Load Balancing Gone Criminal: The Dangerous Game of Using Multiple MIDs to Avoid Chargeback Thresholds

Below is a post by attorney Richard Newman.   While I don’t post much on this publication anymore, I thought this was an important piece to share with the direct response community.   In the upcoming months/years I predict multiple criminal actions against “free trial” merchants that submit false information to banks to acquire merchant accounts that they “load balance” transactions on…in order to stay below chargeback thresholds to avoid losing your ability to process subscriptions.

You’ve heard it first from me, if you are engaged in this very dangerous game there are both Civil and Criminal risks…notably bank fraud which carries very stiff penalities of decades in prison.

Candidly unless you are a major subscription player like Netflix that has well below 1% in chargebacks and deep relationships with Visa/Mastercard, you should carefully consider the risks the continuity space now has due to ever changing regulations:

Enjoy the article:

Investigations and related enforcement actions pertaining to misrepresenting and otherwise failing to properly disclose negative option offer terms remain a focus for the Federal Trade Commission.  In fact,  the FTC filed just such a complaint recently against defendants that purportedly deceived consumers, in violation of the FTC Act and the Restore Online Shopper’s Confidence Act.

Much has and continues to be made about non-compliant negative option campaigns, especially in the dietary supplement space.  Clearly, marketers that rely upon advance consent for continuity offers and the like must carefully scrutinize their programs to ensure compliance with federal and state statutes.

Federal and state authorities have slowly been expanding the regulatory attention given this business model.  Specifically, authorities are catching-up to the practice of marketers distributing transactions between or among merchant identification numbers in order to avoid being flagged as a high-risk merchant for exceeding minimum chargeback thresholds, engaging in fraud or other violations of card brand standards.  A process otherwise referred to as “load balancing.”

For example, in 2015 a credit card payment intermediary settled charges by the FTC that it assisted a group of companies that purportedly failed to properly disclose recurring monthly charges by arranging credit and debit processing services.

In doing so, the FTC alleged that the intermediary permitted a third-party marketer whose merchants were actually newly formed shell companies with no negative processing history to open hundreds of merchant accounts under dozens of corporate names in a very short period of time.  Transactions, as alleged by the FTC, were distributed amongst the different merchant accounts in order to avoid monitoring by banks and credit card associations.

In addition to a separate FTC enforcement action alleging unfair and deceptive business practices, the aforementioned third-party marketer was charged by the U.S. Attorney in Utah and convicted of submitting false information to a bank in furtherance of the purported scheme of spreading transactions across the straw merchant accounts to avoid triggering chargeback monitoring program minimum transaction thresholds.

According to federal prosecutors, the third-party marketer did so because banks flagged the company on a list of merchants to avoid doing business with.

Visa has well-established chargeback limits.  The threshold ratio is calculated by dividing the total number of chargebacks in the current month by the number of transactions in the same month.

MasterCard’s rules for merchants and processors were recently amended to address such business practices.  They state, in pertinent part, that an acquirer must not support any merchant or sub-merchant action having a purpose or effect of evading detection by the company’s fraud monitoring and other compliance thresholds, including but not limited to load balancing.

Clearly, the stakes for knowingly submitting fraudulent merchant applications and recruiting unwitting signers to avoid detection, are growing.  Both state and federal regulatory agencies, including the U.S. Department of Justice, are keenly aware of such tactics designed to evade the card brand rules.

As the use of subscription-based and recurring revenue marketing models continues to grow, so will regulatory scrutiny.  A natural corollary to subscription-based and recurring revenue marketing model billing methods is the need to recognize that the penalties for making or facilitating false statements to banks in order to influence banking decisions are severe.  Doing so may potentially result in both civil and criminal consequences, including wire fraud, bank fraud, money laundering, credit card laundering, aiding and abetting, and conspiracy.

The charges discussed above pose a cautionary tale to high-risk merchants and those processing on their behalf.

Contact an FTC Defense Lawyer for additional information on card-not-present high-risk processing, subscription-based and recurring revenue marketing model compliance considerations, or you are the subject of a regulatory investigation or enforcement action.

Richard B. Newman is an Internet marketing compliance and regulatory defense attorney at      Hinch Newman LLP focusing on advertising and digital media matters. His practice includes conducting legal compliance reviews of advertising campaigns, representing clients in investigations and enforcement actions brought by the Federal Trade Commission and state Attorneys General, commercial litigation, advising clients on promotional marketing programs, and negotiating and drafting legal agreements.

 

HINCH NEWMAN LLP. ADVERTISING MATERIAL. These materials are provided for informational purposes only and are not to be considered legal advice, nor do they create a lawyer-client relationship. No person should act or rely on any information in this article without seeking the advice of an attorney. Information on previous case results does not guarantee a similar future result.