The federal Consumer Financial Protection Bureau named four merchant-acquiring companies as defendants in a lawsuit against six people and their associated debt-collection companies that allegedly attempted to collect millions of dollars in so-called “phantom debts” from consumers that the consumers either did not owe or were not owed to the debt collectors themselves.
The complaint, filed in U.S. District Court in Atlanta, names as defendants Atlanta-based merchant processor Global Payments Inc. and two independent sales organizations that feed transactions to Global, Pathfinder Payment Solutions Inc. and Frontline Processing Corp. Also named as a defendant is Cleveland-based merchant processor Electronic Merchant Systems (EMS).
Those acquirers provided payments services to the accused debt collectors as they engaged in conduct unlawful under the federal Consumer Financial Protection Act. “The payment processors facilitated the debt collectors’ large-scale fraud by enabling the debt collectors to accept payment by consumers’ bank cards when the payment processors knew, or should have known, that the debt collectors were engaged in unlawful conduct,” the lawsuit says.
A spokesperson for EMS said the company “has no comment at this time.” A Global Payments spokesperson did not respond to a Digital Transactions News request for comment by late Thursday morning.
The suit also names another service provider, the telemarketing firm Global Connect LLC, as aiding the debt collectors’ illegal conduct by allegedly sending robo-calls to consumers on their behalf.
According to the lawsuit, the two principals behind the alleged fraud, Marcus Brown of New York and Mohan Bagga of Georgia, ran seven debt-collection companies with the aid of three relatives and another person. Brown and Bagga reportedly bought personal information about millions of consumers from debt brokers and lead generators, according to the lawsuit. Then, through Global Connect, the companies made robo-calls to them. When consumers called back, “they were told that they had committed crimes by failing to pay certain debts, and that if they did not agree to pay the caller, they would be served with papers or arrested for fraud,” a CFPB news release says.
The CFBP claims the collectors tried to get consumers to pay “phantom debts” that they either did not owe at all, or at least were not owed to the collectors themselves. The collectors allegedly threatened to garnish consumers’ wages and “accused consumers of check fraud and sought to disgrace and threaten” them, the release says.
The processors allegedly performed deficient underwriting or “ignored numerous red flags of the debt collectors’ illegal conduct, including consumer disputes that described the scheme and communication problems with the debt collectors,” according to the CFPB release.
The lawsuit bears some similarities to lawsuits filed by the Federal Trade Commission against ISOs and acquirers accusing them of enabling fraudulent merchants, usually telemarketers, to carry out their schemes by providing them with payment services. The U.S. Department of Justice put a name on the practice of denying payment services to allegedly fraudulent merchants—Operation Choke Point. That program encountered intense opposition in the acquiring industry for reportedly cutting off whole categories of legal but sometimes controversial merchants from payment services because of the misconduct of a few.
A spokesperson for the Washington, D.C.-based acquiring trade group the Electronic Transactions Association did not respond to a Digital Transactions News request for comment about the CFPB lawsuit by deadline.
The CFPB filed the lawsuit under seal March 26. After a hearing Tuesday, a judge approved a preliminary injunction to halt the alleged illegal conduct and freeze the assets of the individual defendants and their businesses.