# Telemarketing Sales Rule

> Briefs, arguments, decisions, and more.

URL: https://www.frixlaw.com/law-library/documents/fr%3A2013-12886

## Record

- **Collection:** Federal Register
- **Document type:** Proposed Rule
- **Published:** July 9, 2013
- **Citation:** 78 FR 41200

## Text

FEDERAL TRADE COMMISSION
16 CFR Part 310
RIN 3084-AA98
Telemarketing Sales Rule

AGENCY:

Federal Trade Commission.

ACTION:

Notice of proposed rulemaking; request for public comment.

SUMMARY:

The Federal Trade Commission (“Commission” or “FTC”) seeks public comment on proposed amendments to the Telemarketing Sales Rule (“TSR” or “Rule”). The proposed amendments would: Bar sellers and telemarketers from accepting remotely created checks, remotely created payment orders, cash-to-cash money transfers, and cash reload mechanisms as payment in inbound or outbound telemarketing transactions; expand the scope of the advance fee ban on “recovery” services, now limited to recovery of losses in prior telemarketing transactions, to include recovery of losses in any previous transaction; and clarify other TSR provisions as discussed at the outset of the
SUPPLEMENTARY INFORMATION
section.

DATES:

Written comments must be received by July 29, 2013.

ADDRESSES:

Interested parties may file, online or on paper, a comment by following the instructions in the Request for Comment part of the
SUPPLEMENTARY INFORMATION
section below. Write “Telemarketing Sales Rule, 16 CFR Part 310, Project No. R411001,” on your comment, and file your comment online at
https://ftcpublic.commentworks.com/FTC/tsrantifraudnprm
by following the instructions on the web-based form. If you prefer to file your comment on paper, mail or deliver your comment to the following address: Federal Trade Commission, Office of the Secretary, Room H-113 (Annex B), 600 Pennsylvania Avenue NW., Washington, DC 20580.

FOR FURTHER INFORMATION CONTACT:

Karen S. Hobbs or Craig Tregillus, Division of Marketing Practices, Bureau of Consumer Protection, Federal Trade Commission, 600 Pennsylvania Avenue NW., Washington, DC 20580, (202) 326-3587 or (202) 326-2970.

SUPPLEMENTARY INFORMATION:

I. Introduction

A. The Proposed Amendments

The Federal Trade Commission issues this Notice of Proposed Rulemaking (“NPRM”) to invite public comment on proposed amendments to the TSR. These proposed amendments reflect evolutions in the marketplace toward the use of certain retail payment methods in fraud transactions and the growing expansion of recovery services to include losses incurred in non-telemarketing transactions.

The principal proposed amendments would prohibit telemarketers and sellers in both inbound and outbound telemarketing calls from accepting or requesting remotely created checks, remotely created payment orders, money transfers, and cash reload mechanisms as payment and expand the scope of the advance fee ban on recovery services (now limited to recovery of losses sustained in prior telemarketing transactions) to include recovery of losses in
any
previous transaction.

Several additional proposed amendments are designed to clarify the language of certain existing TSR requirements to reflect Commission enforcement policy. These amendments would: (1) Specify that the recording of a consumer's express verifiable authorization must include a description of the goods or services being purchased; (2) state expressly that a seller or telemarketer bears the burden of demonstrating that the seller has an existing business relationship with, or has obtained an express written agreement from, a person whose number is listed on the Do Not Call Registry; (3) clarify that the business-to-business exemption extends only to calls to induce a sale to or contribution from a business entity, and not to calls to induce sales to or contributions from individuals employed by the business; (4) emphasize that the prohibition against sellers sharing the cost of Do Not Call Registry fees, which are non-transferrable, is absolute; and (5) illustrate the types of impermissible burdens that deny or interfere with a consumer's right to be placed on a seller's or telemarketer's entity-specific do-not-call list. A related amendment would specify that a seller's or telemarketer's failure to obtain the information necessary to honor a consumer's request to be placed on a seller's entity-specific do-not-call list pursuant to section 310.4(b)(1)(ii) will disqualify it from relying on the safe harbor for isolated or inadvertent violations in section 310.4(b)(3).

This NPRM invites written comments on all issues raised by the proposed amendments, including answers to the specific questions set forth in Section VIII of this Notice.

B. Background

On August 16, 1994, the Telemarketing and Consumer Fraud and Abuse Prevention Act (“Telemarketing Act” or “Act”) was signed into law.
1

The purpose of the Act was to curb the deceptive and abusive practices in telemarketing and provide key anti-fraud and privacy protections for consumers receiving telephone solicitations to purchase goods or services. The Telemarketing Act directed the Commission to adopt a rule prohibiting deceptive or abusive practices in telemarketing and specified, among other things, certain acts or practices the rule should address—B for example (1) a requirement that telemarketers may not undertake a pattern of unsolicited telephone calls which the reasonable consumer would consider coercive or abusive of his or her right to privacy; (2) restrictions on the time of day telemarketers may make unsolicited calls to consumers; and (3) a requirement that telemarketers promptly and clearly disclose in all calls to consumers that the purpose of the call is to sell goods or services or solicit a charitable contribution.
2

The Act also generally authorized the Commission to address in the rule other practices it found to be deceptive or abusive.
3

1
15 U.S.C. 6101-6108.

2
15 U.S.C. 6102(a)(3).

3
15 U.S.C. 6102(a)(1) (“The Commission shall prescribe rules prohibiting deceptive telemarketing acts or practices and other abusive telemarketing acts or practices.”). The Telemarketing Act directs the Commission to include in the TSR provisions that address three specific practices denominated by Congress as “abusive.”
Id.
at 6102(a)(3). However, the Act “does not limit the Commission's authority to address abusive practices beyond these three practices legislatively determined to be abusive.”
See
Notice of Proposed Rulemaking (“2002 Notice of Proposed Rulemaking”), 67 FR 4492, 4510 (Jan. 30, 2002).

Pursuant to its authority under the Telemarketing Act, the FTC promulgated the TSR on August 16, 1995.
4

The Commission subsequently amended the Rule on three occasions, in 2003,
5

2008,
6

and 2010.
7

In 2010, the Commission also issued an Advanced Notice of Proposed Rulemaking concerning caller identification (“Caller ID”) services and disclosure of the

identity of the seller or telemarketer responsible for telemarketing calls.
8

4
Statement of Basis and Purpose and Final Rule (“Original TSR”), 60 FR 43842 (Aug. 23, 1995). The effective date of the original Rule was December 31, 1995.

5

See
Statement of Basis and Purpose and Final Amended Rule (“2003 TSR Amendments”), 68 FR 4580 (Jan. 29, 2003).

6

See
Statement of Basis and Purpose and Final Rule Amendments (“2008 TSR Amendments”), 73 FR 51164 (Aug. 29, 2008).

7

See
Statement of Basis and Purpose and Final Rule Amendments (“2010 TSR Amendments”), 75 FR 48458 (Aug. 10, 2010). The Commission subsequently published correcting amendments to the text of section 310.4 the TSR. Telemarketing Sales Rule; Correcting Amendments, 76 FR 58716 (Sept. 22, 2011).

8
Advanced Notice of Proposed Rulemaking, 75 FR 78179 (Dec. 15, 2010).

The Telemarketing Act authorizes the Commission to promulgate rules “prohibiting deceptive telemarketing acts or practices and other abusive telemarketing acts or practices.”
9

Section 310.3 of the TSR targets deceptive telemarketing acts or practices. It contains provisions requiring certain disclosures during telemarketing calls,
10

prohibiting specific material misrepresentations,
11

and imposing liability on third parties that provide substantial assistance to telemarketers that violate the Rule.
12

Section 310.4 of the TSR focuses on abusive telemarketing acts or practices. It includes provisions intended to curb the deleterious effects these acts or practices may have on consumers. This section of the Rule delineates five categories of abusive conduct: (1) Conduct related to a pattern of calls, including conduct prohibited under the Rule's Do Not Call provisions;
13

(2) violations of the Rule's calling time restrictions;
14

(3) failure to make required oral disclosures in the sale of goods or services;
15

(4) failure to make required oral disclosures in charitable solicitations;
16

and (5) other abusive telemarketing acts or practices.
17

9

Supra
note 3.

10
The TSR requires that telemarketers soliciting sales of goods or services promptly disclose several key pieces of information during a telephone call: (1) The identity of the seller; (2) the fact that the purpose of the call is to sell goods or services; (3) the nature of the goods or services being offered; and (4) in the case of prize promotions, that no purchase or payment is necessary to win. 16 CFR 310.3(a)(1). In addition, telemarketers must, in any telephone sales call, disclose the total costs and material restrictions on the purchase of any goods or services that are the subject of the sales offer. 16 CFR 310.3(a)(1). In telemarketing calls soliciting charitable contributions, the Rule requires prompt disclosure of the identity of the charitable organization on behalf of which the request is being made and that the purpose of the call is to solicit a charitable contribution. 16 CFR 310.3(d).

11
The TSR prohibits misrepresentations about, among other things, the cost and quantity of the offered goods or services. 16 CFR 310.3(a)(2). It also prohibits making a false or misleading statement to induce any person to pay for goods or services or to induce a charitable contribution. 16 CFR 310.3(a)(4).

12
The TSR prohibits any person from providing substantial assistance or support to a seller or telemarketer when that person knows or consciously avoids knowing that the seller or telemarketer is engaged in any act or practice that violates sections 310.3(a), (c) or (d), or section 310.4 of the Rule. 16 CFR 310.3(b).

13
16 CFR 310.4(b).

14
16 CFR 310.4(c).

15
16 CFR 310.4(d).

16
16 CFR 310.4(e).

17
16 CFR 310.4(a) (prohibiting the use of threats, intimidation, or profane or obscene language; requesting or receiving an advance fee for credit repair, debt settlement, and recovery services or for the arrangement of a loan or other extension of credit when the telemarketer guarantees or represents a high likelihood of success; disclosing or receiving, for consideration, unencrypted consumer account numbers for use in telemarketing; causing billing information to be submitted for payment, directly or indirectly, without the express informed consent of the customer or donor; and failure to transmit Caller ID information).

In interpreting its rulemaking authority over “other abusive telemarketing acts or practices,”
18

the Commission has determined that its authority includes acts or practices “within the purview of its traditional unfairness analysis as developed in Commission jurisprudence.”
19

Thus, the Commission employs its unfairness analysis when identifying a telemarketing practice as abusive.
20

An act or practice is unfair under Section 5 of the FTC Act if it causes or is likely to cause substantial injury to consumers, if the harm is not outweighed by any countervailing benefits to consumers or competition, and if the harm is not reasonably avoidable.
21

18

Supra
note 3.

19
2002 Notice of Proposed Rulemaking, 67 FR at 4511.

20
2010 TSR Amendments, 75 FR at 48469 (discussing the Commission's use of unfairness standard in determining whether a practice is “abusive”);
see also
15 U.S.C. 45(n) (codifying the Commission's unfairness analysis, set forth in a letter from the FTC to Hon. Wendell Ford and Hon. John Danforth, Committee on Commerce, Science and Transportation, United States Senate, Commission Statement of Policy on the Scope of Consumer Unfairness Jurisdiction,
reprinted in In re Int'l Harvester Co.,
104 F.T.C. 949, *95-101 (1984)) (“Unfairness Policy Statement”).

21
15 U.S.C. 45(n).

II. Retail Payment Methods Susceptible to Fraud in Telemarketing

The following section of this Notice explores the features and vulnerabilities of four types of novel payment methods used in telemarketing, with a particular focus on the use of a consumer's bank account and routing number to withdraw funds from the account without authorization.
22

Noncash retail payment mechanisms used in telemarketing can be divided into two major categories: “Conventional payment methods” and “novel payment methods.” As used in this Notice, the term “conventional payment method” includes credit cards, debit cards, and other types of electronic fund transfers, which are processed or cleared electronically through networks that can be monitored systematically for fraud.
23

In addition, federal laws subject such conventional payments to procedures for resolving errors and statutory limitations on a consumer's liability for certain disputed transactions.
24

22
In addition to the payment methods discussed below, the Commission recognizes that there are additional noncash payment alternatives used in telemarketing transactions, including the use of billing and collection systems of mortgage, telephone, mobile phone, or utility companies and online payment intermediaries. These particular payments are not the subject of this NPRM, which focuses on payment alternatives that offer fraudulent telemarketers the most accessible and anonymous method of extracting money from consumers and for which the Commission has a record of fraud. However, the Commission continues to monitor complaints regarding the use of other billing platforms and payment methods in telemarketing fraud.

23
Credit card transactions are processed through the credit card payment systems, operated by companies such as American Express, MasterCard, and Visa. Many debit card transactions are processed through the payment card systems, such as those operated by MasterCard and Visa. In addition, some debit card transactions, and other types of electronic fund transfers, may be cleared by the Automated Clearinghouse (“ACH”) Network, a nationwide, interbank electronic clearing house for processing and clearing electronic payments for participating financial institutions.
See infra
note 50 (describing other types of electronic fund transfers that are processed as ACH debits). ACH transactions are governed by operating rules implemented and enforced by NACHA—The Electronic Payments Association (“NACHA”), a private, self-regulatory trade association comprised of financial institutions and regional payment associations. There are two ACH operators: the Federal Reserve Bank (“FedACH”) and The Electronic Payments Network (“EPN”), the only remaining private sector operator. Terri Bradford,
The Evolution of the ACH,
Payment System Research Briefing, Federal Reserve Bank of Kansas (Dec. 2007),
available at http://www.kansascityfed.org/PUBLICAT/PSR/Briefings/PSR-BriefingDec07.pdf.

