Earlier this month, payment processor Capital Payments, LLC n/k/a Bluefin Payment Systems LLC (“Bluefin”) agreed to pay $750,000 to settle a Federal Trade Commission (“Commission” or “FTC”) lawsuit involving alleged violations of the FTC’s Telemarketing Sales Rule.

How do telemarketing regulations affect payment processors and ISOs?

Bluefin and Tax Club

Bluefin is an independent sales organization (“ISO”) that solicits and recruits merchants seeking credit card payment processing services. Bluefin entered into contracts with acquiring banks and payment processors, which provided payment processing services to merchants.

Beginning in 2007, Bluefin’s predecessor-in-interest set up more than 20 merchant accounts for a telemarketing operation known as “Tax Club.” Bluefin purportedly acquired these accounts in 2009 and opened additional merchant accounts for Tax Club in 2010. Bluefin allegedly enabled Tax Club to obtain and maintain merchant accounts in order to process credit card payments through VISA and MasterCard payment networks.

According to court documents filed by the FTC, Bluefin also opened and monitored merchant accounts for Tax Club’s clients, who were allegedly investing in non-operational business ventures. These ventures purportedly processed no sales transactions and, therefore, did not need merchant accounts. Nonetheless, Bluefin allegedly continued to sell merchant accounts to approximately 690 of Tax Club’s clients, deducted minimum monthly fees from their bank accounts and split the fees with Tax Club.

Although Bluefin ended its relationship with Tax Club in 2013, Tax Club purportedly processed over $138 million through Bluefin merchant accounts, and Bluefin allegedly generated approximately $2.6 million in gross revenues and fees from its relationship with Tax Club.

FTC Lawsuit

On February 2, 2016, the Commission sued Bluefin in the U.S. District Court for the Eastern District of New York in Long Island (Case No. 2:16-cv-00526-ADS-AYS) for alleged violations of the Telemarketing Sales Rule. The FTC lawsuit claims that Bluefin provided substantial assistance and support to Tax Club with knowledge that Tax Club was misrepresenting material aspects of the goods and services that it sold.

FTC Settles Claims Against Bluefin

Also on February 2, 2016, the Commission and Bluefin reached an agreement settling the FTC’s Telemarketing Sales Rule claims. Under the terms of the agreement, Bluefin is permanently barred from acting as an ISO for a number of high-risk merchants. Additionally, the settlement agreement establishes certain screening and monitoring requirements for designated clients and prevents Bluefin and its officers and employees from providing assistance or support to any entity or individual engaging in conduct that violates the Telemarketing Sales Rule.

Bluefin has further agreed to pay the Commission $750,000 to redress consumer injuries – $375,000 by this Thursday, and an additional $375,000 by April 4, 2016. In the event that Bluefin misstated or failed to disclose any material financial assets to the FTC, the amount due will balloon to $2.6 million.

ISOs and Payment Processors: Avoid Liability in Connection with Telemarketing Campaigns

Broadly speaking, the Telemarketing Sales Rule requires sellers and telemarketers to, among other things, refrain from misrepresenting, directly or by implication, any material aspect of the performance, efficacy, nature or central characteristics of goods or services that are the subject of a sales offer. Further, the FTC forbids third parties – such as ISOs and payment processors – from providing substantial assistance or support to sellers and/or telemarketers that engage in such misrepresentations. To avoid regulatory enforcement and other legal risk, parties involved in the processing of payments for telemarketing operations should always consult with an experienced marketing attorney before opening or maintaining any new merchant accounts.