Earlier this week Reuters reported that PNC Financial said it had been served with a subpoena from the United States Department of Justice, relating to “certain merchant and payment processor customers with whom PNC has a depository relationship.” This subpoena (which comes soon after a $35 million DOJ settlement regarding PNC’s alleged discriminatory lending practices) may well be an indication that the DOJ is serious about putting financial institutions and payment processors in the crosshairs in order to fight of consumer fraud.
According to the article, PNC believes “that the subpoena is intended to determine whether, and to what extent, PNC may have facilitated fraud committed by third-parties against consumers.” You will note that the DOJ believes its third parties committing the fraud, so why the interest in PNC?
The DOJ’s Strategy: Bottlenecks & Choke-Points
Roughly translated, PNC’s statement reads something like this: financial institutions (PNC) serve payment processors (First Data), who in turn, serve merchants. Some of those merchants may commit crimes. Criminally inclined merchants operate in isolation, and are hard to find. Banks and payment processors, on the other hand, service thousands of merchants and are easy to find. The DOJ, and specifically Financial Fraud Enforcement Task Force Executive Director Michael J. Bresnick made the case for this strategy in a speech last year (which I highly recommend reading). Said Bresnick:
The reason that we are focused on financial institutions and payment processors is because they are the so-called bottlenecks, or choke-points, in the fraud committed by so many merchants that victimize consumers and launder their illegal proceeds. … And financial institutions through which these fraudulent proceeds flow, we have seen, are not always blind to the fraud. In fact, we have observed that some financial institutions actually have been complicit in these schemes, ignoring their BSA/AML [Bank Secrecy Act/Anti-Money Laundering] obligations….
The Payments Industry’s Response
For financial institutions and payment processors, identifying merchants who commit fraud can be exceptionally difficult. This difficulty only increases as you move up the financial foodchain, from sales agent, to sub-ISO, to ISO, to payment processors and financial institutions. For every instance of being “blind to the fraud” there are no doubt many more instances of being unaware of any fraud at all.
It goes without saying that financial institutions need to be well versed in, and compliant with, all applicable laws and regulations (including any BSA/ABL obligations). These concepts are, and will likely continue, to creep into processing and other contracts. Each party in the payment chain should be mindful to these new realities and not rely on longstanding language when entering into or amending contracts.