24
Credit card transactions are subject to the Truth-in-Lending Act (“TILA”), 15 U.S.C. 1601
et seq.,
and Regulation Z, 12 CFR part 1026. Debit card transactions, ACH debits, and other types of electronic fund transfers involving a consumer's account at a financial institution are governed by the Electronic Fund Transfer Act (“EFTA”), 15 U.S.C. 1693
et seq.,
and Regulation E, 12 CFR 1005.

As used in this Notice, the term “novel payment method” refers to four types of noncash payments—remotely created checks,
25

remotely created payment orders,
26

“cash-to-cash money transfers,”
27

and “cash reload mechanisms.”
28

These novel payment methods differ significantly from credit card transactions subject to the Truth-in-Lending Act (“TILA”) and Regulation Z, as well as from debit card transactions, Automated Clearinghouse (“ACH”) debits from consumer bank

accounts, and other electronic fund transfers subject to the Electronic Fund Transfer Act (“EFTA”) and Regulation E. Unlike these conventional payment methods, novel payment methods are cleared via check clearing and money transfer networks that provide little or no systematic monitoring to detect or deter fraud. Moreover, these novel payment methods are governed principally by state laws and remittance transfer regulations that do not provide consumers with adequate recourse when unauthorized transactions or telemarketing fraud occurs.
29

25

See infra
note 35 (definition of remotely created check).

26

See infra
note 39 (definition of remotely created payment order).

27

See infra
note 122 and Section IV.A (discussing the proposed definition of cash-to-cash money transfer, which includes the electronic transfer of cash from one person to another person in a different location that is conducted through a money transfer provider and is received in cash).

28

See infra
Section II.B (discussing the function of a cash reload mechanism, which acts as a virtual deposit slip that a person uses to convert cash into electronic format that can be added to any existing prepaid card within the same prepaid network).

29

See infra
note 54 and accompanying text (discussing the Uniform Commercial Code applicable to checks and remotely created checks); notes 129 through 134 (discussing final Remittance Transfer Rule aimed at insuring the transparency and accuracy of cross-border remittance transfers, issued by the Consumer Financial Protection Bureau (“CFPB”) in 2012).

The Commission proposes amending the Rule to prohibit the use of these novel payment methods—remotely created checks, remotely created payment orders, cash-to-cash money transfers, and cash reload mechanisms—in
all
telemarketing transactions.
30

The Commission is concerned that the TSR's provision requiring “express verifiable authorization” for such novel payment methods,
31

which was added to the Rule during the amendment proceeding completed in 2003, has not adequately protected consumers against fraud.
32

The Commission's continuing law enforcement experience has demonstrated that, despite the requirement of express verifiable authorization when accepting a remotely created check as payment for a telemarketing purchase, unscrupulous telemarketers have increasingly exploited remotely created checks to extract or attempt to extract hundreds of millions of dollars from defrauded consumers.
33

Fraudulent telemarketers also rely on other novel payment methods—such as remotely created payment orders, cash-to cash money transfers, and cash reload mechanisms—in their telemarketing schemes. Therefore, the Commission proposes changes to the Rule that would prohibit the use of these novel payment methods in inbound and outbound telemarketing transactions.

30

See infra
Section IV.E (discussing proposed amendments to the general media and direct mail exemptions in sections 310.6(b)(5) and (6)).

31
16 CFR 310.3(a)(3). In 2003, the Commission explained that requiring express verifiable consent was necessary “when consumers are unaware that they may be billed via a particular method, when that method lacks legal protection against unlimited unauthorized charges, and when the method fails to provide dispute resolution rights.” 2003 TSR Amendments, 68 FR at 4606. Thus, section 310.3(a)(3) of the TSR requires telemarketers and sellers to obtain a consumer's express verifiable authorization for all telemarketing transactions where payment is made by a method other than a credit card or a debit card. 16 CFR 310.3(a)(3). This includes ACH debits and other forms of electronic fund transfers subject to the EFTA, as well as payment methods that are not subject to the EFTA.

32
Other law enforcers and regulators have expressed concerns about the fraudulent use of remotely created checks.
See, e.g.,
NACHA Discussion Paper,
Warranty Claims on Demand Drafts Through the ACH Network
(May 1, 2008) (noting that law enforcement and consumer protection agencies continue to alert NACHA about the fraudulent use of remotely created checks, and confirming that, “[a]s the electronic payments networks have implemented risk management and anti-fraud programs, it appears that some fraudulent activity has migrated to this form of payment”),
available at http://www.nacha.org/c/AccomplishmentsandCurrentInitiatives.cfm;
Public Comment filed with the Federal Reserve by the National Association of Attorneys General, the National Consumer Law Center, Consumer Federation of America, Consumers Union, the National Association of Consumer Advocates, and U.S. Public Interest Research Group in Docket No. R-1226 (May 9, 2005) (advocating the elimination of remotely created checks in favor of electronic fund transfers covered by the EFTA); Federal Reserve Bank of Atlanta,
2008 Risk & Fraud in Retail Payments: Detection & Mitigation Conference Summary
(Oct. 6-7, 2008) (“Anecdotally, telemarketers turned to remotely created checks as better ACH risk controls came online.”),
available at http://www.frbatlanta.org/filelegacydocs/08retailpayments.pdf.

33

See infra
notes 91-99 (citing injury estimates in cases brought by the Commission).

A. Remotely Created Checks and Remotely Created Payment Orders

Checks are written orders used to instruct a financial institution to pay money from the account of the check writer (“payor”) to the check recipient (“payee”). Traditional checks have certain requirements as to the type of paper and ink used, and what information appears on the check. Traditional checks also require the signature of the authorized signatory on the checking account, which must be verified by the bank.
34

By contrast, a remotely created check is an unsigned paper check that is created by the payee (typically a merchant, seller, or telemarketer).
35

In place of the payor's signature, the remotely created check bears a statement indicating that the account holder authorized the check or that the “signature is on file.”
36

Any merchant who obtains a consumer's bank routing and account number can print a remotely created check with the proper equipment or the help of a third-party payment processor, and deposit it into its bank account for collection.
37

Thus, remotely created checks are more susceptible to fraud than paper checks.

34
Because payment for goods or services sold through telemarketing occurs immediately over the telephone, traditional paper checks are not commonly used in telemarketing transactions. Nevertheless, in most circumstances, a consumer's written signature on a check would satisfy the express verifiable authorization requirement of section 310.3(a)(3)(i) of the TSR.

35
A remotely created check, also commonly referred to as a “demand draft,” “bank check,” or “bank draft,” is defined by Regulation CC (Availability of Funds and Collection of Checks), 12 CFR 229.2(fff), as “a check that is not created by the paying bank and that does not bear a signature applied, or purported to be applied, by the person on whose account the check is drawn.” Thus, checks generated by an account holder's bank on the request of the account holder through the bank's bill pay service are not remotely created checks, despite the absence of the account holder's signature.

36
“As a result, they are vulnerable to misuse by fraudsters who can, for example, use [a remotely created check] to debit a victim's account without receiving proper authorization or delivering the goods or services. The risk of fraudulent [remotely created checks] is amplified in one-time purchase scenarios where the merchant is relatively unknown to the customer.” Crystal D. Carroll, Federal Reserve Bank of Atlanta, Retail Payments Risk Forum,
Remotely Created Checks: Distinguishing the Good from the Bad
(July 6, 2009),
available at http://portalsandrails.frbatlanta.org/2009/07/remotely-created-checks-distinguishing-the-good-from-the-bad.html.

37
To comply with processing standards at banks that use magnetic ink character recognition line data from the bottom of a check, remotely created checks must be printed using special check paper stock and magnetic ink. Telemarketers often employ third-party processing firms to create and deposit the checks, which are accepted for deposit by the firms' bank.
See, e.g., FTC
v.
Your Money Access, LLC
(
“YMA”
), Civ. No. 07-5147 (E.D. Pa. Aug. 11, 2010) (stipulated permanent injunction against payment processor that allegedly facilitated fraudulent telemarketers by debiting accounts through remotely created checks and ACH debits);
United States
v.
Payment Processing Ctr., LLC,
Civ. No. 06-0725 (E.D. Pa. Aug. 12, 2010) (Stip. Perm. Inj.) (same);
FTC
v.
Interbill, Ltd.,
Civ. No. 2:06-01644 (D. Nev. Apr. 30, 2009) (Summ. J.),
aff'd, FTC
v.
Wells,
Civ. No. 09-16179, 385 F.App'x. 712 (9th Cir. 2010) (summary judgment against payment processor that facilitated fraudulent telemarketers by debiting accounts through remotely created checks).

Changes in banking regulations and advances in technology now enable banks to accept and exchange electronic images of paper checks, including “substitute checks,” instead of sorting and transporting paper checks around the country on a daily basis.
38

As a result, telemarketers, sellers, and payment processors can deposit

scanned images of paper-based checks, including remotely created checks, into the check clearing system.

38
In 2003, Congress enacted the Check Clearing for the 21st Century Act (“Check 21 Act” or “Check 21”), 12 U.S.C. 5001-5018, which paved the way for the use of substitute checks. Under the Act, a substitute check qualifies as the legal equivalent of the original check if:

(1) it accurately represents all of the information on the front and back of the original check as of the time it was truncated [
i.e.,
removed from the collection or return process and supplanted by an electronic image of the check] * * * (2) it bears the legend: “This is a legal copy of your check. You can use it the same way you would use the original check,” and (3) a bank has made the Check 21 Act warranties with respect to the substitute check.

Federal Financial Institutions Examination Council (“FFIEC”),
Check Clearing for the 21st Century Act Foundation for Check 21 Compliance Training, available at

http://www.ffiec.gov/exam/check21/Check21FoundationDoc.htm.

Electronic image exchange also has resulted in an “all-electronic” version of the remotely created check—the “remotely created payment order”—a remotely created check that
never
exists in printed paper form.
39

Like traditional checks and remotely created checks, remotely created payment orders are deposited into and cleared through the check clearing system.
40

As with remotely created checks, remotely created payment orders are created by the merchant (payee), not the consumer (payor). In the case of remotely created payment orders, a telemarketer or seller simply enters a bank account number and bank routing number into an electronic file that is transmitted to a financial institution for processing via the check clearing system.
41

As a result, remotely created payment orders are at least as susceptible to fraud as remotely created checks.
42

39
The proposed definition of “remotely created payment order,” therefore, closely tracks the proposed definition of remotely created check:

a payment instruction or order drawn on a person's account that is initiated or created by the payee and that does not bear a signature applied, or purported to be applied, by the person on whose account the order is drawn, and which is cleared through the check clearing system. The term does not include payment orders cleared through the Automated Clearinghouse Network or subject to the Truth in Lending Act, 15 U.S.C. 1601, and Regulation Z, 12 CFR part 1026.

See infra
Section IV.A.

40
In 2011, while proposing certain amendments to Regulation CC (Availability of Funds and Collection of Checks), the Board of Governors of the Federal Reserve System (“Federal Reserve Board”) used the term “electronically-created item” to describe any all-electronic image of a check that is sent through the check clearing system.
Proposed Rule; Regulation CC,
76 FR 16862, 16865 (Mar. 25, 2011),
available at

http://www.gpo.gov/fdsys/pkg/FR-2011-03-25/pdf/2011-5449.pdf.
As such, the term encompasses “remotely created payment orders” (also known as “electronic RCCs,” “virtual drafts,” “paperless checks,” and “non-check RCCs”), as well as smart-phone checks where the consumer “signs” a digital image of a check that can be emailed to a merchant or the merchant's bank.
Id.
Among other things, the Federal Reserve Board proposed amendments to Regulation CC that would provide such electronically-created items with the same interbank warranty and liability provisions as remotely created checks.
Id. See also supra
note 53 (explaining interbank warranty and liability provisions applicable to remotely created checks). To date, the Board has taken no further action on this proposal.

The Commission's proposed ban would extend to remotely created payment orders. Importantly, the ban would not prohibit the use of other “electronically-created items,” as defined by the Federal Reserve Board's proposed amendments to Regulation CC.

41
FFIEC,
Retail Payment Systems Booklet—February 2010,
at 16 (Feb. 2010) (“
Retail Payment Systems Booklet
”),
available at

http://ithandbook.ffiec.gov/ITBooklets/FFIEC_ITBooklet_RetailPaymentSystems.pdf.
“Unlike traditional checks or RCCs [remotely created checks], electronically created payment orders do not begin with a paper item. However, they are similar to RCCs in that they . . . bear no direct evidence of the customer's authorization. Because these transactions are not originally captured from paper check items, the laws and regulations pertaining to check collection do not apply.”
Id.; see also infra
notes 61-62 and accompanying text (noting the uncertain regulatory framework for remotely created payment orders deposited into the check clearing system).

