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FTC Halts Texas E-Payment Processor

The Federal Trade Commission (FTC) Wednesday continued its summer campaign against Internet fraud when it filed a complaint in U.S. district court charging Electronic Financial Group, Inc. (EFG) and its principals with providing assistance to fraudulent telemarketers seeking to drain funds from consumers' checking accounts.

The FTC alleges that the defendants violated the law by processing transactions through the Automated Clearing House Network (ACH Network) for numerous fraudulent telemarketers and by engaging in the deceptive marketing of their own advance-fee debit cards.

On Tuesday, the court, after a contested hearing, the court entered a temporary restraining order enjoining the defendants from making misrepresentations in the course of marketing or providing of customer service for ACH transactions, debit cards, and credit-related goods or services.

The defendants are also barred from processing ACH transactions or causing consumers' accounts to be debited when certain conditions are met, including when the debit purportedly was authorized as a result of telemarketing, and violating the Telemarketing Sales Rule (TSR).

The court also appointed a temporary monitor over the corporate defendants who is responsible for reviewing defendants' business practices and reporting to the court prior to the preliminary injunction hearing.

According to the FTC, the Waco, Texas-based EFG provides a variety of electronic payment services to clients in the U.S. and Canada. Among its services, EFG processes electronic debits and credits to consumer bank accounts through the ACH Network, a nationwide electronic funds transfer system that provides for the rapid interbank clearing of electronic payments.

The FTC claims the defendants processed ACH transactions on behalf of numerous fraudulent outbound telemarketing operations, a number of which the FTC previously sued as scams. Some of EFG's clients are telemarketing companies with whom EFG enters into a direct contractual agreement to provide ACH processing services.

Other EFG clients are other ACH processors, who in turn have contractual relationships with the telemarketers.

The FTC's complaint alleges that the defendants violated the TSR by providing substantial assistance and support to numerous client telemarketers whom they knew (or consciously avoided knowing) were engaged in business practices that violated the TSR.

In addition, the FTC charges that EFG assisted and facilitated at least four client telemarketers engaged in deceptively selling advance-fee credit cards, and a fifth client engaged in deceptively selling a lottery scam.

The complaint also claims that in providing ACH payment processing services to merchants engaged in outbound telemarketing, the defendants engaged in an unfair practice by systematically breaching a contractual provision with its bank that required EFG to adhere to the National Automated Clearing House Association Operating Rules (NACHA Rules) governing the ACH Network.

The NACHA Rules include a rule specifically prohibiting the processing of ACH transactions on behalf of merchants engaged in outbound telemarketing to consumers with whom such merchants have no existing relationship.