ability to 

force companies to settle investigations under the threat ofjoint and several liability. 

But it is worth noting that when payment processors have fought in court, most recently, 

for example, against the Consumer Financial Protection Bureau ("CFPB"), they have had success 

in discrediting Choke Point-type enforcement actions, In June 20 !6, the CFPB attempted a broadscale lawsuit against payment processor Intercept Corporation and two of its executives for 

providing payments services to payday lenders, auto-title lenders, debt collectors, sales iinancing, 

and other clients, In March 2017, a federal judge in North Dakota dismissed the CFPB's lawsuit 

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because the CFPB did not include specific factual allegations about how Intercept violated industry 

standards or what Intercept had done wrong to cause injury to consumers. Later that year, a federal 

Judge in Northern District of Georgia dismissed a CFPB case that had been filed against Global 

Payments and several other payments companies. In that case, the CFPB alleged that the payment 

processors had failed to conduct sufficient due diligence before providing certain merchants with 

accounts and ignored red flags once the merchants had been boarded. The judge dismissed the 

CFPB' s case after the CFPB failed to comply with reasonable demands by defendants and orders 

by the court to identify with more specificity the alleged wrongful conduct by the processors. 

Why Targeting Payment Processors Harms Industry and Consumers 

The FTC has taken Operation Choke Point to a new level through its focus on holding 

processors jointly and severally liable and its aggressive discovery and enforcement tactics. The 

FTC states in its testimony that it aims to achieve maximum benefits for consumers, but we are 

not aware of any study conducted by the FTC analyzing the collateral damage brought by its 

aggressive enforcement efforts. In fact, like Operation Choke Point, the FTC's misguided 

enforcement approach will result in sit,rnificant negative repercussions for processors, merchants, 

and consumers. The cumulative effect of the threat of joint and several liability, the costs of 

responding to multiple CIDs, and having reserves taken away creates risks and costs for processors 

that threaten their existence if they decide to do business with industries the FTC disfavors, such 

as businesses providing education to consumers on how to make money. This is Operation Choke 

Point at its worst 

First, fi·om a public policy perspective, the federal government should not engage in 

enforcement eflOrts intended to restrict or otherwise discourage the access of law~abiding 

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merchants to the payment systems. Enforcement actions against payment systems are an 

inappropriate tool for regulators to use to limit the ability of consumers to access legal industries 

that happen to be disfavored by a government agency. 

Second. the FTC's enforcement approach, including its focus on joint and several liability, 

places liability on processors for fraud committed by merchants ~ and not just for the refund of 

pending charge backs, but in many cases for the entire proceeds of a merchant's allegedly illegal 

activity and for the entire period that merchant used the processing services, simply because the 

payment processor is solvent while the wrongdoer is not. Payment processors, however, have no 

way to protect against this increased liability exposure. Under the FTC's theory, even a single bad 

merchant out of a portfolio of thousands or hundreds of thousands of merchants could bankmpt a 

payment processor or individual 0\vncr in the case of privately held companies. And even if 

processors were to increase reserves to protect against increased liability, the FTC has 

demonstrated that it will seize every last dollar held by a processor, effectively leaving processors 

with no way to insure against financial risk. 

In response to this increased risk, banks, payment processors, and other financial 

institutions have had no choice but to increase the prices of payment services for merchants and/or 

restrict access to payment systems to manage their expanded liability exposure. Invariably, the 

brunt of these burdens fall on small, new, and innovative businesses because they pose the highest 

potential risks. The only alternative that many of these merchants have is to usc processors located 

overseas. This can result in higher costs tOr the merchant, less oversight of transactions, and hann 

to the economy generally by pushing jobs to foreit,'fl countries. 

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Third, consumers will pay for the higher costs arising from increased liability, and are also 

banned by the inconvenience of not being able to use their preferred methods of payment (credit, 

debit, and prepaid cards) with some merchants due to more restrictive access to payment systems. 

This increased liability will also harm consumers through less innovation in electronic payments. 

Finally, the FTC's aggressive enforcement posture focuses payment processor resources 

on responding to costly and time-consuming investigations and litigation by multiple regulators 

instead of fighting fraud. Although the payments industry has a remarkable record of success in 

preventing the usc of payments systems for illegal activities, the FTC's continued targeting of the 

payments industry threatens this success to the detriment of merchants and consumers. And, as 

noted, there is already a robust chargcback system in place to protect credit cardholders from fraud, 

meaning that the FTC's additional efforts are unnecessary in the first instance. 

A Better Path Forward 

While ETA members share a commitment to protecting consumers from harm, ETA is 

conccmcd that the FTC's enforcement actions are pressuring its members to shun entire lines of 

business out of a fear that the members could be called upon to financially insure the total volume 

of a merchant's sales transactions. A more sensible policy recognizes the strong interest the 

payments industry has in preventing fraud and other illegal activities, and allows industry to focus 

on enhancing its undeiWiiting and risk management tools to safeguard the payments system from 

unscrupulous merchants. 

As discussed throughout this statement, ETA members arc willing to do their part to fight 

fraud. From a policy perspective, however. there is much that can be done to encourage 

collaboration between industry and law enforcement: 

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1. Congress should encourage the FTC to review and reconsider its overly aggressive 

use of CIDs and questionable discovery and enforcement tactics. ETA applauds the efforts of 

former Chairman Ohlhaussen, who in 2017 announced efforts to reform the FTC's CID process, 

including steps to minimize the burden of responding to CIDs. The FTC should revisit this issue 

in light of the concerns raised by the payment industry, 

2. Congress should include a provision in the FTC's budget authority limiting the 

FTC's ability to seek joint and several liability against payment processors except where the 

processor is alleged to be a part of a common enterprise with the merchants. 

3, Congress should direct the FTC to halt all enforcement actions against payment 

processors until the FTC engages in a public work shop investigating the impact of Operation 

Choke Point-type enforcement actions on small businesses, consumers, and the economy as a 

whole, 

4, Congress should encourage the FTC to support additional industry self-regulation, 

such as ETA's development of the ETA Guidelines and Payment Facilitator Guidelines. These 

documents provide a basis for payment processors to work cooperatiYely with federal regulators 

and Jaw enforcement toward the common goal of stopping fraud. ETA strongly believes that ::;uch 

a collaborative approach is good public policy- it encourages companies to cooperate with law 

enforcement by fostering an environment of open communications between government agencies 

and payment processors. 

In the meantime, the payments industry will continue to fight fraud to the best of its ability 

and cooperate with Iaw enfOrcement to the greatest extent possible. 

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Conclusion 

Today, it is recognized that DOJ's Operation Choke Point was premised on a flawed 

assumption that targeting lawful payment processors for the actions of fraudulent merchants would 

yield only benefits to consumers. In practice, this assumption had serious adverse consequences 

for the payments industry, merchants, and consumers. Fortunately, Conb,rress commenced a series 

of investigations into Operation Choke Point and the negative impact it was having on the 

payments industry and the economy at large. On several occasions ETA testified before Congress 

on these and other challenges presented by Operation Choke Point, including on how the initiative 

was banning the payments industry, businesses, and ultimately consumers. 

Our members arc now raising similar concerns with respect to the FTC, which has largely 

flown under the radar in carrying out its own aggressive targeting of the payments industry for 

over a decade. \Vc now ask that Congress take a closer look at the FTC's enforcement practices 

and the aggressive tactics outlined in this testimony. The FTC's actions, just like Operation Choke 

Point, are harming the payments industry, merchants, and consumers. \Ve believe that a 

cooperative approach to combating fraud is far more likely to strike the right balance than the 

FTC's blunt enforcement actions. Accordingly, ETA encourages Congress, federal regulators, and 

industry to work cooperatively toward our common goal of preventing tfaud and expanding 

financial inclusion. 

On behalf of ETA, thank you for the opportunity to provide this testimony before the 

Subcommittee. 

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38 

Mr. MEADOWS. [Presiding.] Thank you, Mr. Oxman. 

Ms. Saunders, you are recognized for 5 minutes. 

STATEMENT OF LAUREN SAUNDERS 

Ms. SAUNDERS. Thank you. 

Chairman DeSantis, Ranking Member Lynch, Chairman Meadows, Ranking Member Connolly, and members of the subcommittees, thank you for inviting me to testify today. I am Lauren Saunders, associate director of the National Consumer Law Center, 

which works for economic justice for low-income and other vulnerable consumers across the United States. 

Fraud takes billions of dollars from people every year, often from 

seniors and other vulnerable communities. Fraud also imposes 

costs on businesses and many other people in the country. 

Fraudsters often do not act alone. Many fraudsters rely on payment processors to take money out of consumers’ accounts. Responsible payment processors can stop fraud or make it more difficult. 

Unfortunately, a very few outliers sometimes willingly enable 

fraud. 

The FTC’s cases against payment processors are part of its traditional bipartisan law enforcement work, unanimously supported by 

both Republican and Democratic chairs and commissioners. These 

cases go back over two decades and are independent at the Department of Justice’s former Operation Chokepoint. 

For example, in 1996, under Chairman Steiger, who was appointed by the first President Bush, the FTC sued Windward Marketing, which used remotely created checks to help a magazine 

subscription scam bilk consumers of over $12 million. 

In 2007, under Chairman Majoras, appointed by the second 

President Bush, the FTC sued Your Money Access, which processed 

more than $200 million on behalf of numerous fraudulent telemarketers and internet-based merchants, accepting merchants with 

facially false sales scripts and ignoring extremely high return 

rates. 