42
In inbound telemarketing calls, the same account information could be used to initiate an electronic fund transfer through the ACH Network. Fraudulent telemarketers and unscrupulous payment processors prefer, however, to use remotely created payment orders to evade the ACH Network and exploit the weaknesses inherent in the check clearing system.
See, e.g., FTC
v.
Automated Electronic Checking, Inc. (“AEC”),
Civ. No. 3:13-cv-00056-RCJ-WGC (D. Nev. Feb. 5, 2013) (Stip. Perm. Inj.);
FTC
v.
Landmark Clearing Inc.,
Civ. No. 4:11-00826 (E.D. Tex. Dec. 15, 2011) (Stip. Perm. Inj.).

The Commission previously considered the risks associated with the use of remotely created checks (then known as “demand drafts”) in telemarketing during the initial promulgation of the Rule and subsequent rulemaking proceedings culminating in the 2003 amendments. At the time of those prior rulemaking proceedings, there were few, if any, convenient and safe payment alternatives available for consumers without access to credit cards. Consequently, prohibiting the use of remotely created checks in telemarketing would have imposed hardships on those consumers.
43

In the past decade, however, there has been a dramatic proliferation of noncash payment alternatives for consumers, and electronic payments now surpass paper checks in popularity as noncash means of payment.
44

In light of these changes in the marketplace, the Commission preliminarily finds that the risks from using these payment methods in telemarketing transactions exceed the benefits of permitting their use. At the same time, the Commission wishes to explore whether there might be legitimate reasons that telemarketers use these payment methods instead of other available payment mechanisms.
45

To understand any potential problems posed for legitimate businesses by the proposed ban on the use of remotely created checks and remotely created payment orders, the Commission welcomes comments from the public in response to the questions posed in Section VIII.

43
Original TSR, 60 FR at 43850.

44
Federal Reserve System,
The 2010 Federal Reserve Payments Study: Noncash Payment Trends in the United States: 2006-2009,
at 4 (April 5, 2011) (
“2010 Payments Study”
) (“Electronic payments (those made with cards and by ACH) now collectively exceed three quarters of all noncash payments while payments by check are now less than one-quarter. The increase in electronic payments and the decline of checks can be attributed to technological and financial innovations that influenced the payment instrument choices of consumers and businesses.” (Citation omitted)),
available at

http://www.frbservices.org/files/communications/pdf/press/2010_payments_study.pdf.

45
The 2010 Federal Reserve Payments Study concluded that “[t]he decline in [consumer-to-business] check writing reflects, among other things, the replacement of consumer checks by electronic payments, such as online bill payments through the ACH, or point-of-sale purchases with debit cards.”
Id.
at 11.

1. Absence of Federal Consumer Protection Regulation of Remotely Created Checks and Remotely Created Payment Orders

A complicated interplay between federal and state laws results in uneven regulation of different payment methods. The type of payment mechanism used by a consumer in a particular transaction determines the level of legal protection against unauthorized charges the consumer receives. Consumers generally are not aware of the differing legal protections pertaining to the various payment methods. Significantly, consumers who provide bank debiting information to a telemarketer have virtually no control over how the telemarketer chooses to process their payment. Once a telemarketer obtains a consumer's bank account and routing number, the telemarketer (not the consumer) may choose to use that information to initiate payment via ACH debit, remotely created check, or remotely created payment order
46

—a choice that determines what level of protections the consumer receives.

46

Cf. supra
note 42.

When a remotely created check or a remotely created payment order is cleared through the check clearing system, consumers receive none of the federal protections that safeguard conventional payments that are processed through the credit card system or the ACH Network. Consider the protections the law affords to credit card transactions and electronic fund transfers, such as debit card and ACH transactions. Federal law subjects credit card transactions to a prescribed billing error resolution process
47

and statutory limitations on a cardholder's liability for certain transactions.
48

Similarly, when

consumers use debit cards linked to a bank account or otherwise initiate electronic fund transfers involving a bank account, they are protected by the EFTA.
49

This is also true when consumers provide paper checks to a merchant that converts the account information from these checks into electronic ACH debits.
50

The EFTA and Regulation E provide consumers with error resolution procedures, including a requirement that funds debited in an unauthorized electronic fund transaction must be returned to the consumer's account within a maximum of ten business days, pending the outcome of further investigation,
51

and statutory limitations on a consumer's liability for unauthorized transactions.
52

47
Fair Credit Billing Act, 15 U.S.C. 1666 (correction of billing errors). Within 60 days of the financial institution's transmittal of her credit card account statement, a consumer may dispute a charge for goods or services with her credit card company, and withhold payment while the dispute is pending. Billing errors include failure of a merchant to deliver goods or services as agreed.

48
Truth-In-Lending Act, 15 U.S.C. 1643 (liability of holder of credit card); Regulation Z, 12 CFR 1026.12(b)(2) (liability of cardholder for unauthorized use).

49
The EFTA also covers payroll cards, and some prepaid debit cards (also referred to as “general purpose reloadable” or “GPR” cards) that are linked to an account at a financial institution. In addition, section 401 of the Credit Card Accountability Responsibility and Disclosure Act of 2009 (“Credit CARD Act”), 15 U.S.C. 1693l-1, created new section 915 of the EFTA, subjecting other types of non-GPR cards (
i.e.,
gift cards) to some, but not all, requirements of the EFTA.

In May 2012, the CFPB requested public comment on whether (and to what extent) EFTA coverage should be provided to all GPR cards. Advanced Notice of Proposed Rulemaking; Electronic Fund Transfers (Regulation E) and General Purpose Reloadable Prepaid Cards (“ANPR Electronic Fund Transfers and GPR Cards”), 77 FR 30923 (May 24, 2012). In a comment submitted the CFPB, Commission staff expressed support for protecting users of GPR cards and for the CFPB's proposal to solicit information about the costs and benefits of extending additional protections to these cards. Comment, Staff of the Bureau of Consumer Protection, ANPR Electronic Fund Transfers and GPR Cards, Dkt. No. CFPB-2012-00196 (July 23, 2012),
available at

http://www.ftc.gov/os/2012/07/120730cfpbstaffcomment.pdf.
The Commission will continue to monitor complaints regarding the use of prepaid debit cards in telemarketing fraud to determine whether additional amendments of the TSR would protect consumers.

50
Examples of such electronic check conversions include point-of-purchase (“POP”) and accounts receivable conversion (“ARC”). A POP entry is created for an in-person purchase of goods or services when a retailer uses a consumer's paper check as a source document to electronically enter the consumer's bank routing and account number to initiate an ACH debit to the consumer's bank account. An ARC entry also uses a consumer's paper check as a source document to initiate an ACH debit, but the check is not received at the point-of-purchase. Instead, “a biller receives the consumer's check in the mail, or at a lockbox location for payment of goods and services.” Karen Furst & Daniel E. Nolle, Policy Analysis Division, Office of the Comptroller of the Currency,
ACH Payments: Changing Users and Changing Uses Policy Analysis Paper #6,
at 8 (Oct. 2005),
available
at
http://www.occ.gov/topics/bank-operations/bit/ach-policy-paper-6.pdf.
“Under a legal sleight of hand, the check is treated as an authorization for an electronic fund transfer, bringing the transaction entirely under the EFTA.” Gail Hillebrand,
Before the Grand Rethinking: Five Things to Do Today with Payments Law and Ten Principles to Guide New Payments Products and New Payments Law,
83 Chi.-Kent L. Rev. 769, 780 n.22 (2008).

51
15 U.S.C. 1693f(c) (provisional recredit of consumer's account). When a consumer disputes an electronic funds transfer as unauthorized or otherwise in error, the EFTA provides a process for error resolution.
Id.
at 1693f. The consumer must notify the financial institution, either orally or in writing, of the reasons for the error or dispute within 60 days of transmittal of an account statement bearing the disputed transaction. The EFTA gives the financial institution up to ten business days to either resolve the dispute or provide the consumer with a provisional recredit of the disputed amount. The financial institution may take up to 45 days to complete its investigation. If the dispute is resolved in the consumer's favor before the end of the ten day period, however, the recredit must be made within one business day. These time periods can be extended under certain circumstances.
Id.

52
Under the EFTA, consumers are not liable for unauthorized electronic fund transfers unless an accepted card or other means of access was used—
i.e.,
a card which had been received by the consumer. 15 U.S.C. 1693g(a). If an accepted card was used, and the card provides for a means to identify the user of the card, the EFTA allows the consumer to be held responsible for certain amounts, depending on the timeliness of the consumer's discovery and report of loss, theft, or unauthorized use. If the consumer reports the loss not later than two business days of discovery of the loss, a consumer's liability is limited to $50.
Id.
at 1693g(a)(1)-(2). If not, a consumer's liability can go up to $500. If the consumer fails to report an unauthorized fund transfer that appears on a statement provided to the consumer within 60 days, however, the consumer's potential loss is unlimited.
Id.

In contrast, no such federal consumer protection laws or regulations apply to remotely created checks deposited into the check clearing system.
53

These payments are governed principally by state law, Articles 3 and 4 of the Uniform Commercial Code (“UCC”), which apply to all negotiable instruments and bank deposits.
54

Unlike the dispute resolution protections provided by the TILA and Regulation Z, the UCC provides no way for a consumer to dispute or withhold payment before the funds are withdrawn from her account.
55

In addition, consumers receive superior substantive liability limits for unauthorized transactions under the TILA and, to a lesser extent, the EFTA.
56

Moreover, unlike the EFTA and Regulation E, the UCC imposes no specific obligation on a financial institution to recredit disputed funds to a consumer's account within a particular time frame,
57

and a consumer may have to pursue legal action against the bank to promptly recover money lost in telemarketing fraud.
58

Thus, consumers victimized by telemarketing schemes that deposit unauthorized remotely created checks are forced to expend a significant amount of time, effort and money to resolve disputes with their banks over unauthorized withdrawals from their accounts.
59

53
Remotely created checks are subject to Regulation CC, 12 CFR 229.34, which provides for special transfer and presentment warranties between banks. These interbank warranties “shift liability for the loss created by an unauthorized remotely created check to the depositary bank,” which is generally the bank for the person that initially created and deposited the remotely created check.
Final Rule; Regulations J and CC,
70 FR 71218, 71220 (Nov. 5, 2005). “The warranty applies only to financial institutions and does not directly create any new rights for checking account customers.” FFIEC,
Retail Payment Systems Booklet, supra
note 41, at 9.

54
The UCC has been adopted (in whole or in part), with some local variation, in all 50 states, the District of Columbia, and the Virgin Islands.

55

See supra
note 47; Hillebrand,
supra
note 50 at 776 (explaining the limited consumer protections afforded by the UCC for many consumer check disputes); Mark E. Budnitz, Lauren K. Saunders, & Margot Saunders, § 2.3.2.3 Consumer Banking and Payments Law: Credit, Debit & Stored Value Cards, Checks, Money Orders, E-Sign, Electronic Banking and Benefit Payments (4th ed., National Consumer Law Center 2009 & Supp. 2010).

56

See supra
notes 47-48 and 51-52.

57
“Thus, only weak and indirect motivations force banks to move promptly in response to such a complaint. For example, the bank that responds slowly to such a complaint might harm its reputation for providing high-quality customer service. Similarly, if the bank refuses to return the funds promptly and subsequently dishonors a check for which the customer's funds should have been adequate, the bank would be exposed to liability for wrongful dishonor. It is safe to say that those motivations are much less effective than the specific statutory deadlines for dealing with customer complaints that appear in the EFTA.” Expert Report of Prof. Ronald Mann, ¶ 24 (Feb. 4, 2008),
filed in FTC
v.
Neovi, Inc.
(“
Neovi”
), Civ. No. 06-1952 (S.D. Cal. Sept. 16, 2008) (Summ. J.).

58
Hillebrand,
supra
note 50, at 780 (explaining that “check law sets no guaranteed time period for the re-credit of disputed funds”).

59
Mann,
supra
note 57, ¶ 25 (“As a result, a typical consumer will expend a considerable amount of time getting the bank to respond to the complaint. Among other things, the consumer ordinarily will be required to submit an affidavit regarding the forgery. For consumers that are not experienced with the legal system, and who have immediate uses to which they would put the funds in their bank accounts, these problems are likely to be most burdensome.”);
see also
Expert Report of Elliott C. McEntee, at ¶ 55 (Oct. 1, 2008),
filed in YMA, supra
note 37.

The regulatory framework for remotely created payment orders is complicated and unsettled, but currently results in the same inferior protection against fraud as provided by remotely created checks. Unlike traditional checks or remotely created checks, remotely created payment orders never exist in paper form and, thus, cannot be used to create a substitute check that meets the requirements of the Check Clearing for the 21st Century Act (“Check 21 Act”).
60

The Consumer Financial

Protection Bureau (“CFPB”) has not yet determined whether such electronically-created items not derived from checks are electronic fund transfers subject to Regulation E.
61

Notwithstanding this uncertain regulatory framework, as a practical matter, the check clearing system cannot currently distinguish remotely created payment orders from remotely created checks (or from images of traditional checks).
62

Banks, therefore, often treat returned remotely created payment orders as if they were remotely created checks covered by the UCC, which, as previously noted, provides consumers with no meaningful protection against telemarketing fraud.

