By Theodore F. Monroe and Bradley O. Cebeci as seen in The Green Sheet, November 2006.
Whether you are an ISO or a merchant level salesperson (MLS), odds are you will at some point receive an unexpected visit from a government agency. How you deal with it could mean the difference between a small administrative headache and a business disaster.
Who’s knocking at the door?
ISOs may receive requests for information from any number of government agencies and prosecutors. However, the Federal Trade Commission, Internal Revenue Service, U.S. Postal Inspection Service and state attorneys general are among the most likely candidates. The FBI and an array of federal prosecutors follow closely behind.
Government agencies may contact ISOs for information about merchants for any number of reasons. Inquiries could be part of preliminary civil investigations in response to consumer complaints. Inquiries could also stem from prosecutors seeking admissible evidence of criminal conduct and its resulting proceeds.
Types of merchant offenses typically pursued by authorities involve allegations of improper advertising and billing practices; 2003 CAN-SPAM Act and Do-Not-Call Registry violations; and the sale of illegal products or services (such as restricted narcotics or online gaming).
I have also seen several IRS inquiries seeking to determine a merchant’s actual income, as well as a number of Justice Department inquiries trying to discern the amount of wrongful proceeds allegedly generated by an illegal scheme.
Requests you can’t refuse
Depending on the investigating agency and the nature of the alleged offense, the government’s inquiry may come in the form of an informal request for information, such as a letter or phone call, or as a formal demand for information, such as a subpoena to produce documents or to appear as a witness before a grand jury.
Many inquiries – initial inquiries at least – are informal requests from agents or attorneys for answers to a few questions, or some other “voluntary” demonstration of cooperation.
The government can compel cooperation at any time by serving subpoenas or civil investigative demands that require the production of documents, electronic information or other tangible evidence.
Government agencies may also compel company officers and representatives to testify under oath in depositions, grand jury proceedings or at trials.
No rational businessperson wants to be involved in a government investigation. Even the most aboveboard and conscientious among us should be extremely cautious when receiving any type of inquiry from a government agency.
Indeed, an investigation of one of your merchant’s business activities may turn into an investigation of your ISO if authorities come to suspect you have done something wrong. Authorities may even attempt to hold you legally responsible for the illegal or improper acts of your merchants.
For instance, a number of ISOs have faced liability from the FTC or the Justice Department for the processing practices for their merchants, in essence holding the ISOs responsible for merchants’ excessive chargeback or return rates.
Heads out of the sand
The most important first step for any processor, ISO or MLS dealing with any form of information request from a government agency is to promptly retain an experienced lawyer and address the situation directly.
Conversely, the biggest mistake you can make is to delay taking action or simply blow the government agency off.
Even when you have no relevant records and absolutely nothing to hide, you can become vulnerable to serious penalties should you fail to comply in a timely fashion with a government investigation.
Moreover, once you are aware of an investigation, it is imperative that you faithfully preserve all documents and electronic information (including e-mail correspondence) that might prove relevant to the government’s inquiry.
Indeed, destroying documents under such circum-stances could render you subject to civil (and even criminal) liability.
Also, if you learn that one of your merchants is under governmental investigation, conduct your own research to determine whether to terminate the merchant or place the merchant on an increased or 100% reserve.
In devising the best risk-mitigation strategy for you and your bank, be sure to comply with all requirements of your merchant agreement. Otherwise, you may expose yourself to a breach of contract claim by the merchant involved.
A government inquiry can be distressing but need not mean disaster. The key is to deal with it promptly.
The information contained in this article is for informational purposes only. Please consult an attorney before relying upon it for your specific legal needs. Theodore F. Monroe is an Attorney whose practice focuses on the electronic payment and direct marketing industries. For more information about this article or any other matter, please e-mail Mr. Monroe at firstname.lastname@example.org or call him at 213-622-7509.