More recently, last year the FTC sued the payment processor 

iStream Financial Services for processing discount club transactions despite numerous fraud indicators, including recommendations from the iStream’s sister bank, independent compliance auditors, and iStream’s own compliance and risk officers that the processing relationship be terminated due to the high return rates and 

likelihood of fraud. 

The FTC’s work has been approved by courts, as in the recent 

case against WV Universal Management, the credit card processor 

for a fraudulent credit card interest rate reduction scheme. The 

processor’s president had personally approved merchant accounts 

despite several glaring red flags, including charge-backs so high 

that they came to the attention of Mastercard, which noted the potential fraud risk. 

The 11th Circuit Court of Appeals affirmed a position of joint 

and several liability on the defendants but only after observing 

that it was undisputed that Universal had violated the telemarketing sales rule by providing substantial assistance to the 

scammers despite knowing or consciously avoiding knowing about 

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The testimony from the Electronic Transaction Association today 

criticizes the FTC’s use of joint and several liability but does not 

attempt to defend the conduct of the processor in the Universal 

case. 

And, indeed, as Mr. Smith pointed out, I haven’t heard anybody 

criticizing the cases they have brought. These are not close cases. 

There is extensive evidence of complicity of the payment processors 

in the very few cases that they bring. 

The FTC targets bad apples and provides incentives for the industry to police itself, spurring efforts like those of the Electronic 

Transaction Association to help its members prevent fraud and 

make enforcement unnecessary in most cases. 

Vague and unsubstantiated claims have been made that the FTC 

may be targeting entire classes of legal businesses, but the evidence is that the FTC targets fraudulent activity, plain and simple. 

While I disagree with the characterizations of DOJ’s Operation 

Chokepoint, there is a key difference between that operation and 

the FTC, and that is the FTC starts with the scammer and then, 

like any good investigator, follows the money. 

Most of FTC’s 600 fraud cases do not have a companion case 

against a payment processor. But if the FTC finds evidence that a 

payment processor was a willing participant and enabler, it brings 

an enforcement action, which is especially important because consumers cannot do this kind of investigation on their own, and they 

rely on government to prevent this type of fraud. 

The FTC’s fraud work is especially important today, with growing problems of identity theft, data breaches, and online scams. Everyone, from individual consumers to legitimate businesses benefits, when fraudsters and their collaborators are held accountable. 

Thank you for inviting me to testify today. I would be happy to 

answer your questions. 

[Prepared statement of Ms. Saunders follows:] 


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Testimony of Lauren K. Saunders 

Associate Director, National Consumer Law Center 

On 

"The Federal Trade Commission's Enforcement of Operation Chokepoint-Related Businesses" 

Before the 

Subcommittee on Govemment Operations and 

Subcommittee on National Security 

Of the 

Committee on Oversight and Govemment Reform 

U.S. House of Representatives 

July 25,2018 

Chairmen Meadows and Desantis, Ranking Members Connolly and Lynch, and Members of the 

subcommittees: 

Thank you for inviting me to testify today. I am the Associate Director of the National 

Consumer Law Center. NCLC works for economic justice for low-income and other 

disadvantaged people in the U.S. through policy analysis and advocacy, publications, litigation, 

and training. One of our publications is Consumer Banking and Payments Law, for which I am 

the lead author. 

I am here today to testify in support of the Federal Trade Commission's work to stop 

payment fraud, including its enforcement actions against payment processors that knowingly or 

recklessly facilitate fraud. 

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Fraud takes billions of dollars from Americans each year. Grandparent scams, IRS 

imposters, fake credit cards, lottery scams, unwanted membership clubs, work-at-home schemes, 

and many other variations prey on people across the country. Often, the victims are elderly, 

immigrants with limited English proficiency, or other vulnerable populations. 

Fraudsters often need help scamming people. Many fraudsters rely on third party 

payment processors to take money from consumers' accounts. Responsible payment processors 

can stop fraud or make it more difficult, but a very few outliers sometimes willingly enable 

fraud. 

It is only the rare payment processor that that knowingly participates in fraudulent 

schemes or willnllly ignores blatant signs of illegal activity, and these are the payment 

processors that the FTC pursues. No one is defending the egregious conduct of any of the 

payment processors that the FTC has sued. 

The FTC's cases against payment processors are part of its traditional law enforcement 

work. That work has been bipartisan and unanimously supported by both Republican and 

Democratic commissioners. The FTC's work in this area goes back over two decades and is 

independent of the Department of Justice's Operation Choke Point, which started much later and 

has now ended. 

The FTC targets fraudulent activity, not any category oflegal business. It is most often 

through the investigation of a fraudulent scheme that the FTC finds evidence that a payment 

processor was a willing participant and enabler. 

Everyone, from individual consumers to legitimate businesses, benefits when fraudsters 

and their collaborators are held accountable. Anyone who cares about protecting Americans 

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from fraud should support the FTC's work to against payment processors that consciously enable 

scams. 

Fraudsters Use Banks and Payment Processors to Take Money ji·om Consumers 

Many scams, frauds and illegal activity could not occur without access to consumers' 

bank or credit card accounts. Fraudstcrs who obtain consumers' account numbers can take 

payments from consumers in several ways. Sometimes they con people into leaving their homes 

to send money by wire transfer or through gift cards or prepaid card reload packs. But 

sometimes, using infonnation obtained on the phone or online, they submit a preauthorized 

electronic debit through the ACH system; create a remotely created check drawn on the 

consumer's account and deposit it 1

; or process a fraudulent charge against the consumer's credit 

or debit card through the relevant card network (Visa, MasterCard, American Express or 

Discover). 2 

Many scams and other forms of unlawful activity rely on the ability to access the 

payment system to get the consumer's money. The FBI estimates that mass-marketing fraud 

schemes cause tens ofbillions of dollars oflosscs each year for millions of individuals and 

businesses 3 Estimates of the costs offraud targeted at seniors alone start at $3 billion and go 

much higher than that4 

1 Amendments to the Telemarketing Sales Rule now ban use of RCCs in telemarketing transactions. 2 For example, the FTC recently brought a case against a third party payment processor that contributed to a massive 

$26 million internet scam by helping its fraudster clients evade the credit card networks' fraud monitoring programs. 

FTC. Press Release, "FTC Charges Payment Processors Involved in I Works Scheme" (Aug. 1, 2014), 

https :/, www. ftc .gov !news-events/press-relea.ses/20 14 I08/ ftc-charges-pavment-processors-involved-i-works-scheme. 3 Federal Bureau oflnvestigation, Intemational Mass-Marketing Fraud Working Group, "Mass-Marketing Fraud: A 

Threat Assessment" (June 20 10)) available at http://'j>i'Wvv·.fbi.gov:stats-services/publications!mass-markcting-fraudthreat-assessmentima~s-marketing-threat. 

4 See Tobie Stanger, Consumer Reports. "Financial Edler Abuse Costs $3 Billion a Year. Or Is It $36 Billion?" 

(Sept. 29, 20 15 ), https:/ /www. consumerreports.org/cro/consumer -protection/financial-elder-abuse-costs--3-billion---

--or-is-it--30-billion-;Thc MetLife Study of Elder Financial Abuse (June 2011), available at 

l:!.t.Ulli: /iwww. metlife.com/assets.'cao-'mmi,'puhlications/studiest 2011 .:mmi-e!der-financial-abuse.pdf. 

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How Payment Processors Cau Prevent or Enable Payment Fraud 

The tcnn "payment processor" can refer both to the entity that packages payments for 

processing by a financial institution and also the independent sales organizations and 

independent sales agents that help merchants arrange processing by financial institutions. 

The payment processor's obligations arise through several sources. Payment system 

rules, such as NACHA rules, 5 may impose direct obligations on payment processors. Processors 

may have obligations that arise through their relationships with financial institutions, which are 

bound by Bank Secrecy Act, know-your-customer, anti-money laundering and fraud prevention 

rules. Payment processors are also covered by general laws, such as laws against unfair or 

deceptive conduct and the FTC's Telemarketing Sales Rule, which prohibits persons from 

consciously providing substantial assistance to support a violation of the rule. 

Some payment processors perform due diligence functions for financial institutions or 

vouch for their merchants. Pay1nent processors that handle transactions must also monitor the 

accounts for sit,'lls of fraud or unlawful activity. 

One of the clearest signs of a problem is a high retum rate- the percentage of payments 

that arc rejected or challenged, i.e., because the payment was unauthorized, was subject to a stop 

pa)~nent order, bounced because of insufficient funds, or was rejected because the account does 

not exist or was closed. 

Not every rejected pa~nent is a sign of fraud. But if return rates are high, processors 

have a duty to determine why, and to investigate if the account is being used for improper 

purposes. If large numbers of consumers are challenging a customer's payments as 

unauthorized, clearly the payment processor's customer-the merchant whose transactions the 

5 Effective january 1, 2015, NACHA rules impose direct obligations on payment processors to the extent that 

the payment processor is performing the financial institution's obligations. 2018 NACHA Operating Rules§ 

2.15.3. 

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payment processor is handling--is doing something wrong. If an unusually high number are 

rejected because the account has been closed, that may reveal that consumers are closing their 

accounts in response to fraud or that the fraudster is buying lists of account numbers that contain 

older accounts long since closed. Even high rates of payments rejected for insufficient funds, 

especially when combined with returns for other reasons, may reveal that consumers are not 

expecting the payments and have been defrauded. Depending on the type and level of the return 

rate, a high return rate can be a per se rule violation or it may trigger a duty to investigate. 

