Regulatory Alert: State governments are now getting into the Operation Choke Point mode. Over the last few years the Federal Trade Commission and other federal agencies have tried to enforce their laws and regulations by cutting off fraudsters’ access to electronic payments networks. By choking off the flow of funds, the federal government puts the fraudsters out of business. This has come to be known as “Operation Choke Point.” Now state governments are getting into the act.
The most recent example comes from Arizona. The Arizona Attorney General has decided to target processors and acquirers in its attempt to enforce its ban on tobacco sales without state licensure. Relying on an Arizona law which prohibits any person from knowingly providing “substantial assistance” to a person who violates a tobacco product sales ban, the Arizona Attorney General seeks to have processors and acquirers prohibit the completion of any tobacco sales into Arizona by unlicensed merchants. In other words, the Arizona Attorney General, like the FTC before it, wants to turn processors into policemen.
And Arizona’s efforts are paying off. On April 14, 2016, Visa released an announcement advising acquirers that they must take immediate action to ensure that their merchants comply with all applicable laws related to the sale and shipping of cigarettes. Visa advised that acquirers must identify and terminate merchants that engage in illegal online cigarette sales. The Visa bulletin further noted that it is the acquirers’ responsibility to confirm that all transactions introduced into the Visa system by their merchants are legal in both the buyers’ and sellers’ jurisdictions.
To protect the integrity of the payments system, acquirers and ISOs are required to review their merchant portfolios to identify any merchants that sell cigarettes online and then take the following concrete actions:
- Underwrite the principal owners to validate their eligibility to hold a merchant account;
- Carefully examine the merchant’s website to make sure they are not engaged in illegal activities, have appropriate shipping restrictions in place, and are not circumventing cigarette tax laws;
- Use a mystery shopper to confirm compliance;
- Confirm the merchant is not on the list created under the Prevent All Cigarette Trafficking Act;
- Recheck the MATCH list; and
- Terminate merchants that are identified as violating applicable laws.
Visa warns that violations of Visa Rules will result in substantial non-compliance assessments.
We expect that other states and agencies will jump on the band wagon in the near future and use the payment networks as leverage to put an end to conduct that they may not have a capacity to regulate on their own. Higher scrutiny of merchants engaged in regulated activities prior to on-boarding is well-advised.