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Credit Card Laundering Is Dirty Business

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Credit card laundering, sometimes referred to as "factoring," works like this: A company that does not have a credit card merchant account with a bank or credit card company recruits another company (that does have a merchant account) to process credit card transactions through its account. When the processing merchant receives payment for the credit card charges, it turns the money over to the company that doesn't have an account, but it keeps a previously agreed-upon percentage or other fee.

The reasons why some companies need other companies to process their credit card transactions are most often not the "hard luck" stories that the company representatives might tell you. In many cases, these companies need other merchants to process their credit card transactions because investigations and credit checks by banks and/or credit card companies revealed that these companies are bad risks and may end up having excessive charge-backs.

Bank Investigations and Regulations
Banks and some credit card companies investigate and evaluate businesses before they give them merchant accounts. One reason they do this is to avoid doing business with merchants they consider to be at potentially high risk for incurring losses, excessive charge-backs, or harm to the reputations of the credit card companies and their members.

Once an account is opened, regulations provide that a member bank may not accept deposits from any person or entity with which there is no merchant agreement. Therefore, merchants can legally deposit only those drafts generated by their own businesses. If someone approaches you, wanting to process credit card transactions through your merchant account, keep the following in mind:

Reasons for being denied a merchant account are not as simple as being a certain "type" of business that prevents the company from being approved for a merchant account. Instead, it may be because a bank or credit card company concluded, based on its investigation and credit check, that a particular business is a bad risk. Yes, banks may want information and financial records. Obtaining this information is not an invasion of privacy; rather, it enables them to evaluate the company in order to protect itself, consumers, and you from risky companies.

Likewise, if a bank ever asks for a large opening balance before granting a merchant account, it is because the bank determined, based on its investigation, that the company poses a financial risk. Again, the bank wants some kind of security to protect itself against losses.

If a company's application for an account has not been processed, that is hardly a sufficient reason for you to process its orders. The very fact that it has already been taking credit card orders without bank authorization demonstrates unreliability.

Financial Risks of Laundering
When you agree to process another merchant's credit card charges, you take on the responsibility of paying for any charge-backs, which will likely exceed any commissions you might earn. For example, disreputable companies can use other merchants to bill consumers for sales for which the goods are never delivered. After receiving payment from the merchants that processed the transactions, these disreputable companies often close their operations or move to new and undisclosed locations without ever sending the products to the consumers who ordered them. When these consumers find that the company has closed or disappeared, they contact the banks that issued their credit cards to challenge the charges on their bills.

Many merchants and banks have suffered substantial losses, including bankruptcy, as a result of voluminous charge-backs from laundering schemes.

Credit Risks of Laundering
Merchants that process credit card purchases on behalf of another company put themselves at serious risk of loss, even if there are not abundant charge-backs. Credit card laundering is a violation of a merchant agreement with a bank or credit card company, and discovery by the bank or credit card company will result in termination, even if the processing company is reputable. All banks and some credit card companies monitor merchant deposits with an eye out for sudden or marked increases. This alerts them to potential laundering schemes.

Once their accounts have been terminated, it will be difficult, or impossible, for merchants that agreed to participate in laundering schemes to obtain other merchant accounts in the future. In fact, Visa has publicly stated that it will permanently ban merchants that have been caught in a laundering scheme. Banks and credit card companies keep lists of companies terminated for cause, such as depositing a high percentage of unauthorized or otherwise fraudulent charges or engaging in laundering schemes. These lists may be available as references for evaluations of future applications for merchant accounts. In any business, especially an Internet business, the inability to accept credit card orders could result in a major loss of sales.

Legal Risks of Laundering
Credit card laundering can also expose you to criminal or civil liability. In September 1988, Visa and MasterCard initiated a federal civil lawsuit against several telemarketers, their agents, and their processing merchants for various laundering schemes they had perpetrated throughout the world. The suit, filed in the U.S. District Court in San Francisco, sought $5 million in punitive damages. The causes for which Visa and MasterCard sued included fraud, unlawful business practices, breach of contract, interference with contractual relations, and trademark infringement.

The state of Florida has passed a law that expressly criminalizes credit card laundering. Other states and federal authorities may also pursue criminal prosecution under a variety of antifraud statutes, such as mail fraud.

Ethical Risks of Laundering
By engaging in credit card laundering, you also help perpetuate the fraudulent and unethical business practices of disreputable and financially unsound companies. This is in direct opposition to ethical business practices. It is in your interest as a credit card-accepting merchant to rid the marketplace of these practices.

Merchants should be especially cautious to stay away from all laundering scams. To avoid being duped into suffering major financial losses, or assuming civil or criminal liabilities, beware of the phony reasons used to induce merchants into participating in these fraudulent schemes. If a business approaches you with what seems like a great opportunity, stop and ask yourself, "Why couldn't this company get its own merchant account?" The answer should give you more than enough reason not to get involved with this company.

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