In the ACH system, the average rate oftransaetions returned as unauthorized is 0.03%6 

NACHA rules prohibit unauthorized return rates higher than 0.5% (over sixteen times higher 

than the average rate)7 The average total rate at which ACH debits are returned for any reason 

is about 1.42%. Under NACHA rules, and a total return rate above 15% (over ten times higher 

than the average rate) requires scrutiny, though not the same absolute obligation to reduce the 

rate. 8 Average return rates in other payment systems are in the same ballpark, and, similarly, 

abnorn1ally high return rates arc strong evidence of fraud. 9 

Payment processors can hide high return rates and help scammcrs avoid scrutiny by 

spreading questionable transactions among different merchant accounts. "Nested" payment 

processors- a processor that processes payments for other payment processors- can launder 

signs of unlawful activity, and nesting is itself a warning signal. For this reason, regulators have 

"NAC!IA, ACH Network Risk and Enforcement Topics, Topic 1- Reducing the Unauthorized Return Rate 

Threshold (effective date September l8, 2015), https:i/yvw\v.nacha.ornirules. ach-network-risk-and-entOrccrnent~ 

topics. 

'fd 

8 NACHA, ACH Network Risk and Enforcement Topics, Topic 2- Establishing Inquiry Process For Administrative 

and Overall Return Rate Levels (effective date September 18, 2015). https>•www.nacha.orQ1ntles/ach-network-riskand-enforcement-toptcs. 

9 See. e.g, FTC, Press Release, "FTC Sues Payment Processor for Assisting Credit Card Debt Relief Scam" (June 5, 

20 13), https://ww\v. ftc. gov/ news-events,press-re leases, 20 13i061fk-sues-pavment -processor -assisting -credit -carddebt-reliet~scam''utm source~govdeliverv (noting that the average credit card chargeback rate is well below one 

percent). 

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advised financial institutions to be especially careful of processor customers whose clients 

include other payment processors. 10 

Other signs of fraud are obvious. The consumer, the consumer's bank, state attorneys 

general, or other government officials may complain to or tip off the payment processor. 

Payment processors are not expected to verify the legality of every payment they process, 

and they are not always aware that they are being used to facilitate illegal activity. But those that 

take their duties seriously can be an important bulwark depriving criminals of access to the 

payment system. 

The FTC Typically Pursues Scammers First, Then Follows the ~Money to Payment 

Processor Conspirators 

The prosecution offraudsters is an important part of the FTC's work. The FTC has 

brought numerous cases against scammcrs over the years. In recent years, these cases have 

included: 

• FTC v. Hornbeam: Defendants deceived consumers into thinking they were 

applying for payday loans but instead registered them in online discount clubs 

without the consumers' consent. The defendants debited more than $40 million 

from consumers' bank accounts by using electronic remotely created checks 

(RCCs).ll 

10 !d. 

u FTC, Press Release, FTC Says Operators of Bogus Discount Clubs Took Tens of Millions of Dollars From 

Consumers' Bank Accounts without Their Consent (Aug. 16, 2017), https:/ jwww.ftc.gov /news-events/pressrei eases /2 017 I 08/ ftc-says-operators-bogus-discount-clubs-took-tens-m iII ions. 

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• FTC v. Money Now Funding. LLC. Money Now Funding cheated consumers out 

of $7 million through false promises of business or work-at-home opportunities. 12 

• FTCv. The Tax Club, Inc. eta/. The Tax Club's telemarketing operation took 

more than $200 million from consumers trying to start home-based businesses. 

The defendants falsely claiming affiliation with companies that the consumers did 

business with, made false claims that their products and services were essential, 

and failed to provide the promised serviccs. 13 

• FTC v. Innovative Wealth Builders, Inc., eta/. The defendants operated a credit 

card interest rate reduction scam using telemarkcters to pitch phony debt relief 

services. The defendants later consented to over $9.9 million in equitable 

monetary relief. 14 

Each of these scams relied on a payment processor to take the money from consumers. 

Most of the FTC's fraud cases do not result in a companion case against a payment 

processor. But in its investigations of fraudulent conduct, the FTC at times uncovers evidence 

that the payment processor knew or consciously disregarded evidence that it was processing 

tl·audulent transactions. 

The FTC has brought cases against payment processors under both Republican and 

Democratic Chairpersons, with the unanimous consent of the FTC's commissioners of both 

u FTC, Press Release, FTC Stops Elusive Business Opportunity Scheme (Aug. 20, 2015), 

h ttps: / jwww .ftc.gov In ews-events I press-rc I cases /2 015 I 08 I ftc-stops-elusive-business-opportunity-scheme. 13 FTC, Press Release, FTC and New York and Florida Attorneys General Charge The Tax Club's Telemarketing 

Scheme with Bilking Consumers Who Were Trying to Launch Home-Based Businesses (January 17, 2013), 

h ttps: j jwww.ftc.gov j news-events /press-releases /2 013 j 0 1 j ftc- new-york-florida-attorneys-general-chargetax-clubs. 

14 FTC, Press Release, FTC Shuts Down Fraudulent Debt Relief Operation (Sept. 11, 20 13), 

h ttps: I /www.ftc.gov I news-events I press-releases /2 013 I 09 I ftc-shuts-down-fraud ul ent-d e bt-rei iefoperation. 

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parties. These cases have been brought for more than 20 years, and have no relationship to the 

U.S. Department of Justice's Operation Choke Point, which began in 2013 and ended in 2017. 

In 1996, under Chairman Steiger, who was appointed by the first President Bush, the 

FTC sued Windward Marketing, which used victims' banking information obtained over the 

phone and illegitimately created remotely created checks that debit accounts for over S 12 million 

in magazine subscriptions that consumers did not realize they were purchasing. 15 

In 2002, under Chainnan Muris, who was appointed by President George W. Bush, the 

FTC obtained a stipulated order against Hvperion, LLC, which helped telemarketers launder 

credit card receipts through offshore companies and books for telemarketing scams including 

lottery tickets, British bonds, and consumer benefits packages. 16 

In 2007, under Chairman Majoras, also appointed by the second President Bush, the FTC 

sued Your ,',;Janey Access, which processed more than $200 million on behalf of numerous 

fraudulent tclemarketcrs and Internet-based merchants, accepting merchants with facially false 

sales scripts and ignOiing extremely high return rates. 

As in these older cases, in more recent years, the FTC has brought enforcement cases 

against payment processors only when there is convincing evidence of the processor's 

culpability. Examples include: 

• The payment processor Global Marketing Group aided Canada-based advance-fee 

credit card schemes to debit bank accounts on behalf of clients whose sales scripts 

plainly indicated that they intended to violate the FTC's Telemarketing Sales Rule 

and industry mles that prohibit processing electronic banking transactions for 

15 FTC v. Windward Marketing, Ltd., 1:96-CV-615-FMH (N.D. Ga. 1996). 16 FTC, Pres Release, Consumers Duped by Telemarketers Claiming To Provide Identity Theft Protection 

Defendants Allegedly Pitched Worthless Credit Card "Protection"; Laundered Credit Card Purchases for 

Products Sold by Others (Oct. 1, 2002), https:l lwww.ftc.govlnews-eventslpressrel cases 12 0 0 2 I 10 I consumers-duped-tclemarketers -claiming-provide-identity-theft. 

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outbound telemarketers. The FTC alleged that the payment processor drafted, 

edited, reviewed, and approved sales scripts and processed transactions without 

first obtaining adequate infonnation about the clients and their business 

practices. 17 

• The defendants in the Your Money Access case processed more than $200 million 

in debits and attempted debits, with more than S69 million of the debits returned 

or rejected by consumers or their banks for various reasons, indicating the lack of 

consumer authorization. Joined by the Attorney Generals of Illinois, Iowa, 

Nevada, North Carolina, North Dakota, Ohio, and Vennont, the FTC charged that 

the defendants, an intenelated group of payment processors, accepted clients 

whose applications contained signs of deceptive activity, including sales scripts 

with statements that were facially false or highly likely to be false. 18 

• Capital Payments (now known as Blue fin) enabled The Tax Club telemarketing 

scheme to process consumers' credit card payments. Capital Payments ignored 

red flags offl'aud including high rates of chargebacks, claims of fraudulent or 

unauthorized charges, and alerts fl'orn financial institutions. 19 

Electronic Payment Svstem a/America and related defendants provided Money 

Now Funding access to credit card networks by submitting and approving 

17 FTC, Press Release, FTC Stops Payment Processor Who Aided Cross-Border Telemarketing Fraud (Dec. 20, 

2006), https:j jwww.ftc.gov jnews-eventsjpress-releases/2006/12/ftc-stops-payment-processor-who-aidedcross-border-telemarketing. 

lfl FTC, Press Release, FTC And Seven States Sue Payment Processor that Allegedly Took Millions from 

Consumers Bank Accounts on Behalf of Fraudulent Telemarketers and Internet-based Merchants 

(Dec. 11, 2007], https:/ jwww.ftc.gov jnews-eventsjpress-relcases/2007 /12/ftc-and-sevcn-states-suepayment-processor-allegedly-took. 

19 FTC, Press Release, Payment Processor Involved in The Tax Club Telemarketing Scheme Settles FTC 

Charges (Feb. 11, 2016), https:j jwww.ftc.govjnews-eventsjpress-releasesj2016/02jpayment-processorinvolved-tax-club-telemarketing-scheme-settles. 