60
Budnitz & Saunders,
supra
note 55, at § 2.6.3.5; NACHA,
Remotely Created Checks and ACH Transactions: Analyzing the Differentiators
(
“RCC and ACH Differentiators”
), at 6 (Mar. 2010),
available at

http://www.macha.org/Portals/0/RCC%20White%20Paper%20031110%20Final.pdf
(“[Remotely created payment orders] that are not originally captured via a paper document cause greater risk than RCCs because they are even more difficult to identify and monitor and because their legal framework is not clearly defined.”); Richard Oliver & Ana Cavazos-Wright, Federal Reserve Bank of Atlanta, Retail Payments Risk Forum, Portals and

Rails,
Going All Digital With the Check: Check 21, ACH, or an Electronic Payment Order?
(May 10, 2010),
available at http://portalsandrails.frbatlanta.org/remotely-created-checks/.

61
In 2011, while proposing certain amendments to Regulation CC (Availability of Funds and Collection of Checks), the Federal Reserve Board stated that it had not made a determination as to the applicability of Regulation E to electronically-created items, such as remotely created payment orders.
Proposed Rule; Regulation CC, supra
note 40 at 16865-86. Since then, the CFBP has assumed responsibility for most rulemaking authority for Regulation E, pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”), Pub. L. 111-203, 124 Stat. 1376 (2010). The CFPB also has not made such a determination.

62

Proposed Rule; Regulation CC, supra
note 40, at 16866;
see also
Ana Cavazos-Wright, Federal Reserve Bank of Atlanta, Retail Payments Risk Forum,
Remotely Created Checks: Banks of First Deposit Provide Front Line of Defense
(June 7, 2010),
available at

http://portalsandrails.frbatlanta.org/remotely-created-checks/.
(“RCCs that exist in [electronic-only] format may easily bypass detection because, when they are sent forward for clearing, they appear in a format indistinguishable from files of images captured from paper checks.”).

Moreover, in explaining amendments to the Federal Reserve Operating Circular 3, the Retail Payments Office of the Federal Reserve System advised depository institutions that these items “actually fall under the requirements of the EFTA and Reg E.” Letter from Richard Oliver, Retail Payments Product Manager, Retail Payments Office of the Federal Reserve to Chief Executive Officers of Depository Institutions (June 16, 2008);
see also
Federal Reserve Bank of New York,
Operating Circular No. 3 Revised, Circular 11962
(June 23, 2008),
available at

http://www.newyorkfed.org/banking/circulars/11962.html.

Some payment processors capitalize on this confusing regulatory framework when marketing their remotely created payment order services to high-risk merchants. These entities openly promote the “merchant-friendly” UCC framework and avoidance of NACHA's Operating Rules, including NACHA's 1 percent monthly threshold for unauthorized returns, as reasons to use remotely created checks and remotely created payment orders instead of credit card or ACH payments.
63

63
For example, the defendants in
AEC
urged their merchant clients to avoid NACHA's 1 percent monthly threshold on unauthorized returns by switching from ACH debits to RCPOs.
FTC
v.
AEC, supra
note 42, at ¶29.

Similarly, the defendants in
Landmark
expressly advertised their remotely created payment order processing product as a less regulated alternative to ACH transactions.
FTC
v.
Landmark Clearing, supra
note 42, at ¶23. The defendants declared on their Web site and promotional materials that:

NACHA, the governing body over check processing rules and regulations, has stated businesses with return rates of higher than 1% unauthorized return rate cannot process ACH transactions. If your company is at risk of higher return rates, [RCPO] processing is a great solution for your business needs.

Id.
at Exhibit A,
Screen Capture of Landmark Web site, Virtual Draft page.

2. Lack of Centralized Fraud Monitoring and Controls

Unlike payments processed or cleared through the credit card system or the ACH Network, remotely created checks are not subject to systematic monitoring for fraud. This makes them an irresistible payment method for fraudulent telemarketers. The credit card system is designed to deter and detect fraud by requiring that a merchant be approved for a merchant account before it may accept credit card payments. In addition, the credit card system monitors all returns and refunds, to identify unusual activity associated with fraud. Specifically, the credit card payment system can analyze the chargeback volume (
i.e.
the number of chargebacks over a particular time period), chargeback rate (
i.e.,
the percentage of attempted debits that are returned out of the total number of attempted debits for a specific merchant), and chargeback reason codes (via a numeric code used to identify why a chargeback occurred) of its participants.
64

To participate in the credit card payment systems, banks and merchants agree to abide by certain operating rules, including requirements that chargeback rates remain below established thresholds,
65

and they can be expelled or otherwise sanctioned for violating these rules.
66

64
A “chargeback” is a payments industry term used to describe the process through which a disputed charge to a consumer's credit card is refunded to the consumer and charged back to the entity, often a merchant, that placed the charge on her account. This dispute process is governed by the Fair Credit Billing Act, TILA and Regulation Z.
See supra
notes 47 and 48.

65
For example, Visa's operating rules state:

Visa monitors the total volume of U.S. Domestic and International Interchange and Chargebacks for a single Merchant Outlet and identifies U.S. Merchants that experience all of the following activity levels during any month:

• 100 or more interchange transactions

• 100 or more Chargebacks

• A 1% or higher ratio of overall Chargeback-to-Interchange volume

Visa, U.S.A,
Visa International Operating Regulations
756 (Apr. 15, 2013),
available at

http://usa.visa.com/download/merchants/visa-international-operating-regulations-main.pdf.
MasterCard maintains similar, but not identical, thresholds for its chargeback monitoring programs (at least 100 chargebacks a chargeback ratio of 1.5 percent). MasterCard,
Security Rules and Procedures: Merchant Edition
8-13 (Feb. 22, 2013),
available at

http://www.mastercard.com/us/merchant/pdf/SPME-Entire_Manual_public.pdf.

66
MasterCard maintains the Member Alert to Control High-risk Merchants (“MATCH”) file, a database that acquiring banks and payment processors use to report merchants that they have terminated for risk-related reasons. In turn, banks and payment processors must check prospective merchants against the MATCH file as part of the underwriting process.
MasterCard Security Rules and Procedures, id.
at 11-1.

Similarly, the two ACH operators (the Federal Reserve Bank and the Electronic Payments Network) systematically monitor transactions to detect and deter fraud. The ACH operators track the volume, reason code, and rate of “returned items”
67

sent back to originating banks where the items were originally deposited, and forward the data to NACHA—The Electronic Payments Association (“NACHA”).
68

When NACHA identifies a merchant with unusually high returns activity, it notifies the merchant's originating bank which must review the merchant's activity and compliance with the NACHA rules.
69

NACHA's rules and guidelines emphasize the responsibility of all ACH participants, including merchants, banks, and payment processors, to monitor return rates and other suspicious activity in order to detect and prevent fraud in the ACH Network. ACH participants can determine whether a merchant's return rates are excessive by comparing the merchant's return rate with the industry average return rates, which NACHA publishes in quarterly NACHA

newsletters. NACHA rules apply additional restrictions on “telephone-initiated” (abbreviated as “TEL”) transactions, which historically have been fertile ground for fraud.
70

67
A “returned item” is a check sent through the check clearing network or an electronic debit processed through the ACH Network that has been returned unpaid to the originating bank. Consumers may initiate returns of checks and electronic debits by disputing the payment with their bank. For traditional checks, this process is governed by the UCC; for electronic debits, it is governed by the EFTA and Regulation E.

68
FFIEC,
Retail Payment Systems Booklet, supra
note 41, at 16.

69
NACHA may initiate a rules enforcement proceeding against an originating depository financial institution (“ODFI”) when its merchant generates a return rate for unauthorized transactions that exceeds 1 percent in a month. NACHA Operating Rules, Art. II, § 2.17.2 (ODFI Return Rate Reporting) and § 10.4.3 (Initiation of a Rules Enforcement Proceeding) (2013). A read-only version of the 2013 edition of the NACHA Rules is available at
www.achrulesonline.org
at no cost to registered users.

On March 15, 2013, NACHA tightened the timeline from 60 days to 30 day for ODFIs to reduce a merchant's return rate for unauthorized transactions below the 1 percent threshold before initiation of a Rules enforcement proceeding. NACHA,
ODFI Return Rate Reporting (Risk Management) March 15, 2013, available at

https://www.nacha.org/ODFI-Return-Rate-Reporting-(Risk%20Management)-March-15-2013.

70
NACHA's “TEL rule” specifically prohibits the use of the ACH Network by
outbound
telemarketers that initiate calls to consumers with whom they have no existing relationship. NACHA Operating Rules, Art. II, § 2.5.15 (Specific Provisions for TEL Entries (Telephone-Initiated Entry)) (2013). For inbound telephone orders and transactions in which the merchant has an existing business relationship with the consumer, a merchant may obtain a consumer's authorization to initiate an ACH debit. As evidence of a consumer's authorization of a TEL transaction, the merchant or seller must either: (1) Record the oral authorization of the consumer, or (2) provide the consumer with written notice confirming the oral authorization prior to the settlement date of the entry.

Historically, NACHA limited consumer-authorized TEL transactions to single-entry payments. However, in 2011 NACHA amended its operating rules to permit recurring TEL transactions. NACHA,
Enhancements to ACH Applications FAQs,
(Jan. 19, 2011),
available at

http://admin.nacha.org/userfiles/File/ACH_Rules/Application%20Enhancements%20rule%20changes%20FAQs.pdf.
For recurring TEL entries to be compliant with NACHA's rules, a merchant must record the oral authorization and provide the consumer with a copy of the authorization.
Id.

Merchant returns and chargebacks
71

that exceed either the thresholds set by credit card system operators or the average return rate experienced by ACH participants often may indicate either that the merchant is submitting transactions that consumers have not authorized, or that the merchant engaged in deceptive conduct to obtain any such authorization.
72

The Commission's law enforcement experience also confirms that high total return rates are a strong indicator of fraud.
73

In more than a decade of Commission enforcement actions alleging that payment processors made unauthorized debits to consumer bank accounts on behalf of fraudulent merchants, the return rates were staggeringly high and vastly out of proportion with industry norms.
74

Although telemarketers engaged in fraud obviously continue to look for ways to subvert the anti-fraud mechanisms of the credit card systems and the ACH Network,
75

the specific initial due diligence and subsequent monitoring of return activity undertaken by the operators of these systems—as well as a steady stream of law enforcement actions by the Commission and other federal and state law enforcement agencies—make it more difficult for wrongdoers to gain and, critically, to maintain access to these payment systems.
76

71
For ease of reference, this section of the NPRM uses the term “returns” to refer to both chargebacks and returned items, as defined
supra
in notes 64 and 67.

72

See, e.g.,
Financial Crimes Enforcement Network (“FinCEN”), Advisory FIN-2012-A010, Risk Associated with Third-Party Payment Processors (October 22, 2012),
available at

http://www.fincen.gov/statutes_regs/guidance/html/FIN-2012-A010.html
(noting that high numbers of consumer complaints and “particularly high numbers of returns or charge backs (aggregate or otherwise), suggest that the originating merchant may be engaged in unfair or deceptive practices or fraud, including using consumers' account information to create unauthorized RCCs or ACH debits.”); McEntee,
supra
note 59, ¶ 32.

73
Total return rate refers to the total number of ACH debit transactions that were returned for any reason code, divided by the total number of ACH debit transactions processed nationwide for that time period. For example, the average total return rate for all ACH debit transactions in 2011 was 1.52 percent.
FTC
v.
Ideal Financial Solutions, Inc.,
Civ. No. 2:13-00143-MMD-GWF (D. Nev. filed Jan. 28, 2013) at ¶ 37,
available at

http://www.ftc.gov/os/caselist/1123211/index.shtm.

74

See, e.g., Landmark, supra
note 42 (alleging defendants accepted merchants with anticipated return rates of 70 to 75 percent, and continued processing remotely created payment orders for merchant that generated return rates ranging from 50 to 80 percent);
YMA, supra
note 37 (defendants allegedly processed ACH and demand draft debits on behalf of merchants that generated return rates ranging from 32 to 82 percent);
FTC
v.
3d Union Card Serv.,
Civ. No. S-04-0712, ¶ 15 (D. Nev. July 19, 2005) (default judgment finding nearly 70 percent of defendants' debits to consumers' accounts were returned or refused by the consumers' banks);
FTC
v.
Interbill, Ltd.,
Civ. No. 2:06-01644 (D. Nev. Apr. 30, 2009) (summary judgment against defendants that continued to process transactions for merchant, Pharmacycards.com, despite a return rate of nearly 70 percent);
FTC
v.
Universal Processing, Inc.,
Civ. No. 05-6054 (C.D. Cal. Aug. 18, 2005) (stipulated permanent injunction in case with an alleged return rate exceeding 70 percent);
FTC
v.
Electronic Financial Group, Inc.,
Civ. No. 03CA0211 (W.D. Tex. Mar. 23, 2004) (stipulated permanent injunction in case with alleged return rates between 40 and 70 percent).

States also have sued payment processors that assisted fraudulent telemarketers by continuing to process transactions in spite of their high return rates and telephone sales scripts evidencing misrepresentations or violations of the law.
See, e.g., Ohio
v.
Capital Payment Sys. Inc.,
Civ. No. 08 H 5 7234 (Franklin County, OH Ct. Com. Pl. (Jan. 31, 2012) (entry of summary judgment finding defendants processed ACH debits and remotely created checks for fraudulent telemarketers that generated return rates ranging from 19 to 68 percent);
Ohio
v.
Cimicato,
Civ. No. 06 H 3 04698 (Franklin County, OH Ct. Com. Pl. Oct. 12, 2012) (Stip. J.) (alleged return rates ranging from 32 to 90 percent);
Iowa
v.
Teledraft Inc.,
Civ. No. 4:04-90507 (S.D. Iowa Dec. 9, 2005) (Stip. J.) (defendants allegedly processed ACH debits for merchants with total return rates ranging from 51 to 77 percent);
Vermont
v.
Amerinet, Inc.,
Civ. No. 642-10-05 (Super. Ct. filed Oct. 31, 2005) (defendants allegedly continued to process bank debits despite return rates as high as 80 percent).

