Payment Processor Ignored Red Flags, Allowed Clients To Withdraw Funds Illegally

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If you’re in the business of processing payments, you have a certain obligation to look into any sort of signs that your clients may be abusing the system or illegally taking funds from customers’ bank accounts. Failing to do so can land you in some pretty hot water with federal regulators.

The Consumer Financial Protection Bureau has accused Fargo-based Intercept Corporation of deliberately turning a blind eye to its clients’ bad behaviors, allegedly allowing them to siphon money directly from victims’ accounts while ignoring complaints from customers and banks.

According to the complaint [PDF] filed this morning in a federal court in North Dakota, banks alerted Intercept and its two principals on multiple occasions to signs of potential fraud on the part of Intercept’s clients, including: high return rates on transactions, amounts debited from consumers’ accounts that didn’t match what had originally been authorized, and missing telephone scripts for transactions that had been authorized by phone.

In one example cited in the lawsuit, an auto-title lender was debiting varying amounts from borrowers’ accounts multiple times, and also lacked the contractual right or proper authorization to do so. The bank told Intercept that it was not okay for the merchant to use these direct withdrawals to “sneak” attack borrowers’ bank accounts.

Rather than terminate dealings with these dodgy clients, Intercept allegedly moved on to working with other banks. Between 2008 and 2014, the CFPB says Intercept worked through eight different banks — sometimes upwards of three different banks at the same time.

Intercept set up what was supposed to be a limited trial deal with one bank, restricted to a small number of transactions, but the CFPB claims that Intercept pushed through millions of payments in a short period of time, even as the bank was seeing thousands of returns a day.

When the bank complained that this level of returns would trigger an audit, Intercept allegedly failed to investigate the client responsible for the bad transactions. Instead, it merely promised to move that client’s business to another bank.

Customers were also complaining about Intercept, with one bank receiving some 600 phone complaints about Interecept-processed transactions in a three-month period.

Another bank says customers disputed 1,800 Intercept transactions between 2011 and 2014, but that Intercept never investigated nor took any meaningful action against the client.

In Georgia, where state law effectively outlaws payday lending, Intercept continued to process payments for a payday lender client even though Intercept had previously been informed that this client was to cease offering loans in Georgia.

The CFPB alleges that Intercept and its principals violated the Dodd-Frank Wall Street Reform and Consumer Protection Act’s prohibition against unfair acts and practices by processing payments for clients without adequately investigating, monitoring, or responding to red flags of possible fraud.

“Intercept and its executives Bryan Smith and Craig Dresser ignored clear signs of brazen fraud, including illegal withdrawals from consumer accounts, and need to clean up their act,” said CFPB director Richard Cordray. “Companies cannot turn a blind eye to wrongdoing when they process payments from consumer banking accounts on behalf of clients that are breaking the law.