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fraudulent applications in the names of more than 40 fictitious companies, 

evading the anti-fraud monitoring efforts of the credit card networks20 

• iStream Financial Services repeatedly disregarded the high return rates generated 

by the Hornbeam discount club and disregarded other fraud indicators, including 

recommendations from iStream's sister bank, independent compliance auditors, 

and iStrcam 'sown Compliance and Risk Officers to terminate the processing 

relationship due to the high return rates and the likelihood of fraud. 21 

One case that has gained attention recently is FTC v. WV Universal Management, LLC, 

877 F.3d 1234 (11th Cir. 2017). The FTC sued a credit card payment processor, Universal, its 

sales agent and others for assisting a telemarketing company in a fraudulent credit card interest 

reduction scheme. The FTC's evidence was so compelling that a court granted summary 

judgment to the FTC, finding that the payment processor knew or consciously avoiding knowing 

of the fraudulent activities. The payment processor did not appeal the merits. The 

uncontroverted facts are that the payment processor's president had personally reviewed and 

approved the merchant accounts despite several glaring red flags, including serious credit 

delinquencies. Chargebacks later became so high that MasterCard took notice of the potential 

fraud risk but, undeterred, the president approved a second merchant account for the 

telemarketer. The Eleventh Circuit Court of Appeals, noting that "it has been established as a 

matter of!aw that Universal violated the [Telemarketing Sales Rule]," affinnedjoint and several 

2° FTC, Press Release, FTC Files Charges Against Independent Sales Organization and Sales Agents (Aug. 7, 

201 7), https: / /""'Ww.ftc.gov /news-events/press-releases/20 17/08 /ftc-files-charges-against -independentsales-organization-sales. 

21 FTC v. Hornbeam Special Situations, LLC, No. Case 1:17 -cv-03094-TCB (N.D. Ga. Aug. 15, 2017). 

h ttps: / jwww.ftc.gov /system/files/documents/ cases/ savings_makes_money _com plain t_fi le_sta m ped_8-16-

17.pdf. 

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liability against the defendants, including the payment processor, following well established 

standards in similar tort and securities cases. 22 

These payment processor cases, though few and far between, can be a more efficient use 

of government resources than scammcr-by-scammer prosecutions. Scammers shut down by the 

FTC often pop up again somewhere else. A payment processor that is aiding one scammer often 

has developed a business of processing payments for multiple fraudsters, so a single enforcement 

action can help identify and shut stop multiple scam. 

Beyond the impact of the individual cases, the FTC's enforcement cases serve as an 

important reminder to all payment processors about the importance of taking their due diligence 

duties seriously. 

Indeed, the most important impact of the FTC's enforcement actions may be to spur 

industry efforts to police itself and avoid the need for government enforcement. Trade 

associations like the Electronic Transaction Association play an important role in these selfpolicing efforts by helping their members comply with the law and to be vigilant against fraud. 

The vast majority of payment processors have no desire to help scammers. These 

institutions are important partners with law enforcement when they deny criminals access to the 

payment system. It is much better to deny fraudsters access to consumers' accounts in the first 

place than to prosecute them after the fact. 

Payment Fraud Hurts Everyone 

Wrongdoers who access the payment system intlict harm on everyone. ln addition to the 

direct victims of fraud: 

• Retailers and online merchants lose business if consumers are afraid to shop online; 

22 FTC v. WV Universal Management, LLC, 877 F.3d 1234 (Dec. 13, 2017). 

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• New and improved payment systems will not gain consumers' confidence if 

consumers fear fraud; 

• Payments fraud causes the general public to spend millions of dollars on identity 

protection products and lose faith in the security of the payment system; 

• Consumers' banks bear the customer friction and the expense of dealing with an 

unauthorized charge at an average cost of$100 and up to $509.90 for a smaller 

bank, according to NACI!A; 

• The fraudsters' banks and payment processors may suffer regulatory or enforcement 

actions, lost customers, private lawsuits, and adverse publicity; and 

• American security is put at risk when banks and processors that lack know-yourcustomer controls are used for money laundering. 

Fighting payment fraud should not be controversiaL Everyone benefits from efforts to 

stop illegal activity that relies on the payment system. Work against payment fraud is especially 

important today with growing problems of identity theft, data breaches, and online scams. 

I urge you to support the FTC's work against payment processors that willfully enable 

fraudulent activity. Everyone must do their part to protect the integrity of the payment system 

and to prevent fraudulent activity that hanns millions of Americans and American businesses. 

Thank you for inviting me to testify today. I would be happy to answer any questions. 

12 
52 

Mr. MEADOWS. Thank you all for your testimony. 

And the chair recognizes the gentleman from the 11th District of 

Virginia, my good friend, Mr. Connolly, for his opening statement. 

Mr. CONNOLLY. I thank the chair, and I thank our witnesses for 

coming here today. I am a little late today because we had a vote, 

and we are going to have some more votes very shortly. 

Two days ago, during a full committee hearing on election security in this very room, I made a motion for the Oversight and Government Reform Committee to subpoena the Office of the Director 

of National Intelligence to inform the committee and the public 

about the extent of the Russian threat to our country. That subpoena unfortunately was tabled by a vote of 17 to 15. 

This morning, two Oversight and Government Reform subcommittees are teaming up to discuss the urgent problem of Operation Chokepoint, a program that no longer exists and a program 

that the full committee conducted extensive oversight of 4 years 

and two chairmen ago. 

What is, one wonders, the urgent need for this hearing now, 

when the administration is under legal compulsion to reunite children that have been separated from their parents as part of a zero 

tolerance policy at the border; when the deaths of perhaps as many 

as 4,600 U.S. citizens in Puerto Rico have been attributed to Hurricane Maria and the Federal Government’s inadequate response to 

it; when the Secretary of Commerce apparently misled this committee on why a divisive question on citizenship was hastily added 

to the 2020 census; when a member of this committee, full committee, forthrightly wrote an op-ed in The New York Times saying 

that the President of the United States has been manipulated by 

Vladimir Putin? 

These are all worthy of committee examination and open hearings. So what could possibly be the reason for this hearing today? 

Congress conducted lengthy oversight of Operation Chokepoint in 

2013 and 2014. Congressional Republicans then alleged that DOJ 

and the FDIC intentionally conspired—intentionally—to mislead 

Congress about their partnership and inappropriately targeted a 

list of high-risk merchants and industries to conduct Operation 

Chokepoint. 

The Committees on Financial Services and Judiciary also held 

oversight hearings. The Oversight and Government Reform Committee conducted an investigation under then-Chairman Darrell 

Issa that produced not one but two staff reports. 

Republicans got what they wanted. The two principal agencies 

involved in Chokepoint, the DOJ and the FDIC, have both ended 

their work on the operation. The FDIC ended its involvement in 

Operation Chokepoint in January of 2015. 

The DOJ issued a letter to the chairman of the House Judiciary 

Committee in August that stated, and I quote, ‘‘All of the Department’s bank investigations conducted as part of Operation 

Chokepoint are now over. The initiative is no longer in effect, and 

it will not be undertaken again,’’ unquote. Pretty definitive. 

Yet here we are questioning the Federal Trade Commission, an 

agency that played no role in Operation Chokepoint. And here we 

are because the FTC has a broad mandate to protect consumers 

from unfair, deceptive, or fraudulent practices in the marketplace. 


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Some have concluded that this must mean a continuation of Operation Chokepoint. That, it seems to me, is not the case. As part 

of its work to protect consumers, the FTC works to stop payment 

fraud, including taking action against payment processors that 

knowingly or recklessly facilitate fraud. That is their job. The 

FTC’s cases against payment processors goes back two decades and 

is not related to Operation Chokepoint, which started much later 

and, as we have heard, no longer exists. 

Enforcement action against payment processors who knowingly 

participate in fraudulent schemes or willfully ignore signs of illegal 

activity has historically received bipartisan support. These schemes 

often prey on vulnerable populations, such as seniors, immigrants 

with limit English language, or families of Active Duty military. 

According to a survey by True Link, a company that provides account monitoring software for elders and families, projected that financial elder abuse costs families more than $36 billion a year, of 

which $17 billion is linked to exploitation and scams such as workfrom-home schemes, misleading financial advice, or reverse mortgages. 

I can’t speak for my colleagues, but I have to say: We ought to 

be having hearings, it seems to me, about some of the pressing 

issues of the day. And we could start with the list of subpoena requests the Democrats have submitted to the full committee and the 

full chairman. I think there are now 62 of them outstanding. That 

would be some work worthy of our enterprise. 

I thank my friend from North Carolina for letting me have this 

time for my opening statement and will try my best to participate 

before we call votes. 

Mr. MEADOWS. I thank the gentleman from Virginia. And, as he 

well knows, on some of those items I am willing to advocate in a 

bipartisan fashion to deal with some of those. 

I would like to ask unanimous consent that my opening statement be made part of the record without doing it. Any objection? 

Mr. CONNOLLY. No objection. 

Mr. MEADOWS. All right. So ordered. 

Mr. MEADOWS. Also, I would like to recognize Charlie Kirk, who 

is here. 

Thank you for being here. You have done some work on this particular issue, and we appreciate your work. 

And so, with that, I will recognize the gentleman from Florida, 

Chairman DeSantis. 

Mr. DESANTIS. Thank you, Mr. Chairman. 

Thanks to the witnesses. I appreciate the work that you guys do. 

Mr. Smith, fraud is just a cottage industry, particularly in my 

State of Florida. You know, you have seniors. And I think we are 

by far, I think, the number-one State for complaints. So I think it 

is very, very important. And the issues you site where people are 

knowingly involved in fraud, I think that is a no-brainer. 

How would you respond to Mr. Oxman? Because there seems to 

be a discrepancy here about how innocent processors are treated by 

the FTC. Because I would say, if the people who are committing 

fraud, that’s where you would want to do the government action. 