75
Many fraudulent telemarketers who engage in outbound telemarketing violate NACHA's TEL rule by processing payments through the ACH Network.
See, e.g., FTC
v.
Elec. Fin. Group Inc.,
Civ. No. 03-211 (W.D. Tex. Mar. 23, 2004) (Stip. Perm. Inj.);
FTC
v.
First Am. Payment Processing, Inc.,
Civ. No. 04-0074 (D. Ariz. Nov. 2, 2004) (Stip. Perm. Inj.). When compared to the check fraud losses experienced by banks, however, “ACH transactions have had a relatively good track record.” Furst & Nolle,
supra
note 50, at 10-11.

76
Since 1995, the Commission has filed more than 300 cases involving violations of the TSR, many of which have included fraudulent or unauthorized charges to consumers' credit card or bank accounts.

Therefore, telemarketers engaged in fraud and the payment processors who assist them have increasingly turned to remotely created checks and remotely created payment orders to defraud consumers.
77

The systemic weaknesses of the check clearing system make it much more accommodating for them than the credit card system or ACH Network. It is much easier for a merchant to open an ordinary business checking account and use it to create and deposit remotely created checks or remotely created payment orders into the check clearing system than it is to establish a credit card merchant account or qualify for ACH origination services.

77

See, e.g., FTC
v.
Landmark, supra
note 63 (describing defendants' promotion of their remotely created payment order processing product as a less regulated alternative to ACH transactions for merchants with a history of high return rates); Expert Report of Dennis M. Kiefer, ¶¶ 31-32 (Oct. 2, 2008),
filed in YMA, supra
note 37 (describing the defendants' efforts to migrate client merchants with high return rates from ACH to demand draft transactions);
see also
George F. Thomas, Digital Transactions,
It's Time to Dump Demand Drafts,
at 39 (July 2008),
available at

http://www.radixconsulting.com/TimetoDumpDemandDrafts.pdf
(“[Y]ou will find merchant-processing sites that advise merchants in high-risk categories or with high unauthorized-return rates to avoid the scrutiny of the ACH by using demand drafts.”).

Moreover, based on current practices, it is impossible for banks to systematically distinguish remotely created checks from conventional checks, or to calculate their isolated rates of return. The reason for this is rooted in the structure and history of the check collection system, which is highly decentralized and originally paper-based. In these respects, it stands in marked contrast to the credit card system and the ACH Network. The interbank check clearing process involves one bank (the “depository bank”) presenting a check to another bank (the “payor bank”) for payment. When a depository bank receives a check, it encodes the amount of the check in magnetic ink at the bottom of the check, and forwards the magnetic ink character recognition (“MICR”) information to the payor bank for settlement.
78

Enactment of the Check 21 Act
79

permits banks now to capture an image of the front and back of the original check and exchange the image and MICR line data in the clearing and

payment process instead of relying on the paper check.

78
Before advances in electronic check processing, the physical processing of checks relied on high-speed reader/sorter equipment to scan the MICR line at the bottom of each check, which contains very limited information—numbers that identify the bank branch, bank routing number, check number, and account number at the payor bank.

79

See supra
note 38.

Remotely created checks contain no unique identifier distinguishing them as such; and they are cleared in the same manner as traditional paper checks. Without examination of the signature block on each check, there is currently no feasible way for banks to analyze the volume, use, or return rate for remotely created checks.
80

80
In an attempt to quantify the number of remotely created checks being automatically processed through the check clearing system, in 2007, the Federal Reserve System conducted a check sampling study of 30,000 randomly-selected checks. The study required “three independent investigators to ‘interrogate,’ i.e., systematically collect information from, each sampled check.” Federal Reserve System,
The Check Sample Study: A Survey of Depository Institutions for the 2007 Federal Reserve Payments Study,
8 (Mar. 2008) (“2007 Check Sample Study”),
available at http://www.frbservices.org/files/communications/pdf/research/2007_check_sample_study.pdf
. The study estimated that approximately 0.95 percent or 308 of the 32,448 checks sampled in 2006 were remotely created.
Id.
at 33.

Like remotely created checks, remotely created payment orders cannot be distinguished from other check images deposited into the check clearing system.
81

Thus, the Federal Financial Institutions Examination Council notes that:

81

See Proposed Rule; Regulation CC, supra
note 40 and accompanying text.

[w]hen a financial institution permits the creation of electronic [remotely created] payment orders, substantial risk-management oversight for unauthorized returns and other unlawful activity is lost because the check-clearing networks do not provide the level of technological and organizational controls of those in the ACH network [or the credit card system]. This lack of systemized monitoring of electronically created payment orders increases their susceptibility to fraud by Web-based vendors and telemarketers.
82

82
FFIEC,
Retail Payment Systems Booklet, supra
note 41, at 16.

As a result of these combined factors, there exists no
systemwide
transaction data available for remotely created checks or remotely created payment orders that are returned through the check clearing system,
83

and scant data on the overall number of such transactions that results in consumer complaints. Nevertheless, substantial harm resulting from unauthorized remotely created checks is documented in a number of enforcement cases.
84

83
Despite the continued decline in overall check volume, the Federal Reserve's 2010 Payments Study revealed a significant increase in the volume of remotely created checks from .95 percent in 2006 to 2.1 percent in 2009. 2010 Payments Study,
supra
note 44, at 37; 2007 Check Sample Study,
supra
note 80.
See also
Carroll,
supra
note 36 (estimating the number of remotely created checks in 2006 at 286 million items, and noting the substantial adverse consumer impact of fraudulent remotely created checks).

84

See, e.g., United States
v.
First Bank of Delaware,
Civ. No. 12-6500, §§ 3, 73-75 (E.D. Pa. Nov. 19, 2012) (settlement of case alleging defendant originated more than 2.6 million remotely created check transactions totaling approximately $123 million “on behalf of third-party payment processors in cahoots with fraudulent Internet and telemarketing merchants,” including Landmark Clearing, Check21, Check Site, and Automated Electronic Checking);
FTC
v.
FTN Promotions, Inc.
(“
Suntasia
”), Civ. No. 8:07-1279 (M.D. Fla. Dec. 30, 2008) (Stip. Perm. Inj.) (defendants allegedly caused more than $171 million in unauthorized charges to consumers' accounts for bogus travel and buyers clubs in part by using unauthorized remotely created checks);
FTC
v.
Universal Premium Servs., Inc.,
Civ. No. 06-0849 (C.D. Cal. Feb. 27, 2007),
aff'd, FTC
v.
MacGregor,
360 F.App'x. 891 (9th Cir. 2009) (final order after summary judgment for more than $28 million against defendants that used unauthorized remotely created checks as payment in fake shopping spree scam); Dep't of Justice Press Release,
International Bank Fraud Ring Busted for Attempt to Debit 100,000 Customer Accounts for Over $20 Million,
(Jan. 13, 2009) (announcing the arrest of one of nine co-conspirators in a purported telemarketing scheme that used ACH debits and remotely created checks to make unauthorized withdrawals or attempted withdrawals from approximately 100,000 consumer bank accounts),
available at http://www.justice.gov/usao/nj/Press/files/pdffiles/2009/sale0113%20rel.pdf
.
See also infra
notes 91-104 and accompanying text, describing numerous enforcement actions.

As the law enforcement cases discussed in the next section demonstrate,
individual
banks and payment processors, however, can detect remotely created checks, investigate the total return rates of their clients' check transactions, compare the percentage of returned remotely created checks to the return rate for all checks transacted through the national banking system (approximately one half of one percent or .5 percent),
85

attempt to categorize the specific reasons for returns, compare their clients' return rates to industry average return rates for other payment mechanisms (such as credit card payments and ACH debits), and watch closely for other signs of suspicious or fraudulent merchant activity. As the complaint in
United States
v.
First Bank of Delaware

86

highlights, banks and payment processors have perverse financial incentives to begin processing remotely created checks for “high-risk” merchants and originators.
87

This is because they charge higher transaction fees to such merchants, and receive additional fees for each returned check.
88

Thus, unscrupulous banks and payment processors often continue to process transactions for fraudulent operations such as these, even in the face of high return rates or other
indicia
of fraud.

85

See infra
note 107 and
First Bank of Delaware, supra
note 84, at § 52.

86

First Bank of Delaware, supra
note 84.

87
According to bank regulators, “[e]xamples of high-risk parties include online payment processors, certain credit-repair services, certain mail order and telephone order (MOTO) companies, illegal online gambling operations, businesses located offshore, and adult entertainment businesses. These operations are inherently more risky and incidents of unahtorized (sic) returns are more common with these businesses.” Office of the Comptroller of the Currency (“OCC”) Bulletin 2006-39 (Sept. 1, 2006),
available at http://www.occ.gov/news-issuances/bulletins/2006/bulletin-2006-39.html
.

88

See, e.g., FTC
v.
Landmark, supra
note 63 at ¶ 27 (defendants' pricing structure enabled them to earn significantly higher fee income from returned transactions than the income generated by cleared transactions);
First Bank of Delaware, supra
note 84, at ¶¶ 54 and 63 (bank allegedly took on higher risk for potential profit and earned higher fees for unauthorized returns);
see also
Kiefer,
supra
note 77, at ¶ 33 (“[YMA defendants] charged fees resulting from bad ACH and [demand] Draft transactions that were many multiples of the fees they otherwise would have charged.”).

3. Law Enforcement Experience with Remotely Created Checks and Remotely Created Payment Orders in Fraudulent Telemarketing

There is substantial evidence that remotely created checks are being widely misused in telemarketing, resulting in very significant consumer injury.
89

The Commission's law enforcement experience demonstrates that telemarketers engaged in fraud use a variety of methods to deceive or pressure consumers into divulging their bank account information in order to debit money from their bank accounts. Wrongdoers exploiting remotely created checks have promoted any number of phony or pretextual offers,
90

including: advance fee credit cards;
91

solicitations for bogus charities;
92

purported medical

discount plans
93

or pharmacy discount cards;
94

useless fraud-prevention services;
95

and misrepresented products or deceptive buyers club memberships.
96

In these ways, fraudulent telemarketers have bilked hundreds of millions of dollars from consumers using remotely created checks.

89
In the past, law enforcement actions primarily involved remotely created checks and not remotely created payment orders. As recent law enforcement actions demonstrate, remotely created payment orders are subject to the same, if not greater, risks as remotely created checks.
See, e.g., FTC
v.
Landmark, supra
note 63;
First Bank of Delaware, supra
note 84. The Commission, therefore, proposes that remotely created payment orders should be treated in the same way as remotely created checks.

90
The majority of the Commission's fraud cases involving remotely created checks have involved outbound telemarketing campaigns; however, the risks associated with this payment method exist equally in the inbound telemarketing context.
See, e.g., FTC
v.
LowPay, Inc.,
Civ. No. 09-1265 (D.O. Sept. 10, 2010) (stipulated permanent injunction against advance fee credit card scheme using inbound calls).

91

See, e.g., FTC
v.
Group One Networks, Inc.,
Civ. No. 09-00352 (M.D. Fla. Mar. 19, 2010) (Stip. Perm. Inj.);
FTC
v.
Capital Choice Consumer Credit, Inc.,
Civ. No. 02-21050 (S.D. Fla. Feb. 19, 2004) (Stip. Perm. Inj.);
FTC
v.
Bay Area Bus. Council, Inc.,
Civ. No. 02-5762 (N.D. Ill. Apr. 14, 2003) (Summ. J.),
aff'd, FTC
v.
Bay Area Bus. Council, Inc.,
423 F.3d 627 (7th Cir. 2005);
FTC
v.
Sainz Enters., LLC,
Civ. No. 04-2078 (D. Colo. Nov. 4, 2004) (Stip. Perm. Inj.).

92

See, e.g., FTC
v.
Handicapped & Disabled Workshops, Inc.,
Civ. No. 08-0908 (D. Ariz. Dec. 9,

2008) (stipulated permanent injunction against defendants that allegedly used remotely created checks to defraud elderly consumers out of nearly $10 million in connection with high-pressure, deceptive sales of products that purportedly help blind and disabled workers). In just two months, Handicapped & Disabled Workshops' telemarketers allegedly used unauthorized remotely created checks to withdraw over $5,513.55 (including $1,025.90 in a single day) from an 82 year old woman's bank account.
Id.,
Decl. of Patricia W. Bunge, ¶ 6 (Apr. 15, 2008).

93

See, e.g., FTC
v.
NHS Sys., Inc.,
Civ. No. 08-2215 (E.D. Pa. Mar. 28, 2013) (Summ. J.);
FTC
v.
6554962 Canada, Inc.,
Civ. No. 1:08-02309 (N.D. Ill. Aug. 19, 2009) (Default J.);
FTC
v.
9107-4021 Quebec, Inc.,
Civ. No. 08-1051 (E.D. Ohio July 17, 2009) (Stip. Perm. Inj.).
See also, e.g., United States
v.
Borden,
Cr. No. 1:08-00196 (N.D.N.Y. sentenced Dec. 3, 2009) (defendant pleaded guilty and was sentenced to 56 months' imprisonment in connection with a fake medical benefits telemarketing scheme that used remotely created checks to bilk elderly consumers).

