Federal Register, Volume 78 Issue 131 (Tuesday, July 9, 2013)

[Federal Register Volume 78, Number 131 (Tuesday, July 9, 2013)]
[Proposed Rules]
[Pages 41200-41225]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-12886]

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Vol. 78

Tuesday,

No. 131

July 9, 2013

Part II

Federal Trade Commission

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16 CFR Part 310

Telemarketing Sales Rule; Proposed Rule

Federal Register / Vol. 78 , No. 131 / Tuesday, July 9, 2013 /
Proposed Rules

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FEDERAL TRADE COMMISSION

16 CFR Part 310

RIN 3084-AA98

Telemarketing Sales Rule

AGENCY: Federal Trade Commission.

ACTION: Notice of proposed rulemaking; request for public comment.

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SUMMARY: The Federal Trade Commission (``Commission'' or ``FTC'') seeks
public comment on proposed amendments to the Telemarketing Sales Rule
(``TSR'' or ``Rule''). The proposed amendments would: Bar sellers and
telemarketers from accepting remotely created checks, remotely created
payment orders, cash-to-cash money transfers, and cash reload
mechanisms as payment in inbound or outbound telemarketing
transactions; expand the scope of the advance fee ban on ``recovery''
services, now limited to recovery of losses in prior telemarketing
transactions, to include recovery of losses in any previous
transaction; and clarify other TSR provisions as discussed at the
outset of the SUPPLEMENTARY INFORMATION section.

DATES: Written comments must be received by July 29, 2013.

ADDRESSES: Interested parties may file, online or on paper, a comment
by following the instructions in the Request for Comment part of the
SUPPLEMENTARY INFORMATION section below. Write ``Telemarketing Sales
Rule, 16 CFR Part 310, Project No. R411001,'' on your comment, and file
your comment online at https://ftcpublic.commentworks.com/FTC/tsrantifraudnprm by following the instructions on the web-based form.
If you prefer to file your comment on paper, mail or deliver your
comment to the following address: Federal Trade Commission, Office of
the Secretary, Room H-113 (Annex B), 600 Pennsylvania Avenue NW.,
Washington, DC 20580.

FOR FURTHER INFORMATION CONTACT: Karen S. Hobbs or Craig Tregillus,
Division of Marketing Practices, Bureau of Consumer Protection, Federal
Trade Commission, 600 Pennsylvania Avenue NW., Washington, DC 20580,
(202) 326-3587 or (202) 326-2970.

SUPPLEMENTARY INFORMATION:

I. Introduction

A. The Proposed Amendments

The Federal Trade Commission issues this Notice of Proposed
Rulemaking (``NPRM'') to invite public comment on proposed amendments
to the TSR. These proposed amendments reflect evolutions in the
marketplace toward the use of certain retail payment methods in fraud
transactions and the growing expansion of recovery services to include
losses incurred in non-telemarketing transactions.
The principal proposed amendments would prohibit telemarketers and
sellers in both inbound and outbound telemarketing calls from accepting
or requesting remotely created checks, remotely created payment orders,
money transfers, and cash reload mechanisms as payment and expand the
scope of the advance fee ban on recovery services (now limited to
recovery of losses sustained in prior telemarketing transactions) to
include recovery of losses in any previous transaction.
Several additional proposed amendments are designed to clarify the
language of certain existing TSR requirements to reflect Commission
enforcement policy. These amendments would: (1) Specify that the
recording of a consumer's express verifiable authorization must include
a description of the goods or services being purchased; (2) state
expressly that a seller or telemarketer bears the burden of
demonstrating that the seller has an existing business relationship
with, or has obtained an express written agreement from, a person whose
number is listed on the Do Not Call Registry; (3) clarify that the
business-to-business exemption extends only to calls to induce a sale
to or contribution from a business entity, and not to calls to induce
sales to or contributions from individuals employed by the business;
(4) emphasize that the prohibition against sellers sharing the cost of
Do Not Call Registry fees, which are non-transferrable, is absolute;
and (5) illustrate the types of impermissible burdens that deny or
interfere with a consumer's right to be placed on a seller's or
telemarketer's entity-specific do-not-call list. A related amendment
would specify that a seller's or telemarketer's failure to obtain the
information necessary to honor a consumer's request to be placed on a
seller's entity-specific do-not-call list pursuant to section
310.4(b)(1)(ii) will disqualify it from relying on the safe harbor for
isolated or inadvertent violations in section 310.4(b)(3).
This NPRM invites written comments on all issues raised by the
proposed amendments, including answers to the specific questions set
forth in Section VIII of this Notice.

B. Background

On August 16, 1994, the Telemarketing and Consumer Fraud and Abuse
Prevention Act (``Telemarketing Act'' or ``Act'') was signed into
law.\1\ The purpose of the Act was to curb the deceptive and abusive
practices in telemarketing and provide key anti-fraud and privacy
protections for consumers receiving telephone solicitations to purchase
goods or services. The Telemarketing Act directed the Commission to
adopt a rule prohibiting deceptive or abusive practices in
telemarketing and specified, among other things, certain acts or
practices the rule should address--B for example (1) a requirement that
telemarketers may not undertake a pattern of unsolicited telephone
calls which the reasonable consumer would consider coercive or abusive
of his or her right to privacy; (2) restrictions on the time of day
telemarketers may make unsolicited calls to consumers; and (3) a
requirement that telemarketers promptly and clearly disclose in all
calls to consumers that the purpose of the call is to sell goods or
services or solicit a charitable contribution.\2\ The Act also
generally authorized the Commission to address in the rule other
practices it found to be deceptive or abusive.\3\
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\1\ 15 U.S.C. 6101-6108.
\2\ 15 U.S.C. 6102(a)(3).
\3\ 15 U.S.C. 6102(a)(1) (``The Commission shall prescribe rules
prohibiting deceptive telemarketing acts or practices and other
abusive telemarketing acts or practices.''). The Telemarketing Act
directs the Commission to include in the TSR provisions that address
three specific practices denominated by Congress as ``abusive.'' Id.
at 6102(a)(3). However, the Act ``does not limit the Commission's
authority to address abusive practices beyond these three practices
legislatively determined to be abusive.'' See Notice of Proposed
Rulemaking (``2002 Notice of Proposed Rulemaking''), 67 FR 4492,
4510 (Jan. 30, 2002).
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Pursuant to its authority under the Telemarketing Act, the FTC
promulgated the TSR on August 16, 1995.\4\ The Commission subsequently
amended the Rule on three occasions, in 2003,\5\ 2008,\6\ and 2010.\7\
In 2010, the Commission also issued an Advanced Notice of Proposed
Rulemaking concerning caller identification (``Caller ID'') services
and disclosure of the