If people are simply processing this stuff without being a part of 

it, then putting some of these investigative demands on them 


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raises the cost of doing business, and that hurts consumers, too, because people don’t have access, the ability to do that. 

So how would you respond to some of the things Mr. Oxman 

pointed out? 

Mr. SMITH. Right. So in the 15 cases that we have brought, I 

don’t think there is any disagreement about complicity by the payment processor. So there are issues raised by Mr. Oxman about 

what I understand to be compulsory process issued by the FTC to 

payment processors as a part of a broader investigation. 

So we do this kind of third-party discovery, like any litigant does 

and like any law enforcement agency does. We do it routinely. We 

send third-party CIDs, civil investigative demands, to telephone 

companies, to banks, to payment processors, to internet registrars 

in order to gather information for our investigations of—— 

Mr. DESANTIS. Is there a threshold that is required before you 

initiate that? 

Mr. SMITH. So any CID that we issue, whether it is to a target 

or to a third party, has to be approved by a commissioner and it 

has to articulate specific allegations of a law violation in order for 

us to issue the CID. So we can’t do fishing expeditions to, you 

know, we want to investigate the business opportunity industry 

and so this CID, we are sending it to 100 companies as a part of 

that. We don’t do that, because we are not permitted to do that 

under our rules of practice and our statute. 

So we do send third-party process, though. All law enforcement 

agencies do. And we are sensitive to the fact that it is expensive 

to respond, and we appreciate that. And, as Mr. Oxman noted, in 

2017 the FTC undertook an effort to streamline its CID processes 

to make them more manageable for businesses. 

But the fact remains that we really need to get this information 

from third parties. We frequently can’t get it anyplace else, either 

because the investigation is confidential and we don’t want to tip 

the target or because we get better information from third parties 

than we get from the target. We have frequently found instances 

where—remember, we are talking about fraudsters here—where 

they have given us bad responses to our CIDs and we have gotten 

better information from third parties. 

But we understand and respect that that presents an expense for 

legitimate businesses, and we appreciate that and try to factor that 

in to our targeting. 

Mr. DESANTIS. The idea of holding the person processing the 

transaction responsible for the entire amount of the transaction, 

unless there is evidence that they knowingly were participating in 

the fraud, that would not be something that you would support? 

Mr. SMITH. Right. So, in the 11th Circuit case that was mentioned by Ms. Saunders, the court held that—and there are a couple of other court decisions that have similar holdings—that, in 

order to impose joint and several liability on a payment processor, 

the FTC has to show that they knew of the fraudulent scheme or 

they consciously avoided knowing it and they actively facilitated 

the fraudulent scheme. 

So, in that 11th Circuit case, what happened was that the company president was complicit in sort of fast-tracking these fraudulent transactions through, circumventing the underwriting process 


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and the monitoring process. And the company essentially admitted 

liability. The question was, was there enough knowledge, was there 

enough intent, in order to satisfy that joint and several standard? 

And the court held that there was. 

Mr. DESANTIS. So, Mr. Oxman, how would you respond? Because 

I think that, you know, Mr. Smith is saying, hey, there are rare 

instances where there is active participation. And, look, I mean, 

that is a totally different issue, if they are actively engaged in 

fraud. You are raising concerns about kind of just the normal 

course of business and having, you know, government action really 

hurt the industry. So how would you respond to what Mr. Smith 

has said? 

Mr. OXMAN. That is exactly right. And I think the reason that 

both Mr. Smith and Ms. Saunders focus on those 15 cases is we 

have no dispute with those cases, and we are not here to discuss 

that. 

What we are here to discuss and what we are raising concerns 

about is what is happening at the FTC in all the cases we don’t 

know about. 

So our member companies are telling us that there are an unrelenting number of CIDs coming out of the FTC in cases where the 

Commission appears to be looking—I call it a fishing expedition— 

at particular merchant categories. They are sending these CIDs 

out, sometimes dozens at a time, looking blanketly across multiple 

industries and using the information gathered to build cases. 

And, as Mr. Smith noted, those CIDs don’t need the approval of 

the entire Commission. They need one commissioner. And what we 

are looking for is a process where, as in those 15 cases, the entire 

Commission is making sure that these actions are justified and 

that the burden is not placed on processors to take these actions 

in support of law enforcement where they are legitimately going 

against bad merchants. That is the concern that we have. 

Mr. DESANTIS. Great. 

I am out of time, so I will yield back. 

Mr. MEADOWS. The chair recognizes the gentleman from Virginia, Mr. Connolly. 

Mr. CONNOLLY. Thank you, Mr. Chairman. 

At this time, I would defer to my colleague, the brilliant 

gentlelady from New York. 

Mrs. MALONEY. Thank you so much, Ranking Member and 

Chairman, for holding this important hearing on consumers and 

protection for them. 

I want to commend and thank Ms. Saunders and the organization she represents, the National Consumer Law Center, for the 

initiatives that you have taken to protect disadvantaged people, 

poor people, and, particularly, elderly people from financial scams. 

So, first, I would like to ask you, in your own words, at the 

NCLC, what types of financial scams targeting the poor, the elderly, or other vulnerable people have you seen and come across? 

Ms. SAUNDERS. You know, the variation is really incredible. 

We see a lot of ‘‘grandparent scams.’’ In fact, my own father was 

subject to one of these that the FTC actually did a little profile blog 

on. Somebody called up—and my father, who is very competent, 88 

years old, but he got a call, you know, ‘‘Hi, this is Ben, and I’ve 


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been arrested, and I need some money to get out on bail.’’ And even 

my own father, who, you know, thought it didn’t sound like his 

voice, you know, called me up and said, ‘‘Where is Ben?’’ And, you 

know, I mean, he was very scared, and the scammer wanted him 

to go and send the money. 

Mrs. MALONEY. Wow. 

Ms. SAUNDERS. We see romance scams. We see lottery scams. We 

see fake interest credit card reduction scams. And often these 

scams do target seniors and people with limited English proficiency 

and other—IRS scams. I get these calls all the time, you know, ‘‘I’m 

the IRS, I’m going to arrest you.’’ Now, I don’t owe the IRS, so I’m 

not too scared when I get those calls, but there are, you know, people who have trouble with their back taxes, don’t realize it is not 

the IRS on the other end. 

There are all sorts of scams. And a lot of these scams require a 

method to take the money from consumers, to take the money out 

of their pockets. And most payment processors, you know, do their 

best to stop being willing participants, but those who do are appropriately subject to enforcement. And the FTC needs to investigate 

to figure out who is culpable and who is not. 

Mrs. MALONEY. Okay. You have given some examples of people. 

Could you give some examples of how the FTC is important in protecting consumers against predatory third-party payor processors, 

which Mr. Oxman seems to feel are being unfairly targeted? 

Ms. SAUNDERS. Right. Well, you know, I mentioned the iStream 

Financial Services case. This is a case where people were signed up 

for discount clubs that they really didn’t want and money was 

taken out of their bank account. And—— 

Mrs. MALONEY. They signed them up without their knowledge 

and then took the money out of their account? 

Ms. SAUNDERS. Exactly. 

Mrs. MALONEY. How in the world can you do that? Isn’t the bank 

there to—how could they get into their accounts? 

Ms. SAUNDERS. Because people often provide their information 

because they think they are signing up for something else. They 

may think they are signing up for a payday loan. They may think 

that they are getting a one-time, you know, purchase of something. 

But once they have their bank account information, they can use 

that. Maybe sometimes in the fine print, in deceptive terms, you 

know, they sign them up for something else. 

Mrs. MALONEY. Is this usual, that payment processors participate in scams like this? 

Ms. SAUNDERS. Payment processors are often essential to move 

the money, in order to take a credit card, a debit card, to do an 

electronic payment. Now, again, they aren’t all complicit, but they 

are often a key part of how the scam works and how the money 

gets from the consumer to the scammer. 

Mrs. MALONEY. Now, what would happen if consumers were 

helpless, if there was no FTC there to help them in payment scams 

or other scams? 

I talked to some of the prosecutors in New York, and they say 

a lot of their work in the district attorney’s office is just trying to 

protect people from scams all the time. 

Ms. SAUNDERS. Right. Absolutely. 


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Mrs. MALONEY. So, if you didn’t have the FTC, would there be 

any protection for consumers in this area? 

Ms. SAUNDERS. You know, consumers do have some protection 

against unauthorized charges, and they can go to their bank if they 

can show that the charge is unauthorized. 

And it actually imposes costs on banks, as well, especially small 

banks. They are the ones who end up having to deal with these 

things, and it costs them money to have to deal with the consumer 

and reverse the charge. And sometimes they can’t get them reversed. 

Mrs. MALONEY. Now, I want to get to some of the other witnesses. 

Mr. Smith, how many enforcement actions has the FTC pursued 

since 1996? And how many of these enforcement actions have involved a third-party processing payment system? 

Mr. SMITH. Right. So we looked back 10 years to 2008, and we 

counted up 639 enforcement actions. We decided just to focus on 

the last 10 years because it would have taken us a long time to 

count up until 1996. But in that 10 years, we have 639 enforcement 

actions generally and 15 against payment processors. 

And one quick thing I wanted to add is that we are focusing a 

lot on the complicit payment processors, but the payment processing industry—trillions of dollars of transactions happen without 

event, right? So consumers should feel safe that the payment processing industry is looking after their best interests. It is just in 

these very few cases where we found a need to drill down and hold 

the payment processor responsible. 

Mrs. MALONEY. Uh-huh. 

May I just, Mr. Chairman, ask a question related to what he just 

said? 

Mr. MEADOWS. Very succinctly. 

Mrs. MALONEY. Okay. 