94

See, e.g., FTC
v.
3d Union Card Servs., Inc.,
Civ. No. S-04-0712 (D. Nev. July 19, 2005) (Default J.) (complaint alleged telemarketers initiated $10 million in unauthorized remotely created checks and other debits from more than 90,000 consumers' accounts in three months for fraudulent discount pharmacy cards).

95

FTC
v.
4086465 Canada, Inc.,
Civ. No. 04-1351 (N.D. Ohio Nov. 7, 2005) (stipulated permanent injunction against telemarketers allegedly used unauthorized remotely created checks as payment for fake consumer protection service that promised to protect consumers from telemarketing and unauthorized banking).

96

See supra
note 84.

Numerous law enforcement actions show that telemarketers engaged in fraud frequently rely on third-party processors to create, print, and deposit remotely created checks drawn on consumers' accounts.
97

By providing the means to extract money from consumers' bank accounts via remotely created checks and remotely created payment orders, payment processors play an indispensable role in furtherance of their clients' fraudulent and deceptive schemes.
98

The Commission and the Department of Justice have sued such non-bank payment processors, alleging they engaged in unfair practices under Section 5 of the FTC Act, as well as violations of mail and wire fraud statutes and the TSR's prohibition on assisting and facilitating fraud by processing remotely created checks for telemarketers, while knowing or consciously avoiding knowledge that the telemarketers were violating the TSR.
99

97

United States
v.
Cimicato,
Cr. No. 1:10-0012 (W.D.N.Y. Jan. 26, 2010) (defendant pled guilty to wire fraud in connection with Integrated Check Technologies' processing of remotely created checks for fraudulent Canadian telemarketers);
United States
v.
Guastaferro,
Cr. No. 1:09-347 (W.D.N.Y. Jun. 27, 2011) (sentenced to 24 months in prison and fined $100,000 for his involvement in Integrated Check Technologies' payment processing scheme);
United States
v.
Whitworth,
Cr. No. 1:10-324 (W.D.N.Y. Jan 6, 2012) (same, sentenced to 18 months);
YMA, supra
note 37;
Payment Processing Ctr., supra
note 37;
FTC
v.
Interbill, Ltd.,
Civ. No. 2:06-01644 (D. Nev. 2007);
FTC
v.
Windward Mktg., Ltd.,
Civ. No. 1:96-615 (N.D. Ga. 1996);
see also Capital Payment Sys., supra
note 74;
Ohio
v.
Cimicato, supra
note 74;
Iowa
v.
Teledraft, Inc.,
Civ. No. 04-90507 (S.D. Iowa filed Sept. 17, 2004).
Cf., FTC
v.
Neovi, Inc.,
598 F. Supp. 2d 1104 (S.D. Cal. Sept. 16, 2008),
aff'd,
604 F.3d 1150, 1158 (9th Cir. 2010) (defendants' Internet-based business facilitated fraudulent operations that created more than 150,000 unauthorized checks totaling more than $400 million).

98
As the FFIEC has advised, “[s]ome higher-risk merchants routinely use third parties to process their transactions because of the difficulty they have in establishing a direct bank relationship.” FFEIC,
Bank Secrecy Act Anti-Money Laundering Examination Manual: Third-Party Payment Processors—Overview (2010),
at 240.
See also
George F. Thomas,
Not Your Father's ACH,
ICBA Indep. Banker (July 2007),
available at http://www.radixconsulting.com/icbaarticle.pdf
(“Many of the merchants that use third-party processors do so because they could not pass the standard know-your-customer procedure if they approached [a] financial institution directly. Like cockroaches, these merchants cannot withstand the light of scrutiny.”).

99
For example, between June 23, 2004 and March 31, 2006, the YMA defendants allegedly processed over $200 million in debits and attempted debits to consumers' bank accounts, more than $69 million of which were returned or rejected by consumers or their banks.
YMA, supra
note 37, Compl. at ¶ 29; McEntee,
supra
note 59, ¶¶ 44-46. One of the Commission's experts in the case uncovered evidence that the defendants intentionally shifted merchants with excessive return rates from ACH debits to remotely created checks in order to continue assisting merchants in defrauding consumers. Kiefer,
supra
note 77, at ¶ 31.

In yet another case, the United States Attorney for the Eastern District of Pennsylvania alleged that during a ten-month period, a payment processor assisted telemarketers in attempting to withdraw $142 million from consumers' accounts using unauthorized remotely created checks, causing more than $50 million in consumer losses.
Payment Processing Ctr., supra
note 37.

Unscrupulous merchants and third-party processors must establish relationships with banks that accept deposits of remotely created checks and remotely created payment orders. Aggressive action taken by federal prosecutors and bank regulators against banks that engaged in such fraud further illustrates the problematic use of remotely created checks and remotely created payment orders in telemarketing. Most recently, the United States Attorney for the Eastern District of Pennsylvania obtained a $15 million civil penalty against First Bank of Delaware, based on its origination of remotely created checks, remotely created payment orders, and ACH debits on behalf of merchants and payment processors engaged in fraud, including the defendants in
FTC
v.
Landmark
.
100

First Bank of Delaware allegedly ignored significant signs of fraud, including the fact that its third-party payment processors had aggregate return rates for remotely created checks exceeding 50 percent from 2009 to 2011. In an earlier action against First Bank of Delaware brought by the Federal Depository Insurance Corporation (“FDIC”), the bank agreed to terminate, among other things, “any and all services, products and/or relationships pertaining to or involving payment processing by or through an automated clearing house, the origination and/or processing of remotely created checks and/or merchant acquiring.”
101

100

First Bank of Delaware, supra
note 84;
Landmark, supra
note 42. According to the complaint filed by the Commission in
FTC
v.
Leanspa,
First Bank of Delaware also processed payments for the defendants, who allegedly used fake news Web sites to promote their products, made deceptive weight-loss claims, and misrepresented the terms of their “free trial” offers.
FTC
v.
LeanSpa,
Civ. No. 3:11-1715 (Nov. 22, 2011) (Stip. Prelim. Inj.).
See also, e.g. In the Matter of Meridian Bank,
FDIC 12-367b (Oct. 19, 2012) (consent order requiring, among other things, cessation of all third party payment processing unless and until bank completes comprehensive due diligence on each payment processor and its merchant-clients),
available at http://www.fdic.gov/news/news/press/2012/pr12136a.html
;
In the Matter of Metro Phoenix Bank,
FDIC 111-083b (Jun. 21, 2011) (same, including cessation of all third party payment processing for CheckGateway LLC and Teledraft, Inc.),
available at http://www.fdic.gov/bank/individual/enforcement/2011-06-001.pdf
.

101

In the Matter of First Bank of Delaware,
FDIC-11-669b, 2 (Dec. 3, 2011),
available at http://fdic.gov/bank/individual/enforcement/2011-12-03.pdf
.

In a 2006 proceeding, the Office of the Comptroller of the Currency (“OCC”) alleged that telemarketers victimized more than 740,000 consumers using remotely created checks processed by three payment processors through Wachovia accounts.
102

All three of these payment processors allegedly knew their clients had return rates well above accepted industry standards.
103

The bank agreed to pay over $150 million in

restitution to resolve the matter. Based on these and other allegations, the U.S. Attorney's Office in the Southern District of Florida and the Asset Forfeiture and Money Laundering Section of the Criminal Division of the Department of Justice filed a criminal case against Wachovia.
104

The case resulted in a deferred prosecution agreement and payment of $160 million in restitution and other penalties.
105

102
OCC Press Release,
OCC, Wachovia Enter Revised Agreement to Reimburse Consumers Directly
(Dec. 11, 2008),
available at http://www.occ.gov/ftp/release/2008-143.htm
.

103
The FTC previously had sued two of the three payment processors (YMA and Suntasia) and the U.S. Department of Justice sued the third (Payment Processing Center). The FTC also brought cases against many of the telemarketers that worked with the three processors.
See, e.g., Universal Premium Servs. supra
note 84;
FTC
v.
Sun Spectrum Commc'ns. Org., Inc.,
Civ. No. 03-81105 (S.D. Fla. Oct. 3, 2004) (Stip. Perm. Inj.);
FTC
v.
Xtel Marketing, Inc.,
Civ. No. 04-7238 (N.D. Ill. July 22, 2005) (Stip. Perm. Inj.);
FTC
v.
120194 Canada, Ltd.,
Civ. No. 1:04-07204 (N.D. Ill. Mar. 8, 2007) (Summ. J.);
FTC
v.
Oks,
Civ. No. 05-5389 (N.D. Ill. Mar. 18, 2008) (Perm. Inj.);
FTC
v.
Frankly Speaking, Inc.,
Civ. No. 1:05-60 (M.D. Ga. May 14, 2005) (Stip. Perm. Inj.).

104

United States
v.
Wachovia, N.A.,
Cr. No. 10-20165 (S.D. Fla. Mar. 16, 2010) (alleging that defendant maintained account relationships with certain payment processors that deposited more than $418 million using remotely-created checks into Wachovia accounts on behalf of fraudulent telemarketers).

105
According to the press release announcing the deferred prosecution, “Wachovia admitted that it failed to identify, detect, and report the suspicious transactions in the third-party payment processor accounts, as required by the BSA [Bank Secrecy Act, 31 U.S.C 1051
et seq.
], due to deficiencies in its anti-money laundering program. Specifically, Wachovia failed to conduct appropriate customer due diligence by delegating most of this responsibility to business units instead of compliance personnel. Wachovia also failed to monitor high return rates for remotely-created checks and report suspicious wire transfer activity from the processors' accounts.” U.S. Att'y's Office (S.D. Fla.) Press Release,
Wachovia Enters Into Deferred Prosecution Agreement
(Mar. 17, 2010),
available at http://www.justice.gov/usao/fls/PressReleases/100317-02.html
.

In another case, the OCC entered into a settlement agreement with T Bank, N.A. in which it agreed to pay a $100,000 civil penalty and make payments totaling $5.1 million in restitution to more than 60,000 consumers affected by the bank's relationships with a third-party payment processor, Giact Systems Inc. The OCC alleged that Giact and several of Giact's merchant-clients (telemarketers and Internet merchants) used remotely created checks to make unauthorized withdrawals from consumers' accounts.
106

The OCC's investigation revealed that over 60 percent of these remotely created checks were returned to the bank by or on behalf of individuals who said they never authorized the checks or that they had never received the products or services promised by the telemarketers or merchants.
107

106

In the Matter of T Bank, N.A.,
#2010-068, AA-EC 09-103 (Apr. 15, 2010) (in addition, the formal agreement requires the bank to develop and adhere to strict “policies, procedures, and standards for payment processor relationships” before entering into a banking relationship with a payment processor),
available at http://www.occ.gov/news-issuances/news-releases/2010/nr-occ-2010-45a.pdf. See also
OCC Press Release,
OCC, T Bank Enter Agreement to Reimburse Consumers
(Apr. 19, 2010),
available at http://www.occ.gov/news-issuances/news-releases/2010/index-2010-news-releases.html
.

107
To provide context for the return rates identified above, in the 2010 Payments Study, the Federal Reserve Board estimated that from 2006 to 2009, “[t]he ratio of [unpaid] returned checks to paid checks by value declined from 0.44 percent to 0.40 percent.”
Supra
note 44, at 9. In previous years, the Board estimated the return rate for checks at 0.6 percent in 2000, and 0.5 percent in 2003. Federal Reserve System,
2004 Federal Reserve Board Payments Study
6 (Dec. 15, 2004),
available at http://www.frbservices.org/files/communications/pdf/research/2004PaymentResearchReport.pdf
. Like the return rates expected for legitimate merchants in the credit card systems and ACH Network, the return rate for checks (including remotely created checks) should be very low. McEntee,
supra
note 59, & 44 (“[T]here is no legitimate business reason why there would be a significant difference between ACH and demand draft return rates, assuming the merchant is engaged in the same line of business.”).

State Attorneys General also have sued payment processors along with the telemarketers who have swindled consumers using remotely created checks.
108

In addition, state and Canadian law enforcement authorities have been active in attempting to regulate and halt abuses of remotely created checks. To combat the vulnerability of remotely created checks to fraud, several states and the Canadian Payments Authority (“CPA”) have restricted or prohibited the use of remotely created checks in telemarketing transactions.
109

In May 2005, thirty-seven Attorneys General also signed a letter urging the Board of Governors of the Federal Reserve to prohibit remotely created checks.
110

108

See, e.g., Capital Payment Sys., supra
note 74;
Ohio
v.
Cimicato, supra
note 74;
State of Ohio ex rel.
v.
Simplistic Advertising, Inc.,
Civ. No. 08-7232 (Franklin County, OH Ct. Com. Pl. filed May 16, 2008);
State of Ohio ex rel.
v.
6450903 Canada, Inc.,
Civ. No. 05CVH7233 (Franklin County, OH Ct. Com. Pl. May 8, 2009) (Default J.).