[[Page 41201]]

identity of the seller or telemarketer responsible for telemarketing
calls.\8\
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\4\ Statement of Basis and Purpose and Final Rule (``Original
TSR''), 60 FR 43842 (Aug. 23, 1995). The effective date of the
original Rule was December 31, 1995.
\5\ See Statement of Basis and Purpose and Final Amended Rule
(``2003 TSR Amendments''), 68 FR 4580 (Jan. 29, 2003).
\6\ See Statement of Basis and Purpose and Final Rule Amendments
(``2008 TSR Amendments''), 73 FR 51164 (Aug. 29, 2008).
\7\ See Statement of Basis and Purpose and Final Rule Amendments
(``2010 TSR Amendments''), 75 FR 48458 (Aug. 10, 2010). The
Commission subsequently published correcting amendments to the text
of section 310.4 the TSR. Telemarketing Sales Rule; Correcting
Amendments, 76 FR 58716 (Sept. 22, 2011).
\8\ Advanced Notice of Proposed Rulemaking, 75 FR 78179 (Dec.
15, 2010).
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The Telemarketing Act authorizes the Commission to promulgate rules
``prohibiting deceptive telemarketing acts or practices and other
abusive telemarketing acts or practices.'' \9\ Section 310.3 of the TSR
targets deceptive telemarketing acts or practices. It contains
provisions requiring certain disclosures during telemarketing
calls,\10\ prohibiting specific material misrepresentations,\11\ and
imposing liability on third parties that provide substantial assistance
to telemarketers that violate the Rule.\12\ Section 310.4 of the TSR
focuses on abusive telemarketing acts or practices. It includes
provisions intended to curb the deleterious effects these acts or
practices may have on consumers. This section of the Rule delineates
five categories of abusive conduct: (1) Conduct related to a pattern of
calls, including conduct prohibited under the Rule's Do Not Call
provisions; \13\ (2) violations of the Rule's calling time
restrictions; \14\ (3) failure to make required oral disclosures in the
sale of goods or services; \15\ (4) failure to make required oral
disclosures in charitable solicitations; \16\ and (5) other abusive
telemarketing acts or practices.\17\
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\9\ Supra note 3.
\10\ The TSR requires that telemarketers soliciting sales of
goods or services promptly disclose several key pieces of
information during a telephone call: (1) The identity of the seller;
(2) the fact that the purpose of the call is to sell goods or
services; (3) the nature of the goods or services being offered; and
(4) in the case of prize promotions, that no purchase or payment is
necessary to win. 16 CFR 310.3(a)(1). In addition, telemarketers
must, in any telephone sales call, disclose the total costs and
material restrictions on the purchase of any goods or services that
are the subject of the sales offer. 16 CFR 310.3(a)(1). In
telemarketing calls soliciting charitable contributions, the Rule
requires prompt disclosure of the identity of the charitable
organization on behalf of which the request is being made and that
the purpose of the call is to solicit a charitable contribution. 16
CFR 310.3(d).
\11\ The TSR prohibits misrepresentations about, among other
things, the cost and quantity of the offered goods or services. 16
CFR 310.3(a)(2). It also prohibits making a false or misleading
statement to induce any person to pay for goods or services or to
induce a charitable contribution. 16 CFR 310.3(a)(4).
\12\ The TSR prohibits any person from providing substantial
assistance or support to a seller or telemarketer when that person
knows or consciously avoids knowing that the seller or telemarketer
is engaged in any act or practice that violates sections 310.3(a),
(c) or (d), or section 310.4 of the Rule. 16 CFR 310.3(b).
\13\ 16 CFR 310.4(b).
\14\ 16 CFR 310.4(c).
\15\ 16 CFR 310.4(d).
\16\ 16 CFR 310.4(e).
\17\ 16 CFR 310.4(a) (prohibiting the use of threats,
intimidation, or profane or obscene language; requesting or
receiving an advance fee for credit repair, debt settlement, and
recovery services or for the arrangement of a loan or other
extension of credit when the telemarketer guarantees or represents a
high likelihood of success; disclosing or receiving, for
consideration, unencrypted consumer account numbers for use in
telemarketing; causing billing information to be submitted for
payment, directly or indirectly, without the express informed
consent of the customer or donor; and failure to transmit Caller ID
information).
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In interpreting its rulemaking authority over ``other abusive
telemarketing acts or practices,'' \18\ the Commission has determined
that its authority includes acts or practices ``within the purview of
its traditional unfairness analysis as developed in Commission
jurisprudence.'' \19\ Thus, the Commission employs its unfairness
analysis when identifying a telemarketing practice as abusive.\20\ An
act or practice is unfair under Section 5 of the FTC Act if it causes
or is likely to cause substantial injury to consumers, if the harm is
not outweighed by any countervailing benefits to consumers or
competition, and if the harm is not reasonably avoidable.\21\
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\18\ Supra note 3.
\19\ 2002 Notice of Proposed Rulemaking, 67 FR at 4511.
\20\ 2010 TSR Amendments, 75 FR at 48469 (discussing the
Commission's use of unfairness standard in determining whether a
practice is ``abusive''); see also 15 U.S.C. 45(n) (codifying the
Commission's unfairness analysis, set forth in a letter from the FTC
to Hon. Wendell Ford and Hon. John Danforth, Committee on Commerce,
Science and Transportation, United States Senate, Commission
Statement of Policy on the Scope of Consumer Unfairness
Jurisdiction, reprinted in In re Int'l Harvester Co., 104 F.T.C.
949, *95-101 (1984)) (``Unfairness Policy Statement'').
\21\ 15 U.S.C. 45(n).
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II. Retail Payment Methods Susceptible to Fraud in Telemarketing

The following section of this Notice explores the features and
vulnerabilities of four types of novel payment methods used in
telemarketing, with a particular focus on the use of a consumer's bank
account and routing number to withdraw funds from the account without
authorization.\22\ Noncash retail payment mechanisms used in
telemarketing can be divided into two major categories: ``Conventional
payment methods'' and ``novel payment methods.'' As used in this
Notice, the term ``conventional payment method'' includes credit cards,
debit cards, and other types of electronic fund transfers, which are
processed or cleared electronically through networks that can be
monitored systematically for fraud.\23\ In addition, federal laws
subject such conventional payments to procedures for resolving errors
and statutory limitations on a consumer's liability for certain
disputed transactions.\24\
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\22\ In addition to the payment methods discussed below, the
Commission recognizes that there are additional noncash payment
alternatives used in telemarketing transactions, including the use
of billing and collection systems of mortgage, telephone, mobile
phone, or utility companies and online payment intermediaries. These
particular payments are not the subject of this NPRM, which focuses
on payment alternatives that offer fraudulent telemarketers the most
accessible and anonymous method of extracting money from consumers
and for which the Commission has a record of fraud. However, the
Commission continues to monitor complaints regarding the use of
other billing platforms and payment methods in telemarketing fraud.
\23\ Credit card transactions are processed through the credit
card payment systems, operated by companies such as American
Express, MasterCard, and Visa. Many debit card transactions are
processed through the payment card systems, such as those operated
by MasterCard and Visa. In addition, some debit card transactions,
and other types of electronic fund transfers, may be cleared by the
Automated Clearinghouse (``ACH'') Network, a nationwide, interbank
electronic clearing house for processing and clearing electronic
payments for participating financial institutions. See infra note 50
(describing other types of electronic fund transfers that are
processed as ACH debits). ACH transactions are governed by operating
rules implemented and enforced by NACHA--The Electronic Payments
Association (``NACHA''), a private, self-regulatory trade
association comprised of financial institutions and regional payment
associations. There are two ACH operators: the Federal Reserve Bank
(``FedACH'') and The Electronic Payments Network (``EPN''), the only
remaining private sector operator. Terri Bradford, The Evolution of
the ACH, Payment System Research Briefing, Federal Reserve Bank of
Kansas (Dec. 2007), available at http://www.kansascityfed.org/PUBLICAT/PSR/Briefings/PSR-BriefingDec07.pdf.
\24\ Credit card transactions are subject to the Truth-in-
Lending Act (``TILA''), 15 U.S.C. 1601 et seq., and Regulation Z, 12
CFR part 1026. Debit card transactions, ACH debits, and other types
of electronic fund transfers involving a consumer's account at a
financial institution are governed by the Electronic Fund Transfer
Act (``EFTA''), 15 U.S.C. 1693 et seq., and Regulation E, 12 CFR
1005.
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As used in this Notice, the term ``novel payment method'' refers to
four types of noncash payments--remotely created checks,\25\ remotely
created payment orders,\26\ ``cash-to-cash money transfers,'' \27\ and
``cash reload mechanisms.'' \28\ These novel payment methods differ
significantly from credit card transactions subject to the Truth-in-
Lending Act (``TILA'') and Regulation Z, as well as from debit card
transactions, Automated Clearinghouse (``ACH'') debits from consumer
bank