So what is the estimated amount of financial harm consumers 

have suffered in these 639 cases and 15 with—so we get a sense 

of what is the economic impact on people and the economy. 

Mr. SMITH. Right. 

Mr. MEADOWS. So you can answer briefly. The gentlewoman’s 

time has expired. 

Mr. SMITH. Okay. In the 15 cases, we had $700 million of harm 

and we recovered $620 million for consumers. 

Mrs. MALONEY. Wow. 

Mr. MEADOWS. Okay. 

Mrs. MALONEY. Uh-huh. 

Mr. MEADOWS. The chair recognizes the gentleman from Georgia. 

Mr. HICE. Thank you, Mr. Chairman. 

Mr. Smith, what was the role of the FTC in developing Operation 

Chokepoint? 

Mr. SMITH. So I wasn’t at the Commission at the time, but I have 

spent a lot of time reviewing the OGR prior investigations, and I 

have also spent a lot of time talking to staff. And the FTC was a 

part of the Financial Fraud Enforcement Task Force established by 

President Obama, along with something like 30 other agencies— 

Securities and Exchange Commission, the IRS, et cetera. 


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We also were a leader of the Consumer Protection Working 

Group of that FFETF. And as the Nation’s primary consumer protection agency, that would only make sense. And there were maybe 

another dozen agencies on the Consumer Protection Working 

Group. So we communicated with DOJ and all of our law enforcement partners regularly about fraud cases. 

In terms of specific Operation Chokepoint activity, the FTC, as 

I understand it, wasn’t involved in that. It wasn’t involved in targeting, to the extent that there was any, of particular industries. 

But I don’t want to say that there wasn’t information being exchanged by the FTC with its law enforcement partners, because we 

do that all the time pursuant to our rules and approval by our general counsel. 

Mr. HICE. Right. According to the memos about Chokepoint, as 

I understand it, the FTC provided the DOJ with potential leads for 

Operation Chokepoint investigations. 

Mr. SMITH. Don’t—well, we provided the DOJ with names of 

banks. 

Mr. HICE. Right. 

Mr. SMITH. Don’t know if that was for Chokepoint or for something else. 

One thing that is important to remember is that the FTC doesn’t 

have any jurisdiction over banks. That is specifically carved out 

from our statute. DOJ does. So, to the extent that there might be 

banks that have information or that may be problematic, then that 

is a DOJ—— 

Mr. HICE. But as you came up with suspicious information, that 

information was passed on as a potential lead, according to memos, 

as I understand it. 

So my question from that would be: How would the FTC determine a particular companyor institution, whether or not they 

should be investigated? What are they looking for? 

Mr. SMITH. So a particular company, we were looking for strong 

evidence of fraud, and we would investigate the merchant, right? 

So we would investigate the business opportunity scam or the 

robocalling scam. 

And in the course of that investigation, as Ms. Saunders said, we 

follow the money, as all investigators do. So you go to the payment 

processor, you go to the acquiring bank, you go also to other third 

parties, like the telephone company and the internet registrar, to 

gather up information. 

And so, in the course of those investigations, there is a process 

between the FTC and other law enforcers to share information that 

we get—— 

Mr. HICE. So did the FTC actually participate in Operation 

Chokepoint? 

Mr. SMITH. No, not as far as I know. I mean, there was—so if 

you think of Chokepoint as the—it was defined earlier in the hearing as these 60 subpoenas that were sent out, that is not us. 

Mr. HICE. All right. 

Now, before your appointment to the FTC, you worked for a law 

firm that represented companies against Operation Chokepoint. Is 

that correct? 

Mr. SMITH. Yes. 


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Mr. HICE. Okay. I am curious of some of your experiences with 

that. Did any of your clients have assets seized as a result of Operation Chokepoint? 

Mr. SMITH. So my involvement with Operation Chokepoint—and 

this is a matter of public record. I was a partner at the law firm 

of Covington & Burling, and I represented a trade association for 

online lenders who were impacted negatively by Operation 

Chokepoint. 

So the work was primarily on a policy level, working with the 

agencies to determine how we can resolve Operation Chokepoint. 

Because the problem was that legitimate companies were losing 

their banking relationship—— 

Mr. HICE. Right. That is what I am aware of. 

Mr. SMITH. Right. 

Mr. HICE. So, with that—and that was the whole problem with 

this. So I take it that you did represent some companies that had 

some assets seized. What—— 

Mr. SMITH. No, not so much companies, but more this trade association. So I don’t know—— 

Mr. HICE. Okay. Were the seizures justified? 

Mr. SMITH. I don’t know of any asset seizures for Operation 

Chokepoint. The problem was the loss of the banking relationship. 

Mr. HICE. You don’t know of any seizures as a result? Because 

I certainly do. 

Mr. SMITH. Of Operation Chokepoint? No. I mean, I know that 

the FTC—and, I mean, in the course of our law enforcement, we 

will seize assets in order to return money to consumers. As far as 

Operation Chokepoint is concerned—so at the top of the hearing, 

it was defined as these 60 subpoenas, resulting in 3 actions against 

banks. And as far as asset seizures, that I don’t know. I think the 

banks were exposed to penalties, perhaps for anti-money-laundering issues, but I don’t know. 

Mr. HICE. Well, so were companies. 

And, unfortunately, my time has expired, Mr. Chairman, so I will 

yield back. 

Mr. MEADOWS. I thank the gentleman from Georgia. 

The gentleman from Virginia is recognized. 

Mr. CONNOLLY. Thank you. 

Ms. Saunders, I understand from your testimony you certainly 

believe, in this context, consumers need some protection. 

Ms. SAUNDERS. Absolutely. 

Mr. CONNOLLY. You need to speak closer to that microphone. You 

can move it to you. 

Ms. SAUNDERS. Okay. Yes, absolutely. I think fraud would be far, 

far worse if we didn’t have the FTC and other law enforcement 

agencies, you know, looking at this fraud and finding everybody 

who is culpable. 

Mr. CONNOLLY. Right. 

Now, one of the practices that has concerned me for a long time: 

Certain payday lenders, for example, not all but some, prey on vulnerable families of Active Duty military, especially those who kind 

of ship overseas and their families are left behind. They tend to be 

lower-income folks, and making ends meet can be a real challenge. 

Is that a problem, in your experience? 


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Ms. SAUNDERS. Well, the Military Lending Act today does prohibit high-cost loans to servicemembers. Certainly, payday loans 

have been a problem with servicemembers and their families and 

loved ones. 

You know, that is not anything related at all to, you know, the 

FTC’s enforcement work against payment processors, but, separately, we have pushed for protections for servicemembers and all 

families against predatory lending, and payday lenders are a big 

problem. 

Mr. CONNOLLY. Yeah. I guess the point I was just trying to make 

is that, when we look at, sort of, financial predation, it covers all 

kinds of classes of people—seniors, ordinary consumers, and even 

our Active Duty military families who can be taken advantage of 

in times of need. And they all need someplace to go for protection. 

Ms. SAUNDERS. Right. Absolutely. And, certainly, servicemembers 

and veterans are targets of fraud, you know, like any other American, and they need the vigorous work of government to stop those 

kinds of scams and to cut off these scammers from the ability to 

take the money, as long as we, you know, are going after the payment processors who are willing participants. 

Mr. CONNOLLY. Right. 

Now, you gave the example of your dad. 

Ms. SAUNDERS. Uh-huh. Who’s a veteran. 

Mr. CONNOLLY. I’m sorry? 

Ms. SAUNDERS. Who is a veteran. 

Mr. CONNOLLY. Who is a veteran. Served this country. 

I think all of us know the stories of sort of the unwitting compliance—unwitting in that people are sometimes too trusting or don’t 

have their guards up. And none of us want to sort of become, you 

know, jaundiced and cynical as a society, but, on the other hand, 

trying to help folks who maybe are more vulnerable to those kinds 

of schemes and threats and manipulation. 

And I mentioned that the best estimate we had was that elder 

crime in this kind of category was $36 billion a year. Sound right 

to you? 

Ms. SAUNDERS. I have heard that number, yes. 

Mr. CONNOLLY. So do you want to expand just a little bit in 

terms of why senior citizens are maybe more vulnerable than some 

others in society and more susceptible to this kind of consumer 

fraud? 

Ms. SAUNDERS. Right. Well, seniors, you know, are often more 

trusting. You know, those of us here in Washington tend to be very 

cynical, but they do tend to be more trusting—— 

Mr. CONNOLLY. Not on this committee, Ms. Saunders. 

Ms. SAUNDERS. Okay. 

Mr. CONNOLLY. Yeah. 

Ms. SAUNDERS. They are often lonely, and somebody who calls 

them on the phone and is friendly and talks to them, you know, 

can be very persuasive. 

I have an uncle who was subject to a romance scam, and I could 

not convince him that this woman, who—he was so lonely, and this 

younger woman befriended him. I could not convince him that, 

even after he wrote $30,000 worth of checks to her, that she was 

a scammer. I could not convince him to go to the police. He was 


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later subject to identity theft as part of the same, you know, problem. 

Mr. CONNOLLY. Yeah. 

Ms. SAUNDERS. And, you know, I had to go to a number of banks 

who were innocent, you know, who had fraudulent accounts created 

there, but I had to enlist their help. 

Mr. CONNOLLY. To what extent are some of these fraudsters offshore, overseas? And does that complicate our ability to regulate 

that? 

Ms. SAUNDERS. It does. I mean, they are often in boiler rooms offshore, and sometimes the money is moved offshore. That is why 

our anti-money-laundering laws and know-your-customer rules are 

especially important, to stop this kind of fraud and other movements of money overseas. 

