Electronic Payment Processor Banned from Assisting Fraudulent Telemarkers

In July 2003, the Federal Trade Commission charged Electronic Financial Group (EFG) and its principals with providing substantial assistance to numerous deceptive telemarketers by processing tens of millions of dollars through the ACH network, a nationwide electronic funds transfer system. The FTC further alleged that the defendants conceived and operated two fraudulent advance-fee debit card marketing scams of their own. In a settlement announced today, the defendants are banned from processing payment for any telephone-initiated sales through the Automated Clearing House (ACH) Network transactions. The settlement also requires the defendants to pay $3.9 million in consumer redress.

The FTC filed its complaint in federal district court against Electronic Financial Group, Inc. (EFG), EFG Card Services, Inc., Paul McClinton, Jerry Federico, and Randy Balusek. According to the complaint, EFG, based in Waco, Texas, provides a variety of electronic payment services to clients in the United States and Canada. Among it services, EFG processes electronic debits and credits to consumer bank accounts through the ACH Network, a nationwide electronic funds transfer system that provides for the rapid interbank clearing of electronic payments. The FTC alleged that the defendants processed ACH transactions on behalf of numerous fraudulent outbound telemarketing operations - a number of which the FTC previously sued as scams - in violation of the FTC's Telemarketing Sales Rule. The FTC also alleged that the defendants violated the FTC Act in two ways. First, the FTC alleged that in providing ACH payment processing services to outbound telemarketers, the defendants systematically breached a contractual provision with their bank that required EFG to comply with the National Automated Clearing House Association (NACHA) Operating Rules, specifically, the prohibition on processing ACH transactions on behalf of outbound telemarketers, and thus engaged in an unfair practice. Second, the FTC alleged that defendants violated the FTC Act by deceptively marketing its own advance-fee debit cards.

The stipulated final judgment and order, which was approved by the court, bans the defendants, with a limited exception for payroll cards, from the sale, advertising, or marketing of debit or credit cards. It also prohibits the defendants from making misrepresentations or unauthorized withdrawals from consumer bank accounts. The settlement prohibits them from processing any ACH transaction initiated as the result of telemarketing, and requires the defendants to have "express verifiable authorization" before charging consumers' bank accounts. In addition, the settlement requires the defendants to pay $3.9 million for consumer redress. Finally, the settlement contains various recordkeeping requirements to assist the FTC in monitoring the defendants' compliance.

The Commission vote to authorize staff to file the stipulated order for permanent injunction was 5-0. The stipulated order for permanent injunction was filed in the U.S. District Court, Western District of Texas, Waco Division, and signed by the judge on March 23, 2004.

NOTE: This stipulated order for permanent injunction is for settlement purposes only and does not constitute an admission by the defendant of a law violation. Stipulated order for permanent injunctions have the force of law when signed by the judge.

Copies of the stipulated order for permanent injunction are available from the FTC's Web site at http://www.ftc.gov and also from the FTC's Consumer Response Center, Room 130, 600 Pennsylvania Avenue, N.W., Washington, D.C. 20580. The FTC works for the consumer to prevent fraudulent, deceptive, and unfair business practices in the marketplace and to provide information to help consumers spot, stop, and avoid them. To file a complaint, or to get free information on any of 150 consumer topics, call toll-free, 1-877-FTC-HELP (1 877-382-4357), or use the complaint form at http://www.ftc.gov.The FTC enters Internet, telemarketing, identity theft, and other fraud-related complaints into Consumer Sentinel, a secure, online database available to hundreds of civil and criminal law enforcement agencies in the U.S. and abroad.

(FTC Matter No. X030071)
(Civil Action No. W-03-CA-211)