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accounts, and other electronic fund transfers subject to the Electronic
Fund Transfer Act (``EFTA'') and Regulation E. Unlike these
conventional payment methods, novel payment methods are cleared via
check clearing and money transfer networks that provide little or no
systematic monitoring to detect or deter fraud. Moreover, these novel
payment methods are governed principally by state laws and remittance
transfer regulations that do not provide consumers with adequate
recourse when unauthorized transactions or telemarketing fraud
occurs.\29\
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\25\ See infra note 35 (definition of remotely created check).
\26\ See infra note 39 (definition of remotely created payment
order).
\27\ See infra note 122 and Section IV.A (discussing the
proposed definition of cash-to-cash money transfer, which includes
the electronic transfer of cash from one person to another person in
a different location that is conducted through a money transfer
provider and is received in cash).
\28\ See infra Section II.B (discussing the function of a cash
reload mechanism, which acts as a virtual deposit slip that a person
uses to convert cash into electronic format that can be added to any
existing prepaid card within the same prepaid network).
\29\ See infra note 54 and accompanying text (discussing the
Uniform Commercial Code applicable to checks and remotely created
checks); notes 129 through 134 (discussing final Remittance Transfer
Rule aimed at insuring the transparency and accuracy of cross-border
remittance transfers, issued by the Consumer Financial Protection
Bureau (``CFPB'') in 2012).
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The Commission proposes amending the Rule to prohibit the use of
these novel payment methods--remotely created checks, remotely created
payment orders, cash-to-cash money transfers, and cash reload
mechanisms--in all telemarketing transactions.\30\ The Commission is
concerned that the TSR's provision requiring ``express verifiable
authorization'' for such novel payment methods,\31\ which was added to
the Rule during the amendment proceeding completed in 2003, has not
adequately protected consumers against fraud.\32\ The Commission's
continuing law enforcement experience has demonstrated that, despite
the requirement of express verifiable authorization when accepting a
remotely created check as payment for a telemarketing purchase,
unscrupulous telemarketers have increasingly exploited remotely created
checks to extract or attempt to extract hundreds of millions of dollars
from defrauded consumers.\33\ Fraudulent telemarketers also rely on
other novel payment methods--such as remotely created payment orders,
cash-to cash money transfers, and cash reload mechanisms--in their
telemarketing schemes. Therefore, the Commission proposes changes to
the Rule that would prohibit the use of these novel payment methods in
inbound and outbound telemarketing transactions.
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\30\ See infra Section IV.E (discussing proposed amendments to
the general media and direct mail exemptions in sections 310.6(b)(5)
and (6)).
\31\ 16 CFR 310.3(a)(3). In 2003, the Commission explained that
requiring express verifiable consent was necessary ``when consumers
are unaware that they may be billed via a particular method, when
that method lacks legal protection against unlimited unauthorized
charges, and when the method fails to provide dispute resolution
rights.'' 2003 TSR Amendments, 68 FR at 4606. Thus, section
310.3(a)(3) of the TSR requires telemarketers and sellers to obtain
a consumer's express verifiable authorization for all telemarketing
transactions where payment is made by a method other than a credit
card or a debit card. 16 CFR 310.3(a)(3). This includes ACH debits
and other forms of electronic fund transfers subject to the EFTA, as
well as payment methods that are not subject to the EFTA.
\32\ Other law enforcers and regulators have expressed concerns
about the fraudulent use of remotely created checks. See, e.g.,
NACHA Discussion Paper, Warranty Claims on Demand Drafts Through the
ACH Network (May 1, 2008) (noting that law enforcement and consumer
protection agencies continue to alert NACHA about the fraudulent use
of remotely created checks, and confirming that, ``[a]s the
electronic payments networks have implemented risk management and
anti-fraud programs, it appears that some fraudulent activity has
migrated to this form of payment''), available at http://www.nacha.org/c/AccomplishmentsandCurrentInitiatives.cfm; Public
Comment filed with the Federal Reserve by the National Association
of Attorneys General, the National Consumer Law Center, Consumer
Federation of America, Consumers Union, the National Association of
Consumer Advocates, and U.S. Public Interest Research Group in
Docket No. R-1226 (May 9, 2005) (advocating the elimination of
remotely created checks in favor of electronic fund transfers
covered by the EFTA); Federal Reserve Bank of Atlanta, 2008 Risk &
Fraud in Retail Payments: Detection & Mitigation Conference Summary
(Oct. 6-7, 2008) (``Anecdotally, telemarketers turned to remotely
created checks as better ACH risk controls came online.''),
available at http://www.frbatlanta.org/filelegacydocs/08retailpayments.pdf.
\33\ See infra notes 91-99 (citing injury estimates in cases
brought by the Commission).
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A. Remotely Created Checks and Remotely Created Payment Orders