109
In 2003, the CPA adopted a policy prohibiting the use of remotely created checks (or “tele-cheques”) as a preemptive measure based on the heightened risk of fraud and unauthorized payments. Ana Cavazos-Wright, Federal Reserve Bank of Atlanta,
An Examination of Remotely Created Checks,
at n.8,
available at http://www.frbatlanta.org/documents/rprf/rprf_resources/RPRF_wp_0510.pdf; see also, e.g.,
ARK. CODE ANN. § 4-99-203 (1987) (prohibiting telemarketers from obtaining or submitting for payment a check drawn on a person's bank account without the consumer's express written authorization); N.Y. GEN. BUS. LAW § 399-pp (McKinney 2006) (same); VT. STAT. ANN. tit. 9, § 2464 (2006 & Supp. 2010) (same).

110
Comment, National Association of Attorneys General,
Proposed Amendment to Regulation CC Remotely Created Checks,
FRB Dkt. No. R-1226 (May 9, 2005),
available at http://www.federalreserve.gov/SECRS/2005/May/20050512/R-1226/R-1226_264_1.pdf
.

Despite these efforts, telemarketers engaged in fraud face no effective impediment to their use of remotely created checks and remotely created payment orders. And, as the credit card systems and ACH Network have redoubled their efforts to detect and deter fraud—by monitoring returns and transaction data, imposing fines and penalties on participants that violate their operating rules, and requiring banks to conduct more robust up-front due diligence on client merchants—wrongdoers are forced to turn to more novel payment methods that fall outside this zone of increased scrutiny. To close off this avenue to fraudulent telemarketers, the Commission therefore proposes to prohibit the use of remotely created checks and remotely created payment orders in all telemarketing transactions.

In doing so, the Commission recognizes that, for certain transactions, remotely created checks and remotely created payment orders may offer advantages over electronic fund transfers via the ACH Network,
111

such as same-day availability of funds for merchants.
112

In light of significant changes in the marketplace, and to ensure that the rulemaking record adequately reflects the potential impact of the proposed ban against remotely created checks and remotely created payment orders on legitimate telemarketing businesses, the Commission encourages the submission of comments describing the types of telemarketing transactions in which remotely created checks or remotely created payment orders are essential, including the types of products or services involved, whether the telemarketing calls are inbound or outbound, whether certain telemarketing transactions could be processed via the ACH Network under NACHA's rules for recurring TEL transactions, as well as the resulting cost increase or savings, if any, from the use or avoidance of the ACH Network.

111
Electronic fund transfers via the ACH Network are available to all inbound telemarketers and to those outbound telemarketers who have a pre-existing relationship with the consumer.
See supra
note 70 (explaining NACHA's TEL rule).

112
NACHA,
RCC and ACH Differentiators, supra
note 60, at 9 (describing the advantage of using remotely created checks in effectuating insurance coverage on the same day the payment is submitted). The current ACH settlement schedules are next-day or, for some credits, two days. NACHA has been exploring ways to reduce the settlement times for certain types of ACH entries. Letter from NACHA to Regional Payments Associations Direct Financial Institution Members (revised July 10, 2012),
available at https://www.nacha.org/EPS_SupplementalInfoandMaterials#epsattachments
.

4. The Use of Remotely Created Checks and Remotely Created Payment Orders Is an Abusive Telemarketing Act or Practice

As explained in Section I.B above, when the Commission considers identifying a telemarketing practice as abusive, it does so within the purview of the Commission's traditional unfairness analysis.
113

An act or

practice is unfair under Section 5 of the FTC Act if it causes or is likely to cause substantial injury to consumers, if the harm is not outweighed by any countervailing benefits to consumers or competition, and if the harm is not reasonably avoidable.
114

The Commission preliminarily concludes that the use of remotely created checks and remotely created payment orders in telemarketing transactions meets this unfairness test.

113

Supra
notes 3, 19—20 and accompanying text.

114
15 U.S.C. 45(n).

As discussed above, the Commission's law enforcement experience demonstrates the substantial consumer injury that results from telemarketers' use of remotely created checks and remotely created payment orders.
115

Second, the economic harm from the use of remotely created checks and remotely created payment orders in telemarketing outweighs any countervailing benefits to consumers or competition.
116

The Commission is aware that remotely created checks and remotely created payment orders processed through the bank clearing system may make funds available to merchants more quickly than certain types of electronic fund transfers, such as ACH debits, and are used for recurring payments authorized by telephone.
117

However, it is the Commission's understanding that this advantage is less critical in telemarketing transactions than in other contexts, such as making last minute bill payments and collecting debts owed by consumers. Innovations in payment cards and access devices have increased the number and availability of convenient, fast, noncash payment alternatives to the use of remotely created checks.
118

These alternatives offer both dispute resolution rights and protection against unlimited liability for unauthorized charges to consumers and are available to consumers who do not possess or do not wish to use credit cards.
119

Thus, it appears that the significant injury and risk of harm to consumers is not outweighed by the benefits of using remotely created checks and remotely created payment orders in telemarketing transactions.
120

115
Remotely created checks are subject to the UCC and lack both dispute resolution rights and protection against unlimited liability for unauthorized charges, which compounds the injury caused by fraudulent telemarketing. As previously discussed, it remains unclear whether remotely created payment orders are subject to the EFTA. Regardless, without changes to the interbank clearing system that would enable banks to distinguish remotely created payment orders from remotely created checks, banks may continue to treat remotely created payment orders as if they are remotely created checks covered by the UCC.
See supra
note 62 and accompanying text.

116

Neovi, supra
note 97, at 1116 (finding this prong of unfairness test satisfied “[w]hen a practice produces clear adverse consequences for consumers that are not accompanied by an increase in services or benefits to consumers or by benefits to competition”).

117

See supra
notes 70 and 112 (discussing NACHA operating rules that permit recurring TEL transactions). Any person initiating recurring electronic debits from a consumer's bank account must comply with the preauthorized transfer rules of Regulation E, 12 CFR 1005.10(b). Regulation E requires the person to: (1) Obtain the consumer's authorization for the recurring debits in a writing signed or similarly authenticated; (2) provide the consumer a clear and readily understandable statement of the terms of the agreement; and (3) give to the consumer a copy of the signed authorization.
Id.

118
According to the Federal Reserve Bank of Boston, 94.4 percent of American consumers have adopted one or more types of payment card: credit (72.2 percent), debit (77.0 percent), or prepaid (32.3 percent). Federal Reserve Bank of Boston,
2009 Survey of Consumer Payment Choice,
41-42 (Apr. 2011).

119
See supra notes 49—52 (discussing EFTA protections for various debit cards and ACH payments) and infra note 122 (discussing protections for consumers using payment intermediaries, such as PayPal).

120
In March 2010, NACHA's Risk Management Advisory Group concluded: ACH debit transactions, such as TEL transactions, offer a payment choice where the safeguards to [consumers] outweigh the conveniences that RCCs currently offer to [merchants]. This conclusion is based on the following factors: (1) The heightened risk profile of RCC transactions that bear no evidence of authorization, (2) the fact that ACH transactions can be identified and monitored with relative ease, and (3) the fact that the Rules include clear and explicit authorization requirements for capturing evidence of a consumer's authorization of a transaction.

NACHA,
RCC and ACH Differentiators, supra
note 60, at 12.

Finally, it appears that consumers cannot reasonably avoid the injury. When consumers give their bank account numbers to a telemarketer to make a purchase, they have little or no ability to control whether the telemarketer will process the charge via the ACH system, which is monitored for fraud and provides EFTA and Regulation E protections, or as a remotely created check or remotely created payment order. In addition, consumers do not understand the differences in protections they have with a payment that clears through the ACH system and those that are available when a payment is processed as a remotely created check or remotely created payment order. Finally, consumers cannot avoid injury by checking their account records and disputing any unauthorized charges that may be there. As discussed above, disputing an unauthorized remotely created check or remotely created payment order is a long and time-consuming process that may be futile, since the UCC lacks significant consumer protections.

Telemarketers that choose to use remotely created checks and remotely created payment orders effectively deprive consumers of the anti-fraud monitoring, accountability, and dispute resolution mechanisms of other payment methods.
121

Thus, the harm to consumers is unavoidable; and the harm, in the form of unauthorized charges and limited consumer protections against fraud, is significant and does not appear to be outweighed by any countervailing benefits to consumers or competition given the widespread availability of alternative payment methods that provide greater consumer protection.

121
2003 TSR Amendments, 68 FR at 4605.

B. Cash-to-Cash Money Transfers and Cash Reload Mechanisms

Cash-to-cash money transfers offer individuals a fast and convenient method for sending funds to someone they know and trust in a different location.
122

This speed and ease, however, make these money transfers a preferred payment method in telemarketing to perpetrate cross-border fraud. To initiate a cash-to-cash money transfer, a sender provides currency to a money transfer provider (such as Western Union or MoneyGram), fills out a “send form” designating the name and address of the recipient to whom the money transfer is to be sent, and pays a transaction fee.
123

The money transfer provider's employee or agent inputs the transaction information into a computer network, whereupon the value of the money the sender paid is made available within minutes to the recipient. At that point, the recipient can claim the funds in cash at any of the money transfer provider's locations, with little or no need to provide any personal identification or identifying

information in order to do so.
124

For example, when initiating money transfers of less than $900 at MoneyGram, the sender has the option of using a “Test Question and Answer,” which enables the recipient to claim the funds without presenting photo identification by instead correctly answering the sender's test question.
125

122
As explained below in Section IV.A, and used in this NPRM, the term “cash-to-cash money transfer” describes a transfer of cash from one person to another person in a different location that is sent by a money transfer provider and received in cash. This term would include a “remittance transfer,” as defined in section 919(g)(2) of the EFTA, that is a cash-to-cash transaction.
See infra
note 129 (discussing Remittance Transfer Rule). It does
not
include a remittance transfer or other transfer—such as a transfer from a consumer's account balance with a payment service provider or at a financial institution—that is an electronic fund transfer subject to the EFTA or Regulation E, or a transaction subject to the TILA or Regulation Z.
See
Ronald J. Mann,
Regulating Internet Payment Intermediaries,
82 Tex. L. Rev. 681, 695 (2004) (noting that payments made via an online payment intermediary (
e.g.,
PayPal) may be covered by the TILA (when funded by a credit card) or the EFTA (when funded by a consumer's account at a financial institution)).

123
U.S. Gov't Accountability Office, Rep. to the S. Comm. on Banking, Hous., and Urban Affairs,
International Remittances: Information on Products, Costs, and Consumer Disclosures,
10-11 (Nov. 2005) (“GAO Report”),
available at http://www.gao.gov/new.items/d06204.pdf
.

124
GAO Report,
supra
note 123, at 10-11.

125
MoneyGram's Web site states: “In the absence of a proper ID, test questions can serve as an identification method for most transaction[s] below a certain dollar amount. Test questions can be included in a transaction, and should address something only the receiver could answer.” MoneyGram,
Money Transfers, Receiving a Money Transfer, What if my receiver doesn't have identification?, available at https://www.moneygram.com/wps/portal/moneygramonline/home/CustomerService/FAQs
(located under the “MoneyGram” tab and “Receiving a Money Transfer”).

Like a cash-to-cash money transfer, a cash reload mechanism offers a convenient method for consumers to convert cash into electronic form. A cash reload mechanism acts as a virtual deposit slip for consumers who wish to load funds onto a general-use prepaid debit card without the use of a bank transfer or direct deposit. A consumer simply pays cash, plus a small fee, to a retailer that sells cash load mechanisms such as MoneyPak or REloadit. In exchange, the consumer receives a unique access or authorization code that corresponds with the specific amount of funds paid. Using the authorization code, a consumer can load the funds onto any existing prepaid debit card within the same prepaid network or an online account with a payment intermediary (
e.g.,
PayPal) using the phone or Internet.
126

The primary function of a cash reload mechanism is to provide a method for consumers to add money to their own prepaid cards and online accounts, or to transfer money to a relative or friend by supplying the authorization code that corresponds to the funds.
127

The consumer's relative or friend simply uses the authorization code to load the funds onto her own prepaid card or online account. Thus, the cash reload mechanism itself is not a general-use prepaid card that can be swiped or redeemed at a retail location or automated teller machine (“ATM”).

126
Currently, Green Dot's MoneyPak is the only cash reload mechanism accepted by PayPal as a funding source. PayPal,
Now There's A New Way to Add Cash* to Your PayPal Account With MoneyPak, available at https://www.paypal.com/webapps/mpp/greendot-moneypak
.

127
Green Dot also enables MoneyPak consumers to make same-day payments to certain billers using a MoneyPak. However, only approved billing partners are authorized to accept MoneyPak authorization codes directly from consumers as a method of payment.
See, e.g.,
GreenDot MoneyPak,
Where can I use a MoneyPak? available at https://www.moneypak.com/WhoAccepts.aspx
. In contrast, scam artists must load the funds onto a prepaid card before they can withdraw the money at an ATM or spend down the balance.

Fraudulent telemarketers demand or request payment by cash-to-cash money transfer and cash reload mechanism because they are essentially equivalent to a cash payment B once the money is picked up or offloaded from a prepaid card, there is virtually no chance for the sender to recover the money, obtain a refund, or even verify the identity of the recipient.
128

When a consumer is deceived into transferring money in these ways—particularly across national borders—a telemarketer can receive it anonymously. A cash-to-cash money transfer can be picked up at any one of multiple locations within minutes. Similarly, once a scam artist obtains the authorization code for a cash reload mechanism from a consumer over the phone, he can quickly load the funds onto an existing prepaid card and withdraw the funds immediately at an ATM. This makes it difficult to identify or track down the perpetrator of the fraud and return funds to defrauded consumers.

