BlueSnap complaint alleges unfair payment processing and credit card laundering: Don’t lather, don’t rinse, and definitely don’t repeat

According to Aesop, you’re known by the company you keep. Put in the FTC context, you’re known by the companies you keep as clients. That’s the message of a $10 million proposed settlement with payment processing company BlueSnap, Inc., a related corporate defendant, former CEO Ralph Dangelmaier, and Senior Vice President Terry Montieth. 

Accepting credit and debit cards is the lifeblood of most businesses. As a processing service, BlueSnap helps businesses establish merchant accounts with a financial institution affiliated with a credit card network like Mastercard or Visa. BlueSnap advertised itself as an “all-in-one payment orchestration platform,” but according to the FTC, the defendants struck a symphony of sour notes by processing payments for known scammers, violating the Telemarketing Sales Rule, and engaging in credit card laundering.

Card networks don’t grant access to just anyone. To prevent fraud, they impose rules on merchants and on third-party companies like BlueSnap. For example, before accepting a merchant as a client, payment facilitators have a due diligence obligation to ensure the merchant’s business is legitimate and to screen out merchants engaged in potentially fraudulent or illegal activity. What’s more, credit card networks impose an ongoing obligation to monitor merchants’ transaction activity for signs of fraud or deception.

Among the most notable red flags is a high chargeback rate. Using Visa as an example, if a merchant has 100 or more disputes in a single month and the ratio of disputed transactions to total transactions – the chargeback rate – is 0.9% or more, Visa puts the company in a special monitoring program. Visa imposes similar scrutiny when a merchant has $75,000 or more in fraudulent transactions in a month and the ratio is 0.9% or higher. The merchant remains in Visa’s program until its chargeback or fraud level stays below the threshold for three straight months. If merchants continue to experience a high rate of questionable transactions, the credit card network may impose fines or ultimately deny them access to the credit card system. 

Because those threshold numbers are so integral to their anti-fraud programs, card networks specifically prohibit practices that fidget with the digits to make a merchant’s chargeback rate look misleadingly low. Merchants may try this by processing transactions through another company’s account (known as credit card laundering); concealing their identities from consumers, banks, and card networks; using shell companies; or hiding the true nature of their business.

Which brings us to BlueSnap’s dealings with an outfit called ACRO Services LLC. According to a 2022 FTC law enforcement action, ACRO perpetrated a deceptive telemarketing scheme to sell bogus debt relief services using names like Tri Star Consumer Group, Thacker & Associates International, Reliance Solutions, and our two personal favorites, American Consumer Rights Organization and Consumer Protection Resources. As the FTC alleged in its complaint against ACRO, “consumer rights” and “consumer protection” were the farthest things from the defendants’ minds. The trial court froze their assets, appointed a receiver, and ultimately enjoined the defendants from further violations of the FTC Act and the Telemarketing Sales Rule.

Here’s how the complaint summarizes the assistance BlueSnap provided to ACRO Services’ scams:

Defendants knew or consciously avoided knowing that ACRO Services and the ACRO owners were engaged in deceptive telemarketing and defrauding consumers. Yet Defendants time and again disregarded warnings and continued processing for ACRO Services. Even worse, Defendants took affirmative steps to launder ACRO Services’ payments and conceal the true nature of ACRO Services’ business so that they could continue processing for the scheme.

More specifically, the FTC says BlueSnap ignored consumer complaints, turned a blind eye to lawsuits charging ACRO Services with fraud or deception, and disregarded warnings from credit card companies, banks, and other payment processors about ACRO’s practices. The FTC says the defendants engaged in this conduct even as ACRO’s accounts posted high chargeback and fraud rates and even incurred a $75,000 fine imposed by Visa. How high were the chargebacks? During some months, the rate soared to 40%, an astronomical figure in light of the fact that a rate as low as .9% – in other words, less than 1% – is sufficient to draw scrutiny from card networks.

What’s more, the FTC says the defendants took deliberate steps to help conceal ACRO Services’ illegal conduct. For example, according to the complaint, BlueSnap falsely classified ACRO’s merchant accounts as lower-risk business categories to evade increased scrutiny, helped ACRO create a merchant account for a shell company, and continued to process other ACRO accounts even after the card network shut one of them down. Even BlueSnap’s own Director of Fraud Strategy described ACRO to one of the named defendants this way: “These guys are really sketchy. . . . [They] are for sure not operating a legit business.”

The complaint further alleges:

Defendants’ support for the ACRO Services scam, even in the face of warnings and direct evidence of fraud, was not an anomaly. Rather, Defendants processed payments for other merchants that they knew or consciously avoided knowing were likely engaged in fraudulent or illegal business practices and that they received multiple warnings about from upstream processors, card networks, and BlueSnap’s own Fraud Prevention Team.

For example, the FTC says BlueSnap moved payment traffic from merchants generating excessive chargebacks to its own “merchant of record” account – a practice called load-balancing designed to “dilute” companies’ high chargebacks by mixing them with other accounts. But that deceptive strategy backfired on Blue Snap because chargeback rates for those merchants were so high that BlueSnap’s own “merchant of record” account exceeded monitoring thresholds.

Count I of the complaint alleges the defendants’ unfair payment processing practices violated the FTC Act. Count II charges them with assisting and facilitating violations of the Telemarketing Sales Rule. And according to Count III, their credit card laundering practices also violated the TSR. The proposed settlement will require the defendants to turn over $10 million to provide refunds for consumers. In addition to mandating closer screening and monitoring of higher-risk clients (for example, companies selling money-making opportunities, nutraceuticals sold with negative options, and tech support services), the order bans the defendants from providing payment processing services to debt collection, debt consolidation, and debt relief companies. Also prohibited: processing payments for companies on an industry monitoring program due to excessive chargebacks, fraud, laundering, illegal transactions, or identity theft and helping any client evade fraud monitoring.

How would Aesop describe the moral of the BlueSnap fable?

Pay close attention to warning signs that emerge as you do your due diligence. Whether or not due diligence is a requirement of your contracts, savvy business people keep their eyes open when taking on new clients. If a prospective client’s line of work or business model looks questionable from the start, don’t look the other way. Run the other way. 

Businesses are known by the companies they keep. Card networks require payment facilitators to monitor their merchants’ activities for signs of fraud or deception, but it’s wise advice for any business. If you spot questionable conduct by an affiliate, insist they move quickly to fix the problem. If their response isn’t fast and comprehensive, cut them loose. And certainly don’t help them to continue or conceal their practices.

The FTC’s Telemarketing Sales Rule is broad in scope. “We don’t do telemarketing, so we don’t need to concern ourselves with the TSR. Right?” Wrong. Section 310.3(b) of the Rule prohibits assisting and facilitating others who engaged in illegal telemarketing and Section 310.3(c) makes credit card laundering illegal in the context of telemarketing.