Checks are written orders used to instruct a financial institution
to pay money from the account of the check writer (``payor'') to the
check recipient (``payee''). Traditional checks have certain
requirements as to the type of paper and ink used, and what information
appears on the check. Traditional checks also require the signature of
the authorized signatory on the checking account, which must be
verified by the bank.\34\ By contrast, a remotely created check is an
unsigned paper check that is created by the payee (typically a
merchant, seller, or telemarketer).\35\ In place of the payor's
signature, the remotely created check bears a statement indicating that
the account holder authorized the check or that the ``signature is on
file.'' \36\ Any merchant who obtains a consumer's bank routing and
account number can print a remotely created check with the proper
equipment or the help of a third-party payment processor, and deposit
it into its bank account for collection.\37\ Thus, remotely created
checks are more susceptible to fraud than paper checks.
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\34\ Because payment for goods or services sold through
telemarketing occurs immediately over the telephone, traditional
paper checks are not commonly used in telemarketing transactions.
Nevertheless, in most circumstances, a consumer's written signature
on a check would satisfy the express verifiable authorization
requirement of section 310.3(a)(3)(i) of the TSR.
\35\ A remotely created check, also commonly referred to as a
``demand draft,'' ``bank check,'' or ``bank draft,'' is defined by
Regulation CC (Availability of Funds and Collection of Checks), 12
CFR 229.2(fff), as ``a check that is not created by the paying bank
and that does not bear a signature applied, or purported to be
applied, by the person on whose account the check is drawn.'' Thus,
checks generated by an account holder's bank on the request of the
account holder through the bank's bill pay service are not remotely
created checks, despite the absence of the account holder's
signature.
\36\ ``As a result, they are vulnerable to misuse by fraudsters
who can, for example, use [a remotely created check] to debit a
victim's account without receiving proper authorization or
delivering the goods or services. The risk of fraudulent [remotely
created checks] is amplified in one-time purchase scenarios where
the merchant is relatively unknown to the customer.'' Crystal D.
Carroll, Federal Reserve Bank of Atlanta, Retail Payments Risk
Forum, Remotely Created Checks: Distinguishing the Good from the Bad
(July 6, 2009), available at http://portalsandrails.frbatlanta.org/2009/07/remotely-created-checks-distinguishing-the-good-from-the-bad.html.
\37\ To comply with processing standards at banks that use
magnetic ink character recognition line data from the bottom of a
check, remotely created checks must be printed using special check
paper stock and magnetic ink. Telemarketers often employ third-party
processing firms to create and deposit the checks, which are
accepted for deposit by the firms' bank. See, e.g., FTC v. Your
Money Access, LLC (``YMA''), Civ. No. 07-5147 (E.D. Pa. Aug. 11,
2010) (stipulated permanent injunction against payment processor
that allegedly facilitated fraudulent telemarketers by debiting
accounts through remotely created checks and ACH debits); United
States v. Payment Processing Ctr., LLC, Civ. No. 06-0725 (E.D. Pa.
Aug. 12, 2010) (Stip. Perm. Inj.) (same); FTC v. Interbill, Ltd.,
Civ. No. 2:06-01644 (D. Nev. Apr. 30, 2009) (Summ. J.), aff'd, FTC
v. Wells, Civ. No. 09-16179, 385 F.App'x. 712 (9th Cir. 2010)
(summary judgment against payment processor that facilitated
fraudulent telemarketers by debiting accounts through remotely
created checks).
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Changes in banking regulations and advances in technology now
enable banks to accept and exchange electronic images of paper checks,
including ``substitute checks,'' instead of sorting and transporting
paper checks around the country on a daily basis.\38\ As a result,
telemarketers, sellers, and payment processors can deposit