Mr. CONNOLLY. Yeah. I think that is really important to note, as 

well. Because I know of one, in particular, headquartered in the 

Caribbean, and that scheme was to call you up and say, you’ve won 

the lottery, the Jamaican lottery or whatever lottery, and all you 

have to do is send us, you know, your credit card number and $200 

for processing and you’re going to be rich. And I couldn’t believe 

how many people, unfortunately, were prey to that scheme. So that 

is a whole different dimension. 

Thank you, Mr. Chairman. 

Mr. MEADOWS. The gentleman from Kentucky is recognized, Mr. 

Massie. 

Mr. MASSIE. Thank you, Mr. Chairman. 

Mr. Smith, in 2011, FDIC Quarterly Journal published a list of 

30 merchant categories that were high-risk endeavors. Among 

these categories included what I consider to be very legitimate commerce: ammunition sales, firearms sales, pharmaceutical sales, surveillance equipment, and tobacco sales. 

Does the FTC use this list or does the FTC have their own list 

of high-risk categories? And is that publicly available? 

Mr. SMITH. We don’t target our—we don’t have a list of high-risk 

merchants. We don’t target our enforcement activity based on highrisk merchants. 

I will tell you, in all of the cases that we have brought that we 

outlined here, the fraud cases where there have been payment 

processors involved, involved telemarketing boiler rooms essentially, you know, real hardened scams, situations where merchants 

were debiting consumers’ accounts without even any authorization. 

Mr. MASSIE. Okay. I just want to make sure you weren’t targeting firearms sales, ammunition sales, pharmaceutical sales—— 

Mr. SMITH. No. None of our cases have been brought against—— 

Mr. MASSIE. I am not talking about cases that have been brought 

but the things that are initiated in the way you look for cases. 

Mr. SMITH. Right. We don’t—okay. So, in terms of case targeting, 

we look at things like consumer complaints, consumers who have 

been defrauded. We conduct consumer surveys to determine whether or not there are companies that are engaged essentially in deceptive conduct. 

Mr. MASSIE. Okay. 

Mr. SMITH. So that’s our guide. 


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Mr. MASSIE. So when you think you’ve found it, do you have a 

standard formula to fine or penalize the processing companies, or 

do you just sort of ad hoc make it up as you go? 

Mr. SMITH. Well, we are looking for complicit—evidence that 

these processors were complicit in the underlying fraud. And, typically, what we—well, in fact, in every case that I reviewed in preparing for this testimony, every case, we have a situation where 

the payment processor was actively hiding the misconduct from its 

banking partner and—— 

Mr. MASSIE. Right, right. But I’m assuming you’ve found somebody who’s guilty of something. Do you have a standard formula for 

the penalty? 

Mr. SMITH. So, with respect to the underlying merchant, we look 

for unfair—— 

Mr. MASSIE. Or the processor. 

Mr. SMITH. Okay. So our cases, we start with the underlying 

merchant, and we typically, you know, prove up or allege fraud, get 

a settlement sometimes with that merchant. So real fraud, deceptive conduct that hurts consumers. 

And then we follow the money. And in those couple of cases 

where we’ve thought that the payment processor went, sort of, beyond the pale—I mean, we’re not pushing the envelope here. We’re 

talking about really bad conduct by payment processors. In those 

cases, we’ve brought action. 

Mr. MASSIE. But my question is, is there a standard policy that 

guides when you’re going to do that or what the penalty is going 

to be? 

Mr. SMITH. We don’t have a written—— 

Mr. MASSIE. Okay. 

Mr. SMITH. —policy for when we bring an action. 

Mr. MASSIE. My next question is, I heard you say, I think—and 

this is encouraging—that you acknowledge that the civil investigative demands are a burden on the merchant. Is that—— 

Mr. SMITH. On all third-party recipients. So the payment processors aren’t unique in this regard or uniquely burdened. But any 

company, we routinely in the course of our investigations—and this 

is true for all law enforcement agencies, State, Federal, local—we 

will have to seek information from third parties unconnected from 

the fraud. And responding to that compulsory process is going to 

be expensive, and we understand that and appreciate it and do our 

best to—— 

Mr. MASSIE. So it’s almost like a tax, this added regulatory compliance. So, given that, I think it’s important to know how many 

of these CIDs have been initiated. Can you tell us—I think Mr. 

Oxman has alluded to an increased amount or activity of CIDs. 

Can you give us the number of CIDs? 

Mr. SMITH. I don’t have the number of third-party CIDs that 

we’ve—— 

Mr. MASSIE. Are they going up or down or—— 

Mr. SMITH. My guess is that they’re going to be flat, because I 

think that our enforcement activity is generally, you know, a fairly 

steady pace. So, as an example, if you just look at cases—— 


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Mr. MASSIE. Instead of guessing, could you just give us those 

numbers, like, how many CIDs? Could you give us that later? I’m 

not asking for it today. 

Mr. SMITH. Yes. I’ll ask the staff if we can get those numbers. 

Mr. MASSIE. Thank you. 

I’ve got one last question in the last 30 seconds. I’m glad to hear 

that you recovered money for people who have been defrauded. But 

can you guarantee us that all the assets that are seized by the FTC 

go to victims or consumers, that none of it gets diverted to other 

things? 

Mr. SMITH. Well, there are severe legal limitations on our ability 

to divert money. There’s a—— 

Mr. MASSIE. So it never happens? 

Mr. SMITH. So there are cases where are administering a redress 

program and there is money left over. And, in those cases, sometimes—— 

Mr. MASSIE. So you’ve remunerated all of the victims and they’ve 

all become whole and you’ve got money left over? 

Mr. SMITH. Sometimes, because not every victim—— 

Mr. MASSIE. Every victim has always been compensated? 

Mr. SMITH. We can’t always find every victim. But what I’m talking about here is a small amount of money, typically, in the tens 

of thousands, and we disgorge that to the Treasury Department. 

Mr. MASSIE. So you can—— 

Mr. SMITH. Because it’s very difficult—— 

Mr. MASSIE. Do you know what they do with it? Just goes back 

into the general—— 

Mr. SMITH. It goes into the general fund. 

Mr. MASSIE. So it’s not diverted to any type of projects or anything? 

Mr. SMITH. We’re prohibited from that. I think it’s called the 

Miscellaneous Receipts Act. And we’re prohibited from using money 

that we recover for consumers for our own purposes. 

Mr. MASSIE. All right. 

My time has expired. Thank you, Mr. Chairman. 

Mr. MEADOWS. I thank the gentleman for his insightful questions. 

The gentleman from Kentucky, Mr. Comer, is recognized. 

Mr. COMER. Thank you, Mr. Chairman. 

I have two questions for Mr. Smith. 

First of all, has the Federal Trade Commission performed any 

studies or research on whether holding processors responsible for 

all alleged harm caused by a merchant will result in higher processing costs for merchants and ultimately consumers? 

Mr. SMITH. Well, so, first, I disagree with the premise that we’re 

holding all processors liable for all fraud. We’re bringing, as we 

said a couple of times, very few cases here. But in answer to your 

question, no, we haven’t conduct a study. 

Mr. COMER. Does the FTC have a standard approach to settlements? 

Mr. SMITH. To settlement with payment processors? 

Mr. COMER. To settlements. 

Mr. SMITH. To settlement. 

Mr. COMER. Yes. 


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Mr. SMITH. So most of the cases that we bring we settle, particularly in the fraud area. In some cases, the bad guys don’t show up 

for court, and so we get a default judgment. And in the course of 

following the money to try to return money to consumers, if we go 

to a payment processor, then most of those cases are settled too. 

Of the however many that I mentioned, I think four have been litigated. 

Mr. COMER. What are ways in which the FTC can improve its 

tactics to be less burdensome to law-abiding and legitimate businesses? 

Mr. SMITH. Well, last year, the Commission undertook an effort 

to streamline its CID process, and we’ve heard back from industry 

that that’s helpful. Of course, more always needs to be done, and 

we are, you know, open to additional suggestions about how to 

streamline the process. 

Then the other aspect of that would just be to send fewer thirdparty CIDs and try to get information from the targets themselves. 

We sometimes have difficulty doing that because the investigation 

is confidential or because the targets aren’t forthcoming, so we 

have to go to third parties. But we appreciate that this imposes a 

burden on businesses, and we are always looking for ways to lessen 

that burden. 

Having said that, we badly need this information for our law enforcement program. We badly need information from third parties, 

whether it’s payment processors, banks, telephone companies, 

internet registrars, other folks who provide services to the companies that are defrauding consumers. 

Mr. COMER. Thank you, Mr. Chairman. I yield back. 

Mr. MEADOWS. I thank the gentleman. 

The chair recognizes himself for a series of questions. 

Ms. Saunders, listen, I think all of us up here want to make sure 

that consumers are protected. And the horrible stories you hear— 

actually, I’ve been one that—you know, it’s interesting because occasionally I get these phone calls where I’ve won unbelievable 

amounts of money, and they just want me to call back, and so I 

do. And it’s very interesting when we have these dialogues with a 

Member of Congress. And so I’ve called the FTC. So we want to 

protect it. And so I want to say thank you for being an advocate 

for those consumers. 

But there is an equal protection that has a concern, as a business 

guy, as a small-business guy. And, Mr. Smith, you’ve talked about 

only bringing a few small actions. But is it not true that you many 

times will freeze assets and force companies to settle without ever 

bringing them to trial? 

Mr. SMITH. So I think you’re talking here about the issue—— 

Mr. MEADOWS. Well, you cast a wide net—so you get a complaint. 