128
Unlike cash-to-cash money transfers which can be completely anonymous, electronic fund transfers to and from accounts maintained at financial institutions or with online payment service providers require senders and recipients to open and maintain accounts, which may be identified and traced to a particular person or entity.
See, e.g.,
FFEIC,
Bank Secrecy Act Anti-Money Laundering Examination Manual, Customer Identification Program—Overview, available at http://www.ffiec.gov/bsa_aml_infobase/pages_manual/OLM_011.htm
(describing the Customer Identification Program rules requiring banks to obtain, at a minimum, the name, date of birth, address, and identification number from each customer before opening an account). Similarly, bank secrecy and anti-money laundering laws require issuers of prepaid cards to verify the identity of each prepaid cardholder. Fraudulent telemarketers, however, frequently register cards using the personal information of identity theft victims.
See infra
note 135 (discussing the new Prepaid Access Rule).

1. Existing Regulation of Money Transfers Fails to Protect Consumers Against Telemarketing Fraud

New federal remittance transfer rules, as well as existing federal and state laws pertaining to money transfers, are designed to regulate money transfer providers, not to protect consumers from telemarketing fraud. Specifically, the Remittance Transfer Rule is aimed at preventing money transfer providers from taking advantage of their customers, many of whom are foreign-born workers sending payments back to their home country.
129

As a result, the Rule's disclosure and error resolution procedures apply only to covered “remittance transfers” B those transfers that originate in the United States and are received in another country.
130

In addition, the definition of remittance transfer excludes cash reload mechanisms, which are not “sent by a remittance transfer provider”
131

to a “designated recipient,”
132

but instead are provided directly to consumers by a retailer at the point of sale. Moreover, the disclosure and error resolution procedures in the Remittance Rule focus on the transparency and accuracy of the transaction between the remittance sender and the remittance

provider.
133

Thus, the Rule fails to ameliorate the need for restrictions on cash-to-cash money transfers and cash reload mechanisms in telemarketing, where a telemarketer fraudulently induces the consumer to initiate the money transfer or provide access to a cash reload mechanism.
134

129
Section 1073 of the Dodd-Frank Act mandated changes to the EFTA that resulted in some coverage of cross-border money transfers (
i.e.,
“remittance transfers” initiated in the United States and sent to recipients in other countries). In 2012, the CFPB issued the Remittance Rule in three parts to implement the remittance transfer provisions of the Dodd-Frank Act by adding a new Subpart B to Regulation E (12 CFR 1005.30-36).
Final Rule; Remittance Transfer Rule, Electronic Fund Transfers (Regulation E),
77 FR 6194 (Feb. 7, 2012);
Technical Correction to Final Remittance Transfer Rule; Electronic Fund Transfers (Regulation E),
77 FR 40459 (Jul. 10, 2012);
Final Remittance Transfer Rule; Official Interpretation,
77 FR 50244 (Aug. 20, 2012). The Rule covers these cross-border remittance transfers, whether or not the sender holds an account with the remittance transfer provider and whether or not the remittance transfer is also an “electronic fund transfer,” as defined in section 903 of the EFTA.

On January 22, 2013, the CFPB announced that it would continue to temporarily postpone the original February 2013 effective date for the Rule until after the Bureau issued a new proposal to refine three elements of the Rule: “(1) errors resulting from incorrect account numbers provided by senders of remittance transfers; (2) the disclosure of certain foreign taxes and third-party fees; and (3) the disclosure of sub-national, foreign taxes.” David Silberman, CFPB,
Temporarily Delaying the Implementation of Our International Remittance Transfer Rule
(Jan. 22, 2013),
available at http://www.consumerfinance.gov/blog/temporarily-delaying-the-implementation-of-our-international-remittance-transfer-rule/;
CFPB,
CFPB Bulletin 2012-08 Re: Remittance Rule Implementation (Subpart B of Regulation E)
(Nov. 27, 2012),
available at http://files.consumerfinance.gov/f/201211_cfpb_remittance-rule-bulletin.pdf
. On April 30, 2013, the CFPB announced final revisions to the Rule with an effective date of October 28, 2013. The text of the final rule is available at
http://files.consumerfinance.gov/f/201211_cfpb_remittance-rule-bulletin.pdf
.

130
12 CFR 1005.30(e) (definition of remittance transfer).

131

Official Staff Commentary,
12 CFR part 1005 (Supp. I), Comment 30(e)(2) (explaining that “sent by a remittance transfer provider” “means that there must be an intermediary that is directly engaged with the sender to send an electronic transfer of funds on behalf of the sender to a designated recipient.”).

132

Official Staff Commentary,
12 CFR part 1005 (Supp. I), Comment 30(c)(2)(iii) (clarifying that when a remittance transfer provider mails or delivers a prepaid card (for example) directly to the consumer, there is no “designated recipient” because “the provider does not know whether the consumer will subsequently send the prepaid card to a recipient in a foreign country.”).

133
Among other things, remittance transfer providers must disclose transfer fees and exchange rates, and provide error resolution procedures in

the event the provider transmitted funds in error (
e.g.,
to the wrong recipient or in the wrong amount). 12 CFR 1005.31-33. In addition, for covered remittance transfers, a provider must comply with a sender's timely request to cancel a transfer, as long as the funds have not been picked up by the recipient or deposited into an account held by the recipient.
Id.
at 1005.34.

134
Unless the remittance provider commits an error (
i.e.,
sending the wrong amount, transferring to the wrong recipient, etc.), the victim of telemarketing fraud would have little recourse under the Remittance Rule.

Similarly, other federal and state laws pertaining to cash-to-cash money transfers and cash reload mechanisms do not address the abuse of these payment methods by fraudulent telemarketers and con artists, and fail to provide consumers with the means to recoup their money once they discover the fraud. The Bank Secrecy Act and related laws target terrorism financing, tax evasion, and money laundering activity,
135

and state statutes provide licensing requirements for money transfer providers.
136

The proposed TSR ban on cash-to-cash money transfers and cash reload mechanisms would serve to close this regulatory gap and fortify the existing regulatory regime. The Commission's experience in combating telemarketing fraud operators that use these transfers to pocket consumers' money, and pursuing the third parties that assist and facilitate them, suggests that the use of these transfers in telemarketing is an unfair practice, and that prohibiting them would serve the public interest.

135
The Financial Crimes Enforcement Network (“FinCEN”) provides the following explanation of the Bank Secrecy Act regulations:

The Currency and Foreign Transactions Reporting Act of 1970 (which legislative framework is commonly referred to as the “Bank Secrecy Act” or “BSA”) . . . requires [financial institutions] to keep records of cash purchases of negotiable instruments, file reports of cash transactions exceeding $10,000 (daily aggregate amount), and to report suspicious activity that might signify money laundering, tax evasion, or other criminal activities. It was passed by the Congress of the United States in 1970. The BSA is sometimes referred to as an ‘anti-money laundering’ law (>AML=) or jointly as >BSA/AML=. Several AML acts, including provisions in Title III of the USA PATRIOT Act of 2001, have been enacted up to the present to amend the BSA. (See 31 USC 5311-5330 and 31 CFR Chapter X [formerly 31 CFR Part 103]).

U.S. Department of Treasury, FinCEN,
Statutes & Regulations: Bank Secrecy Act, available at

http://www.fincen.gov/statutes_regs/bsa/
. In 2011, FinCEN issued the Prepaid Access Rule, which amended the money services businesses rules of the Bank Secrecy Act regulations to mandate similar reporting and transactional information collection requirements on providers and sellers of certain types of prepaid access.
Final Rule; Bank Secrecy Act Regulations—Definitions and Other Regulations Relating to Prepaid Access,
76 FR 45403-02 (Jul. 29, 2011).

136

See, e.g.,
Ariz. Rev. Stat. § 6-1202 (2011) (licensing requirements for money transfer providers); Kan. Stat. Ann. § 9-509 (2010 Supp.) (same).

2. Survey Data Linking Cash-to-Cash Money Transfers to Telemarketing Fraud

The Commission has observed a striking correlation between cash-to-cash money transfers and telemarketing fraud through its survey of consumers who sent money transfers via MoneyGram, one of the largest commercial money transfer services in the United States. The FTC survey demonstrated that at least 79 percent of all MoneyGram transfers of $1,000 or more from the United States to Canada over a four-month period in 2007 were fraud-induced.
137

A similar survey of Western Union customers, conducted by Attorneys General in several states, concluded that approximately one-third of the person-to-person transfers of over $300 to Canada were fraud-induced.
138

The Western Union survey revealed that fraud-induced transfers represented 58 percent of the total dollars transferred by the surveyed consumers, and that the average transfer by a defrauded consumer was $1,500.
139

137

FTC
v.
MoneyGram Int'l., Inc.,
Civ. No. 1:09-06576, § 27 (N.D. Ill. Oct. 19, 2009) (Stip. Perm. Inj.).

138
The survey was conducted by the Attorneys General of North Carolina and six other states in 2003. Virginia H. Templeton & David N. Kirkman,
Fraud, Vulnerability and Aging, published in
8 ALZHEIMER'S CARE TODAY 265-277 (2007),
available at http://www.ftc.gov/bcp/workshops/fraudforum/docs/ACTElderFraudArticle9-07.pdf
.

139

Id.

In addition, the Commission, consumer advocates, AARP, and the Better Business Bureau have observed a significant increase in the number of scams involving cash reload mechanisms.
140

These schemes have involved payments made to cover taxes on purported lottery winnings, settle phony debts, pay for advertised goods and services, and obtain advance fee loans. Consumers have reported that telemarketers required them to purchase a cash reload mechanism from a local retailer and provide the authorization code as payment for the promised goods or services. With the authorization code in hand, the scam artist can quickly load the funds to existing prepaid card and withdraw the money at an ATM or by spending down the balance. Despite fraud warnings provided by two major cash reload networks on their Web sites
141

and packaging,
142

telemarketers engaged in fraud continue to extract money from consumers using cash reload mechanisms.

140

See, e.g.,
AARP Bulletin,
Scam Alert: Beware of Green Dot MoneyPak Scams—The crooks' other preferred payment method has become the weapon of choice
(Apr. 23, 2012),
available at

http://www.aarp.org/money/scams-fraud/info-04-2012/avoid-moneypak-scams.html;
Better Business Bureau,
Fraud Task Force Warns Consumers Of Scams Using Western Union, MoneyGram, Green Dot MoneyPaks
(Aug. 2, 2012),
available at http://www.bbb.org/us/article/fraud-task-force-warns-consumers-of-scams-using-western-union-moneygram-green-dot-moneypaks-36126
.

141
On its Web site, Blackhawk Network, Inc. warns its REloadit Pack customers:

REloadit should ONLY be used to reload your prepaid cards or for accounts that YOU control.

Beware of any offers that do not accept a VISA or MasterCard payment and asks for you to purchase a REloadit Pack where you provide the REloadit Pack number and PIN in an email or over the phone.

Never use a REloadit Pack to pay for taxes or fees on foreign lottery winnings, grants, or any offer that requires you to pay first before getting something back. REloadit,
Frequently Asked Questions: What is the best way to protect my REloadit Pack?, available at https://reloadit.com/faqs2.aspx#safe
. GreenDot Corporation includes similar warnings to consumers on its Web site. GreenDot MoneyPak,
MoneyPak FAQs: 7 Tips on How to Protect Yourself From Fraud, available at https://www.moneypak.com/ProtectYourMoney.aspx
.

142
On the back of each MoneyPak card, Green Dot posts the following warning:

FRAUD ALERT:
Use your MoneyPak number
only
with businesses listed at
moneypak.com
. If anyone else asks for your MoneyPak number, it's probably a scam. If a criminal gets your money, Green Dot is not responsible to pay you back. (Emphasis original.)

3. Law Enforcement Experience With Cash-to-Cash Money Transfers and Cash Reload Mechanisms Used in Telemarketing Fraud

The experience of the Commission and other federal and state law enforcers further documents the high risk to consumers and widespread injury caused by fraud-induced money transfers and cash reload mechanisms in inbound and outbound telemarketing. The Commission has sued telemarketers for using a variety of means to dupe or pressure consumers into sending cash-to-cash money transfers, including fake foreign lottery or sweepstakes prizes,
143

phony mystery shopper scams,
144

and

work-at-home opportunities.
145

In some of the scams, wrongdoers used counterfeit checks to trick consumers into sending money back to them via money transfer.
146

In all of these cases, consumers received nothing in exchange for their payments, and had no ability to reclaim their money once they discovered the fraud.

143

See, e.g., FTC
v.
Bezeredi,
Civ. No 05-1739 (W.D. Wash. Apr. 3, 2007) (Summ. J.);
FTC
v.
627867 B.C. Ltd.,
No C03-3166 (W.D. Wash. Aug. 4, 2006) (Stip. Perm. Inj.);
FTC
v.
World Media Brokers, Inc.,
No. 02C6985 (N.D. Ill. June 22, 2004),
aff'd,
415 F.3d 758 (7th Cir. 2005) (Partial Sum

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A2013-12886. Public record. Not legal advice.