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scanned images of paper-based checks, including remotely created
checks, into the check clearing system.
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\38\ In 2003, Congress enacted the Check Clearing for the 21st
Century Act (``Check 21 Act'' or ``Check 21''), 12 U.S.C. 5001-5018,
which paved the way for the use of substitute checks. Under the Act,
a substitute check qualifies as the legal equivalent of the original
check if:
(1) it accurately represents all of the information on the front
and back of the original check as of the time it was truncated
[i.e., removed from the collection or return process and supplanted
by an electronic image of the check] * * * (2) it bears the legend:
``This is a legal copy of your check. You can use it the same way
you would use the original check,'' and (3) a bank has made the
Check 21 Act warranties with respect to the substitute check.
Federal Financial Institutions Examination Council (``FFIEC''),
Check Clearing for the 21st Century Act Foundation for Check 21
Compliance Training, available at http://www.ffiec.gov/exam/check21/Check21FoundationDoc.htm.
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Electronic image exchange also has resulted in an ``all-
electronic'' version of the remotely created check--the ``remotely
created payment order''--a remotely created check that never exists in
printed paper form.\39\ Like traditional checks and remotely created
checks, remotely created payment orders are deposited into and cleared
through the check clearing system.\40\ As with remotely created checks,
remotely created payment orders are created by the merchant (payee),
not the consumer (payor). In the case of remotely created payment
orders, a telemarketer or seller simply enters a bank account number
and bank routing number into an electronic file that is transmitted to
a financial institution for processing via the check clearing
system.\41\ As a result, remotely created payment orders are at least
as susceptible to fraud as remotely created checks.\42\
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\39\ The proposed definition of ``remotely created payment
order,'' therefore, closely tracks the proposed definition of
remotely created check:
a payment instruction or order drawn on a person's account that
is initiated or created by the payee and that does not bear a
signature applied, or purported to be applied, by the person on
whose account the order is drawn, and which is cleared through the
check clearing system. The term does not include payment orders
cleared through the Automated Clearinghouse Network or subject to
the Truth in Lending Act, 15 U.S.C. 1601, and Regulation Z, 12 CFR
part 1026.
See infra Section IV.A.
\40\ In 2011, while proposing certain amendments to Regulation
CC (Availability of Funds and Collection of Checks), the Board of
Governors of the Federal Reserve System (``Federal Reserve Board'')
used the term ``electronically-created item'' to describe any all-
electronic image of a check that is sent through the check clearing
system. Proposed Rule; Regulation CC, 76 FR 16862, 16865 (Mar. 25,
2011), available at http://www.gpo.gov/fdsys/pkg/FR-2011-03-25/pdf/2011-5449.pdf. As such, the term encompasses ``remotely created
payment orders'' (also known as ``electronic RCCs,'' ``virtual
drafts,'' ``paperless checks,'' and ``non-check RCCs''), as well as
smart-phone checks where the consumer ``signs'' a digital image of a
check that can be emailed to a merchant or the merchant's bank. Id.
Among other things, the Federal Reserve Board proposed amendments to
Regulation CC that would provide such electronically-created items
with the same interbank warranty and liability provisions as
remotely created checks. Id. See also supra note 53 (explaining
interbank warranty and liability provisions applicable to remotely
created checks). To date, the Board has taken no further action on
this proposal.
The Commission's proposed ban would extend to remotely created
payment orders. Importantly, the ban would not prohibit the use of
other ``electronically-created items,'' as defined by the Federal
Reserve Board's proposed amendments to Regulation CC.
\41\ FFIEC, Retail Payment Systems Booklet--February 2010, at 16
(Feb. 2010) (``Retail Payment Systems Booklet ''), available at
http://ithandbook.ffiec.gov/ITBooklets/FFIEC_ITBooklet_RetailPaymentSystems.pdf. ``Unlike traditional checks or RCCs
[remotely created checks], electronically created payment orders do
not begin with a paper item. However, they are similar to RCCs in
that they . . . bear no direct evidence of the customer's
authorization. Because these transactions are not originally
captured from paper check items, the laws and regulations pertaining
to check collection do not apply.'' Id.; see also infra notes 61-62
and accompanying text (noting the uncertain regulatory framework for
remotely created payment orders deposited into the check clearing
system).
\42\ In inbound telemarketing calls, the same account
information could be used to initiate an electronic fund transfer
through the ACH Network. Fraudulent telemarketers and unscrupulous
payment processors prefer, however, to use remotely created payment
orders to evade the ACH Network and exploit the weaknesses inherent
in the check clearing system. See, e.g., FTC v. Automated Electronic
Checking, Inc. (``AEC''), Civ. No. 3:13-cv-00056-RCJ-WGC (D. Nev.
Feb. 5, 2013) (Stip. Perm. Inj.); FTC v. Landmark Clearing Inc.,
Civ. No. 4:11-00826 (E.D. Tex. Dec. 15, 2011) (Stip. Perm. Inj.).
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The Commission previously considered the risks associated with the
use of remotely created checks (then known as ``demand drafts'') in
telemarketing during the initial promulgation of the Rule and
subsequent rulemaking proceedings culminating in the 2003 amendments.
At the time of those prior rulemaking proceedings, there were few, if
any, convenient and safe payment alternatives available for consumers
without access to credit cards. Consequently, prohibiting the use of
remotely created checks in telemarketing would have imposed hardships
on those consumers.\43\ In the past decade, however, there has been a
dramatic proliferation of noncash payment alternatives for consumers,
and electronic payments now surpass paper checks in popularity as
noncash means of payment.\44\ In light of these changes in the
marketplace, the Commission preliminarily finds that the risks from
using these payment methods in telemarketing transactions exceed the
benefits of permitting their use. At the same time, the Commission
wishes to explore whether there might be legitimate reasons that
telemarketers use these payment methods instead of other available
payment mechanisms.\45\ To understand any potential problems posed for
legitimate businesses by the proposed ban on the use of remotely
created checks and remotely created payment orders, the Commission
welcomes comments from the public in response to the questions posed in
Section VIII.
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\43\ Original TSR, 60 FR at 43850.
\44\ Federal Reserve System, The 2010 Federal Reserve Payments
Study: Noncash Payment Trends in the United States: 2006-2009, at 4
(April 5, 2011) (``2010 Payments Study'') (``Electronic payments
(those made with cards and by ACH) now collectively exceed three
quarters of all noncash payments while payments by check are now
less than one-quarter. The increase in electronic payments and the
decline of checks can be attributed to technological and financial
innovations that influenced the payment instrument choices of
consumers and businesses.'' (Citation omitted)), available at http://www.frbservices.org/files/communications/pdf/press/2010_payments_study.pdf.
\45\ The 2010 Federal Reserve Payments Study concluded that
``[t]he decline in [consumer-to-business] check writing reflects,
among other things, the replacement of consumer checks by electronic
payments, such as online bill payments through the ACH, or point-of-
sale purchases with debit cards.'' Id. at 11.
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1. Absence of Federal Consumer Protection Regulation of Remotely
Created Checks and Remotely Created Payment Orders
A complicated interplay between federal and state laws results in
uneven regulation of different payment methods. The type of payment
mechanism used by a consumer in a particular transaction determines the
level of legal protection against unauthorized charges the consumer
receives. Consumers generally are not aware of the differing legal
protections pertaining to the various payment methods. Significantly,
consumers who provide bank debiting information to a telemarketer have
virtually no control over how the telemarketer chooses to process their
payment. Once a telemarketer obtains a consumer's bank account and
routing number, the telemarketer (not the consumer) may choose to use
that information to initiate payment via ACH debit, remotely created
check, or remotely created payment order \46\--a choice that determines
what level of protections the consumer receives.
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\46\ Cf. supra note 42.
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When a remotely created check or a remotely created payment order
is cleared through the check clearing system, consumers receive none of
the federal protections that safeguard conventional payments that are
processed through the credit card system or the ACH Network. Consider
the protections the law affords to credit card transactions and
electronic fund transfers, such as debit card and ACH transactions.
Federal law subjects credit card transactions to a prescribed billing
error resolution process \47\ and statutory limitations on a
cardholder's liability for certain transactions.\48\ Similarly, when

[[Page 41204]]