You cast a very wide net. And, literally, you freeze their assets, so 

they don’t have the ability to actually endure long-term. Because 

you don’t bring the case—actually, you don’t ever bring the case, 

but they holler, ‘‘Olly, olly, oxen free, please let me go’’—— 

Mr. SMITH. Right. 

Mr. MEADOWS. —and so they settle the case. 


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Mr. SMITH. We don’t have the ability to freeze assets without a 

court order. So here is how an asset freeze would work. And typically we would—— 

Mr. MEADOWS. Yeah, but the power of the FTC is well-known. 

And so you get a court order, and you cast a very wide net. Do you 

not cast a wide net? 

Mr. SMITH. So we get a court order against a bad guy—— 

Mr. MEADOWS. Right. 

Mr. SMITH. —a temporary restraining order—— 

Mr. MEADOWS. And everybody that touches the bad guy. 

Mr. SMITH. —and a receiver-appointed—no. The money of the 

bad guy, right? So we find the bad guy’s accounts—or, more appropriately, the receiver finds the bad guy’s accounts and freezes 

them. It is the receiver’s job, who is appointed by the court. 

And within those accounts, when those accounts are held by 

other people, then what the law says is that a constructive trust 

is established over that money because it’s money that is being 

held for the merchant by its service providers. And so the receiver 

may reach out to those other accounts that are being held on behalf 

of the merchant by others. 

Mr. MEADOWS. So, Mr. Oxman, maybe help clarify my question, 

so Mr. Smith can understand it a little bit better. 

Mr. OXMAN. Yeah. Thanks, Mr. Chairman. 

So this enforcement strategy that Mr. Smith calls ‘‘follow the 

money,’’ here’s how it works. So they’ll go after a legitimate 

fraudster. And, as you noted, Mr. Chairman, it’s very important 

that they do so. It’s an important law enforcement function. 

Once they’ve established a case against the fraudster or bad merchant, they then turn their sights on the payment processor and 

say: Okay, you processed $40 million in transactions for this merchant. They were bad, so we’re going to go after $40 million of your 

money. And the processor says: Well, wait a minute, I only made $5,000 

off that, you know, less than a penny on the dollar from that transaction. 

And the FTC says: Well, no, you processed that money for them, 

and you have a reserve account—which, by the way, is a reserve 

account—— 

Mr. MEADOWS. To pay this. 

Mr. OXMAN. —to pay consumers. 

Mr. MEADOWS. Right. 

Mr. OXMAN. ‘‘Charge-backs’’ they’re called. 

Mr. MEADOWS. Right. 

Mr. OXMAN. And instead of allowing the processor to take those 

funds and reimburse consumers, the FTC says or directs a receiver 

to say: No, we’re going seize that money, we’re going to use it. 

That is the ‘‘follow the money’’ strategy. And, as you’ve noted, 

Mr. Chairman, that strategy punishes processors who weren’t even 

implicated in the process at all. It’s like holding a cash register responsible for taking money and going after the manufacturer of the 

cash register, or holding AT&T responsible if you and I have a 

phone call plotting a crime. 

Going after the processor might seem easy because that’s where 

the money is. But when you’re following the money to a party that 


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had nothing to do with the fraud, that’s where the problem comes. 

And that’s where the issue of payment processors, you know, having to shut off merchants unfairly, having to raise their prices because of this FTC enforcement strategy. 

So what we would like to see the FTC do is follow the money to 

the fraudster, don’t bring in innocent parties like payment processors and hold them financially responsible essentially as an insurer for bad merchant behavior. 

Mr. SMITH. This is not—— 

Ms. SAUNDERS. Could I respond? 

Mr. SMITH. —an issue of holding payment processors liable for 

the full amount of the fraud. This is an issue of marshaling the assets of the fraudster and freezing them. So these reserve accounts 

are—— 

Mr. MEADOWS. So you’re saying what he just said, freezing the 

$40 million in his example—— 

Mr. SMITH. We’re not freezing $40 million. 

Mr. MEADOWS. Well, hold on. 

Mr. SMITH. Reserve accounts don’t have the full amount of the 

fraud in them. The reserve accounts have whatever the payments 

that the merchants or the processors—— 

Mr. MEADOWS. So are you saying there’s not enough money in 

the reserve accounts to pay the consumers? Is that your sworn testimony here today? 

Mr. SMITH. What I’m saying is—— 

Mr. MEADOWS. No, I—yes or no, is there enough money in the 

reserve accounts, like Mr. Oxman said, if you had the reserve account, that would actually go to her father or whomever if it was 

done improperly, is there enough money in the reserve accounts—— 

Mr. SMITH. There’s never enough money in the reserve accounts 

because it represents a fraction of the fraud. It’s just whatever 

money the payment processor is holding back for the last 60, 90, 

180 days, whatever the contract is between the payment processor 

and the merchant. 

Mr. MEADOWS. Okay. So why, then, if it’s frozen, why would you 

freeze that? 

Mr. SMITH. We would freeze it—— 

Mr. MEADOWS. Freeze the reserves. 

Mr. SMITH. We would freeze the reserve account so that we can 

marshal all of the assets of the fraudster and make as close to full 

recompense as we can to all of the customers. 

Mr. MEADOWS. So let’s assume that you’re following the money 

and the FTC follows the money and you freeze the assets. What 

happens when they’re innocent? 

Mr. SMITH. Well, we’re not freezing the assets of anyone who’s 

innocent. We’re freezing the assets of the fraudster that are being 

held—— 

Mr. MEADOWS. So how do you know that they’re guilty? 

Mr. SMITH. I’m sorry? 

Mr. MEADOWS. How do you know that they’re guilty? 

Mr. SMITH. Because a court has entered a temporary restraining 

order—— 


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Mr. MEADOWS. You’ve got a court order. That’s different than 

having an actual case. 

Mr. SMITH. Well, no, we have to make a strong showing to the 

court—look, a TRO, an asset freeze—— 

Mr. MEADOWS. Right. Okay. 

Mr. SMITH. —the appointment of a receiver, these are extraordinary remedies, and courts don’t enter them lightly. We go into 

court without giving an opportunity for the other side to respond 

because the fear is that, if we do, the money, the evidence, the people will be—— 

Mr. MEADOWS. Gotcha. Okay. That makes sense. That makes 

sense. 

So here’s what I would ask of you, Mr. Smith, because you’ve got 

a long career not just in your new job but at the FTC, and, actually, I have found the people of the FTC to be very capable Federal 

servants. I mean, they actually are a great group. I actually, when 

I was a freshman, had a hearing with the FTC and found the engagement to be delightful. 

Here is the concern that we’re hearing. So, just as awful as some 

of those stories that Ms. Saunders has shared with us, we’re hearing some stories from people who believe that they’ve had a disproportionate amount of attention based on through no fault of 

their own. And so it’d be like me processing something, and all of 

a sudden I find that I processed, through millions of different people, I had one bad actor, and then all of a sudden my entire business operation gets constrained. And we’ve got to find a way to deal 

with that too. 

Because what happens—and whether it’s additional reserves, 

whether it’s actually looking at a more targeted approach. Because 

if we’re not dealing with that, Mr. Smith, what we’re doing is we’re 

having a chilling effect on a number of different small businesses. 

And as a small-business guy, that’s something that I’m not going 

to stand for. 

And so I can tell by the way you’re nodding that you’re willing 

to help us work through this. This is not my issue. This is not one 

that, honestly, when I heard about it originally, I said, well, how 

could that be going on? If you’re willing to come in and brief, you 

know, our staff or me personally, I am willing to look at that. 

And I think, as a small-business guy, hopefully what I can do is 

help mediate the distance between Mr. Oxman, Ms. Saunders, and 

you, Mr. Smith, where we can come together and say, well, this is 

some good policy that we can change, and figure out what part is 

legislative and what part of it is administrative. Does that sound 

fair? 

Mr. SMITH. Yes. 

And I would add that, in most instances where we’re talking 

about reserve accounts, that there is some sort of an accommodation that’s agreed to by the parties. The ultimate issue over whether the receiver owns the reserve accounts is one for the court, but 

it doesn’t usually get there, and we’re able to reach some sort of 

an accommodation. 

Mr. MEADOWS. So let me tell you what you may be getting a little bit of side benefit. Obviously, Operation Chokepoint was an 

issue that had a political agenda in some shape or fashion. The 


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other part that you’re getting from me is seeing the FDIC do similar things when it comes to banking regulations and what they do. 

And so you may be getting a little bit of spillover, because I have 

seen the long arm of the FDIC, at times, do things that have an 

unbelievable chilling effect, that make absolutely no business sense 

whatsoever, in the name of protecting consumers. 

And so I want to be fair to you. And so if—I see some of your 

staff nodding that they’re willing to come in, so I assume that 

you’re willing to bring your staff in to help, where we can work 

through that. 

And, Mr. Oxman, I would ask you to give me a few more examples. 

Ms. Saunders, if you will do the same from a consumer standpoint. 

Hopefully, we can come together and we can fix this without another hearing. How about that? Does that sound good? 

Mr. SMITH. We’d be happy to work with your staff. 

Mr. MEADOWS. All right. 

So, with that, I’d like to thank all of you for appearing today. 

I think they’re—well, they did call votes, and so hopefully I’ll 

make it. 

The hearing record will remain open for the next 2 weeks for any 

member who wants to submit an opening statement or questions. 

So you may get followup questions from some of the those members. 

Mr. MEADOWS. And if there’s no further business before the subcommittee, it stands adjourned. 

[Whereupon, at 11:39 a.m., the subcommittees were adjourned.] 

Æ 


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