Enabling Deception Has Consequences — Even Years Later

The Federal Trade Commission recently filed a contempt motion against Cliq, Inc. (formerly CardFlex, Inc.) and its principals. The motion traces back to a 2014 enforcement action against CardFlex, a payment processor that connected merchants to merchant banks.

In the original case, the FTC alleged that CardFlex assisted and facilitated a large-scale scam purporting to provide information regarding government grants or business opportunities. Cardflex allegedly helped these bad actors maintain hundreds of merchant accounts despite obvious red flags. According to the FTC's complaint, CardFlex helped merchants evade card-network risk controls by opening accounts under multiple shell entities, spreading transactions across accounts, and continuing to provide access to the payments system even as chargebacks and consumer complaints mounted.

The FTC alleged these practices were unfair and deceptive acts or practices in violation of Section 5 of the FTC Act, resulting in tens of millions of dollars in unauthorized consumer charges. In 2015, CardFlex agreed to a stipulated order requiring it to implement meaningful screening, monitoring, and fraud-prevention controls, including obligations to identify high-risk merchants and cut off access when deception was likely.

According to the FTC's recent filing, Cardflex and/or Cliq later violated that 2015 order by failing to implement the required controls. The agency alleges that the company continued to support high-risk merchants without adequate due diligence, ignored clear card-network warning signs such as excessive chargebacks and monitoring alerts, and failed to take reasonable steps to prevent deceptive merchants from accessing the payments ecosystem. The FTC characterizes these failures as systemic, not accidental.

In its current motion, the FTC asks the court to hold Cliq and its principals in civil contempt and to impose substantial remedies. The agency seeks at least $52.9 million in compensatory relief for consumers, expanded and strengthened compliance obligations, and structural remedies that could include barring the individual defendants from operating in the merchant-services space and appointing a receiver to ensure future compliance.

Based on the continued references to "assisting and facilitating", if you were surprised to see no allegations regarding telemarketing, you're not alone. The Telemarketing Sales Rule explicitly prohibits assisting and facilitating violations of the TSR, whereas Section 5 does not. Here, it appears that these defendants did more than merely process payments with knowledge of high chargeback rates. Instead, they appear to have been directly involved in helping merchants evade fraud controls, which likely explains why the Commission focused assistance and facilitation in a Section 5 context. Regardless of the theory of liability, the FTC's message is consistent and unambiguous. Companies that directly participate in enabling fraud should expect enforcement action. Further, for those companies with historic consent orders, heed this warning: the FTC is watching and will pursue contempt. Old orders do not fade away, and compliance programs that exist only on paper are unlikely to hold up when regulators or courts take a closer look.

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