consumers use debit cards linked to a bank account or otherwise
initiate electronic fund transfers involving a bank account, they are
protected by the EFTA.\49\ This is also true when consumers provide
paper checks to a merchant that converts the account information from
these checks into electronic ACH debits.\50\ The EFTA and Regulation E
provide consumers with error resolution procedures, including a
requirement that funds debited in an unauthorized electronic fund
transaction must be returned to the consumer's account within a maximum
of ten business days, pending the outcome of further investigation,\51\
and statutory limitations on a consumer's liability for unauthorized
transactions.\52\
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\47\ Fair Credit Billing Act, 15 U.S.C. 1666 (correction of
billing errors). Within 60 days of the financial institution's
transmittal of her credit card account statement, a consumer may
dispute a charge for goods or services with her credit card company,
and withhold payment while the dispute is pending. Billing errors
include failure of a merchant to deliver goods or services as
agreed.
\48\ Truth-In-Lending Act, 15 U.S.C. 1643 (liability of holder
of credit card); Regulation Z, 12 CFR 1026.12(b)(2) (liability of
cardholder for unauthorized use).
\49\ The EFTA also covers payroll cards, and some prepaid debit
cards (also referred to as ``general purpose reloadable'' or ``GPR''
cards) that are linked to an account at a financial institution. In
addition, section 401 of the Credit Card Accountability
Responsibility and Disclosure Act of 2009 (``Credit CARD Act''), 15
U.S.C. 1693l-1, created new section 915 of the EFTA, subjecting
other types of non-GPR cards (i.e., gift cards) to some, but not
all, requirements of the EFTA.
In May 2012, the CFPB requested public comment on whether (and
to what extent) EFTA coverage should be provided to all GPR cards.
Advanced Notice of Proposed Rulemaking; Electronic Fund Transfers
(Regulation E) and General Purpose Reloadable Prepaid Cards (``ANPR
Electronic Fund Transfers and GPR Cards''), 77 FR 30923 (May 24,
2012). In a comment submitted the CFPB, Commission staff expressed
support for protecting users of GPR cards and for the CFPB's
proposal to solicit information about the costs and benefits of
extending additional protections to these cards. Comment, Staff of
the Bureau of Consumer Protection, ANPR Electronic Fund Transfers
and GPR Cards, Dkt. No. CFPB-2012-00196 (July 23, 2012), available
at http://www.ftc.gov/os/2012/07/120730cfpbstaffcomment.pdf. The
Commission will continue to monitor complaints regarding the use of
prepaid debit cards in telemarketing fraud to determine whether
additional amendments of the TSR would protect consumers.
\50\ Examples of such electronic check conversions include
point-of-purchase (``POP'') and accounts receivable conversion
(``ARC''). A POP entry is created for an in-person purchase of goods
or services when a retailer uses a consumer's paper check as a
source document to electronically enter the consumer's bank routing
and account number to initiate an ACH debit to the consumer's bank
account. An ARC entry also uses a consumer's paper check as a source
document to initiate an ACH debit, but the check is not received at
the point-of-purchase. Instead, ``a biller receives the consumer's
check in the mail, or at a lockbox location for payment of goods and
services.'' Karen Furst & Daniel E. Nolle, Policy Analysis Division,
Office of the Comptroller of the Currency, ACH Payments: Changing
Users and Changing Uses Policy Analysis Paper #6, at 8 (Oct. 2005),
available at http://www.occ.gov/topics/bank-operations/bit/ach-policy-paper-6.pdf. ``Under a legal sleight of hand, the check is
treated as an authorization for an electronic fund transfer,
bringing the transaction entirely under the EFTA.'' Gail Hillebrand,
Before the Grand Rethinking: Five Things to Do Today with Payments
Law and Ten Principles to Guide New Payments Products and New
Payments Law, 83 Chi.-Kent L. Rev. 769, 780 n.22 (2008).
\51\ 15 U.S.C. 1693f(c) (provisional recredit of consumer's
account). When a consumer disputes an electronic funds transfer as
unauthorized or otherwise in error, the EFTA provides a process for
error resolution. Id. at 1693f. The consumer must notify the
financial institution, either orally or in writing, of the reasons
for the error or dispute within 60 days of transmittal of an account
statement bearing the disputed transaction. The EFTA gives the
financial institution up to ten business days to either resolve the
dispute or provide the consumer with a provisional recredit of the
disputed amount. The financial institution may take up to 45 days to
complete its investigation. If the dispute is resolved in the
consumer's favor before the end of the ten day period, however, the
recredit must be made within one business day. These time periods
can be extended under certain circumstances. Id.
\52\ Under the EFTA, consumers are not liable for unauthorized
electronic fund transfers unless an accepted card or other means of
access was used--i.e., a card which had been received by the
consumer. 15 U.S.C. 1693g(a). If an accepted card was used, and the
card provides for a means to identify the user of the card, the EFTA
allows the consumer to be held responsible for certain amounts,
depending on the timeliness of the consumer's discovery and report
of loss, theft, or unauthorized use. If the consumer reports the
loss not later than two business days of discovery of the loss, a
consumer's liability is limited to $50. Id. at 1693g(a)(1)-(2). If
not, a consumer's liability can go up to $500. If the consumer fails
to report an unauthorized fund transfer that appears on a statement
provided to the consumer within 60 days, however, the consumer's
potential loss is unlimited. Id.
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In contrast, no such federal consumer protection laws or
regulations apply to remotely created checks deposited into the check
clearing system.\53\ These payments are governed principally by state
law, Articles 3 and 4 of the Uniform Commercial Code (``UCC''), which
apply to all negotiable instruments and bank deposits.\54\ Unlike the
dispute resolution protections provided by the TILA and Regulation Z,
the UCC provides no way for a consumer to dispute or withhold payment
before the funds are withdrawn from her account.\55\ In addition,
consumers receive superior substantive liability limits for
unauthorized transactions under the TILA and, to a lesser extent, the
EFTA.\56\ Moreover, unlike the EFTA and Regulation E, the UCC imposes
no specific obligation on a financial institution to recredit disputed
funds to a consumer's account within a particular time frame,\57\ and a
consumer may have to pursue legal action against the bank to promptly
recover money lost in telemarketing fraud.\58\ Thus, consumers
victimized by telemarketing schemes that deposit unauthorized remotely
created checks are forced to expend a significant amount of time,
effort and money to resolve disputes with their banks over unauthorized
withdrawals from their accounts.\59\
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\53\ Remotely created checks are subject to Regulation CC, 12
CFR 229.34, which provides for special transfer and presentment
warranties between banks. These interbank warranties ``shift
liability for the loss created by an unauthorized remotely created
check to the depositary bank,'' which is generally the bank for the
person that initially created and deposited the remotely created
check. Final Rule; Regulations J and CC, 70 FR 71218, 71220 (Nov. 5,
2005). ``The warranty applies only to financial institutions and
does not directly create any new rights for checking account
customers.'' FFIEC, Retail Payment Systems Booklet, supra note 41,
at 9.
\54\ The UCC has been adopted (in whole or in part), with some
local variation, in all 50 states, the District of Columbia, and the
Virgin Islands.
\55\ See supra note 47; Hillebrand, supra note 50 at 776
(explaining the limited consumer protections afforded by the UCC for
many consumer check disputes); Mark E. Budnitz, Lauren K. Saunders,
& Margot Saunders, Sec. 2.3.2.3 Consumer Banking and Payments Law:
Credit, Debit & Stored Value Cards, Checks, Money Orders, E-Sign,
Electronic Banking and Benefit Payments (4th ed., National Consumer
Law Center 2009 & Supp. 2010).
\56\ See supra notes 47-48 and 51-52.
\57\ ``Thus, only weak and indirect motivations force banks to
move promptly in response to such a complaint. For example, the bank
that responds slowly to such a complaint might harm its reputation
for providing high-quality customer service. Similarly, if the bank
refuses to return the funds promptly and subsequently dishonors a
check for which the customer's funds should have been adequate, the
bank would be exposed to liability for wrongful dishonor. It is safe
to say that those motivations are much less effective than the
specific statutory deadlines for dealing with customer complaints
that appear in the EFTA.'' Expert Report of Prof. Ronald Mann, ] 24
(Feb. 4, 2008), filed in FTC v. Neovi, Inc. (``Neovi''), Civ. No.
06-1952 (S.D. Cal. Sept. 16, 2008) (Summ. J.).
\58\ Hillebrand, supra note 50, at 780 (explaining that ``check
law sets no guaranteed time period for the re-credit of disputed
funds'').
\59\ Mann, supra note 57, ] 25 (``As a result, a typical
consumer will expend a considerable amount of time getting the bank
to respond to the complaint. Among other things, the consumer
ordinarily will be required to submit an affidavit regarding the
forgery. For consumers that are not experienced with the legal
system, and who have immediate uses to which they would put the
funds in their bank accounts, these problems are likely to be most
burdensome.''); see also Expert Report of Elliott C. McEntee, at ]
55 (Oct. 1, 2008), filed in YMA, supra note 37.
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The regulatory framework for remotely created payment orders is
complicated and unsettled, but currently results in the same inferior
protection against fraud as provided by remotely created checks. Unlike
traditional checks or remotely created checks, remotely created payment
orders never exist in paper form and, thus, cannot be used to create a
substitute check that meets the requirements of the Check Clearing for
the 21st Century Act (``Check 21 Act'').\60\ The Consumer Financial

[[Page 41205]]

