Payment Processor Pleads Guilty After Allowing Fake Payday Lenders To Raid Bank Accounts
According to charges [PDF] filed last month in a federal court in Pennsylvania, for four years, Neil Godfrey, owner and operator of a payment processor called Check Site Inc., used this business to help illegally move millions of dollars out of consumers’ bank accounts.
Federal prosecutors say that Godfrey first identified banks that he believed would look the other way at certain behaviors that would have raised red flags at most institutions. He then used Check Site and these to process payments for fraudulent payday loan websites.
One merchant client of Godfrey’s ran a site claiming to offer payday loans. Applying for these bogus loans required users to enter their very real bank account information.
The fraudster would then use this ill-gotten info to create a demand draft — a check created by a third party using the account holder’s name and account info. Unlike ordinary checks, demand drafts are not signed by the account holder, but contain a statement claiming the account holder has authorized the check.
Demand drafts also differ from credit card payments and electronic bank-to-bank transactions (ACH transactions) in that demand drafts are not monitored by any supervisory authority.
So if a bank doesn’t have a system in place to identify when large numbers of demand drafts have been rejected, the fraud can continue undetected.
In fact, Godfrey was so proud of his ability to pull this ruse off successfully that he bragged in an e-mail that this client would only be in business a day if they were trying to run this scam with monitored ACH transactions.
He also advised clients who had operated previous fraudulent ventures on how to change their business names to avoid detection.
Another Check Site merchant client also posed as payday lenders to harvest consumer bank account info. But rather than just creating demand drafts to help themselves to the money, they tricked applicants into being enrolled in weekly or monthly fee payments.
Prosecutors say Godfrey knew this merchant never intended to offer payday loans, that consumers were being deceived into these recurring payments, and that there was no actual value to the fraudulent subscriptions. One service charged for e-mailing customers a monthly cocktail recipe.
In an e-mail to that client, Godfrey warned that the cavalier attitude of these scammers could scuttle the fun for everyone, writing that “[W]e have too much opportunity to let this little larceny sink our boat.” At the same time, he belittled victims by telling the merchant that “the complainers are people who are the bottom of society and probably have been blaming other[s] for their woes forever.”
Another e-mail gives a client advice on how to convince a bank that it’s a legitimate business and not just a front to drain bank accounts:
“[T]he lesson we have learned is that we must trick the [bank] folk. It means you need to set up some type of website front. What we need to do is set up a legitimate website selling anything you can think of – that is what you get approved on. It is irrelevant if anything is ever sold there – just so it exists…. In the mean time we set up false credit card approval etcetera. It is this we use to run the transactions. Yes, there will be a lot of returns, but what we do is send through transactions over the next few weeks that don’t have high returns. They stop looking and then we can run the regular stuff…. [A]fter several months we junk that company and go to another company.”
“The Justice Department will not sit idly by while companies and individuals take money from victims’ accounts without their consent,” said Principal Deputy Assistant Attorney General Benjamin C. Mizer, head of the Justice Department’s Civil Division. “As this case demonstrates, the Department of Justice will continue to prosecute those involved in perpetrating or knowingly assisting fraud schemes.”
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