Protection Bureau (``CFPB'') has not yet determined whether such
electronically-created items not derived from checks are electronic
fund transfers subject to Regulation E.\61\ Notwithstanding this
uncertain regulatory framework, as a practical matter, the check
clearing system cannot currently distinguish remotely created payment
orders from remotely created checks (or from images of traditional
checks).\62\ Banks, therefore, often treat returned remotely created
payment orders as if they were remotely created checks covered by the
UCC, which, as previously noted, provides consumers with no meaningful
protection against telemarketing fraud.
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\60\ Budnitz & Saunders, supra note 55, at Sec. 2.6.3.5; NACHA,
Remotely Created Checks and ACH Transactions: Analyzing the
Differentiators (``RCC and ACH Differentiators''), at 6 (Mar. 2010),
available at http://www.macha.org/Portals/0/RCC%20White%20Paper%20031110%20Final.pdf (``[Remotely created
payment orders] that are not originally captured via a paper
document cause greater risk than RCCs because they are even more
difficult to identify and monitor and because their legal framework
is not clearly defined.''); Richard Oliver & Ana Cavazos-Wright,
Federal Reserve Bank of Atlanta, Retail Payments Risk Forum, Portals
and Rails, Going All Digital With the Check: Check 21, ACH, or an
Electronic Payment Order? (May 10, 2010), available at http://portalsandrails.frbatlanta.org/remotely-created-checks/.
\61\ In 2011, while proposing certain amendments to Regulation
CC (Availability of Funds and Collection of Checks), the Federal
Reserve Board stated that it had not made a determination as to the
applicability of Regulation E to electronically-created items, such
as remotely created payment orders. Proposed Rule; Regulation CC,
supra note 40 at 16865-86. Since then, the CFBP has assumed
responsibility for most rulemaking authority for Regulation E,
pursuant to the Dodd-Frank Wall Street Reform and Consumer
Protection Act (``Dodd-Frank Act''), Pub. L. 111-203, 124 Stat. 1376
(2010). The CFPB also has not made such a determination.
\62\ Proposed Rule; Regulation CC, supra note 40, at 16866; see
also Ana Cavazos-Wright, Federal Reserve Bank of Atlanta, Retail
Payments Risk Forum, Remotely Created Checks: Banks of First Deposit
Provide Front Line of Defense (June 7, 2010), available at http://portalsandrails.frbatlanta.org/remotely-created-checks/. (``RCCs
that exist in [electronic-only] format may easily bypass detection
because, when they are sent forward for clearing, they appear in a
format indistinguishable from files of images captured from paper
checks.'').
Moreover, in explaining amendments to the Federal Reserve
Operating Circular 3, the Retail Payments Office of the Federal
Reserve System advised depository institutions that these items
``actually fall under the requirements of the EFTA and Reg E.''
Letter from Richard Oliver, Retail Payments Product Manager, Retail
Payments Office of the Federal Reserve to Chief Executive Officers
of Depository Institutions (June 16, 2008); see also Federal Reserve
Bank of New York, Operating Circular No. 3 Revised, Circular 11962
(June 23, 2008), available at http://www.newyorkfed.org/banking/circulars/11962.html.
---------------------------------------------------------------------------

Some payment processors capitalize on this confusing regulatory
framework when marketing their remotely created payment order services
to high-risk merchants. These entities openly promote the ``merchant-
friendly'' UCC framework and avoidance of NACHA's Operating Rules,
including NACHA's 1 percent monthly threshold for unauthorized returns,
as reasons to use remotely created checks and remotely created payment
orders instead of credit card or ACH payments.\63\
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\63\ For example, the defendants in AEC urged their merchant
clients to avoid NACHA's 1 percent monthly threshold on unauthorized
returns by switching from ACH debits to RCPOs. FTC v. AEC, supra
note 42, at ]29.
Similarly, the defendants in Landmark expressly advertised their
remotely created payment order processing product as a less
regulated alternative to ACH transactions. FTC v. Landmark Clearing,
supra note 42, at ]23. The defendants declared on their Web site and
promotional materials that:
NACHA, the governing body over check processing rules and
regulations, has stated businesses with return rates of higher than
1% unauthorized return rate cannot process ACH transactions. If your
company is at risk of higher return rates, [RCPO] processing is a
great solution for your business needs.
Id. at Exhibit A, Screen Capture of Landmark Web site, Virtual
Draft page.
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2. Lack of Centralized Fraud Monitoring and Controls
Unlike payments processed or cleared through the credit card system
or the ACH Network, remotely created checks are not subject to
systematic monitoring for fraud. This makes them an irresistible
payment method for fraudulent telemarketers. The credit card system is
designed to deter and detect fraud by requiring that a merchant be
approved for a merchant account before it may accept credit card
payments. In addition, the credit card system monitors all returns and
refunds, to identify unusual activity associated with fraud.
Specifically, the credit card payment system can analyze the chargeback
volume (i.e. the number of chargebacks over a particular time period),
chargeback rate (i.e., the percentage of attempted debits that are
returned out of the total number of attempted debits for a specific
merchant), and chargeback reason codes (via a numeric code used to
identify why a chargeback occurred) of its participants.\64\ To
participate in the credit card payment systems, banks and merchants
agree to abide by certain operating rules, including requirements that
chargeback rates remain below established thresholds,\65\ and they can
be expelled or otherwise sanctioned for violating these rules.\66\
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\64\ A ``chargeback'' is a payments industry term used to
describe the process through which a disputed charge to a consumer's
credit card is refunded to the consumer and charged back to the
entity, often a merchant, that placed the charge on her account.
This dispute process is governed by the Fair Credit Billing Act,
TILA and Regulation Z. See supra notes 47 and 48.
\65\ For example, Visa's operating rules state:
Visa monitors the total volume of U.S. Domestic and
International Interchange and Chargebacks for a single Merchant
Outlet and identifies U.S. Merchants that experience all of the
following activity levels during any month:
100 or more interchange transactions
100 or more Chargebacks
A 1% or higher ratio of overall Chargeback-to-
Interchange volume
Visa, U.S.A, Visa International Operating Regulations 756 (Apr.
15, 2013), available at http://usa.visa.com/download/merchants/visa-international-operating-regulations-main.pdf. MasterCard maintains
similar, but not identical, thresholds for its chargeback monitoring
programs (at least 100 chargebacks a chargeback ratio of 1.5
percent). MasterCard, Security Rules and Procedures: Merchant
Edition 8-13 (Feb. 22, 2013), available at http://www.mastercard.com/us/merchant/pdf/SPME-Entire_Manual_public.pdf.
\66\ MasterCard maintains the Member Alert to Control High-risk
Merchants (``MATCH'') file, a database that acquiring banks and
payment processors use to report merchants that they have terminated
for risk-related reasons. In turn, banks and payment processors must
check prospective merchants against the MATCH file as part of the
underwriting process. MasterCard Security Rules and Procedures, id.
at 11-1.
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Similarly, the two ACH operators (the Federal Reserve Bank and the
Electronic Payments Network) systematically monitor transactions to
detect and deter fraud. The ACH operators track the volume, reason
code, and rate of ``returned items'' \67\ sent back to originating
banks where the items were originally deposited, and forward the data
to NACHA--The Electronic Payments Association (``NACHA'').\68\ When
NACHA identifies a merchant with unusually high returns activity, it
notifies the merchant's originating bank which must review the
merchant's activity and compliance with the NACHA rules.\69\ NACHA's
rules and guidelines emphasize the responsibility of all ACH
participants, including merchants, banks, and payment processors, to
monitor return rates and other suspicious activity in order to detect
and prevent fraud in the ACH Network. ACH participants can determine
whether a merchant's return rates are excessive by comparing the
merchant's return rate with the industry average return rates, which
NACHA publishes in quarterly NACHA

[[Page 41206]]

newsletters. NACHA rules apply additional restrictions on ``telephone-
initiated'' (abbreviated as ``TEL'') transactions, which historically
have been fertile ground for fraud.\70\
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\67\ A ``returned item'' is a check sent through the check
clearing network or an electronic debit processed through the ACH
Network that has been returned unpaid to the originating bank.
Consumers may initiate returns of checks and electronic debits by
disputing the payment with their bank. For traditional checks, this
process is governed by the UCC; for electronic debits, it is
governed by the EFTA and Regulation E.
\68\ FFIEC, Retail Payment Systems Booklet, supra note 41, at
16.
\69\ NACHA may initiate a rules enforcement proceeding against
an originating depository financial institution (``ODFI'') when its
merchant generates a return rate for unauthorized transactions that
exceeds 1 percent in a month. NACHA Operating Rules, Art. II, Sec.
2.17.2 (ODFI Return Rate Reporting) and Sec. 10.4.3 (Initiation of
a Rules Enforcement Proceeding) (2013). A read-only version of the
2013 edition of the NACHA Rules is available at
www.achrulesonline.org at no cost to registered users.
On March 15, 2013, NACHA tightened the timeline from 60 days to
30 day for ODFIs to reduce a merchant's return rate for unauthorized
transactions below the 1 percent threshold before initiation of a
Rules enforcement proceeding. NACHA, ODFI Return Rate Reporting
(Risk Management) March 15, 2013, available at https://www.nacha.org/ODFI-Return-Rate-Reporting-(Risk%20Management)-March-
15-2013.
\70\ NACHA's ``TEL rule'' specifically prohibits the use of the
ACH Network by outbound telemarketers that initiate calls to
consumers with whom they have no existing relationship. NACHA
Operating Rules, Art. II, Sec. 2.5.15 (Specific Provisions for TEL
Entries (Telephone-Initiated Entry)) (2013). For inbound telephone
orders and transactions in which the merchant has an existing
business relationship with the consumer, a merchant may obtain a
consumer's authorization to initiate an ACH debit. As evidence of a
consumer's authorization of a TEL transaction, the merchant or
seller must either: (1) Record the oral authorization of the
consumer, or (2) provide the consumer with written notice confirming
the oral authorization prior to the settlement date of the entry.
Historically, NACHA limited consumer-authorized TEL transactions
to single-entry payments. However, in 2011 NACHA amended its
operating rules to permit recurring TEL transactions. NACHA,
Enhancements to ACH Applications FAQs, (Jan. 19, 2011), available at
http://admin.nacha.org/userfiles/File/ACH_Rules/Application%20Enhancements%20rule%20changes%20FAQs.pdf. For
recurring TEL entries to be compliant with NACHA's rules, a merchant
must record the oral authorization and provide the consumer with a
copy of the authorization. Id.
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Merchant returns and chargebacks \71\ that exceed either the
thresholds set by credit card system operators or the average return
rate experienced by ACH participants often may indicate either that the
merchant is submitting transactions that consumers have not authorized,
or that the merchant engaged in deceptive conduct to obtain any such
authorization.\72\ The Commission's law enforcement experience also
confirms that high total return rates are a strong indicator of
fraud.\73\ In more than a decade of Commission enforcement actions
alleging that payment processors made unauthorized debits to consumer
bank accounts on behalf of fraudulent merchants, the return rates were
staggeringly high and vastly out of proportion with industry norms.\74\
Although telemarketers engaged in fraud obviously continue to look for
ways to subvert the anti-fraud mechanisms of the credit card systems
and the ACH Network,\75\ the specific initial due diligence and
subsequent monitoring of return activity undertaken by the operators of
these systems--as well as a steady stream of law enforcement actions by
the Commission and other federal and state law enforcement agencies--
make it more difficult for wrongdoers to gain and, critically, to
maintain access to these payment systems.\76\
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\71\ For ease of reference, this section of the NPRM uses the
term ``returns'' to refer to both chargebacks and returned items, as
defined supra in notes 64 and 67.
\72\ See, e.g., Financial Crimes Enforcement Network
(``FinCEN''), Advisory FIN-2012-A010, Risk Associated with Third-
Party Payment Processors (October 22, 2012), available at http://www.fincen.gov/statutes_regs/guidance/html/FIN-2012-A010.html
(noting that high numbers of consumer complaints and ``particularly
high numbers of returns or charge backs (aggregate or otherwise),
suggest that the originating merchant may be engaged in unfair or
deceptive practices or fraud, including using consumers' account
information to create unauthorized RCCs or ACH debits.''); McEntee,
supra note 59, ] 32.
\73\ Total return rate refers to the total number of ACH debit
transactions that were returned for any reason code, divided by the
total number of ACH debit transactions processed nationwide for that
time period. For example, the average total return rate for all ACH
debit transactions in 2011 was 1.52 percent. FTC v. Ideal Financial
Solutions, Inc., Civ. No. 2:13-00143-MMD-GWF (D. Nev. filed Jan. 28,
2013) at ] 37, available at http://www.ftc.gov/os/caselist/1123211/index.shtm.
\74\ See, e.g., Landmark, supra note 42 (alleging defendants
accepted merchants with anticipated return rates of 70 to 75
percent, and continued processing remotely created payment orders
for merchant that generated return rates ranging from 50 to 80
percent); YMA, supra note 37 (defendants allegedly processed ACH and
demand draft debits on behalf of merchants that generated return
rates ranging from 32 to 82 percent); FTC v. 3d Union Card Serv.,
Civ. No. S-04-0712, ] 15 (D. Nev. July 19, 2005) (default judgment
finding nearly 70 percent of defendants' debits to consumers'
accounts were returned or refused by the consumers' banks); FTC v.
Interbill, Ltd., Civ. No. 2:06-01644 (D. Nev. Apr. 30, 2009)
(summary judgment against defendants that continued to process
transactions for merchant, Pharmacycards.com, despite a return rate
of nearly 70 percent); FTC v. Universal Processing, Inc., Civ. No.
05-6054 (C.D. Cal. Aug. 18, 2005) (stipulated permanent injunction
in case with an alleged return rate exceeding 70 percent); FTC v.
Electronic Financial Group, Inc., Civ. No. 03CA0211 (W.D. Tex. Mar.
23, 2004) (stipulated permanent injunction in case with alleged
return rates between 40 and 70 percent).
States also have sued payment processors that assisted
fraudulent telemarketers by continuing to process transactions in
spite of their high return rates and telephone sales scripts
evidencing misrepresentations or violations of the law. See, e.g.,
Ohio v. Capital Payment Sys. Inc., Civ. No. 08 H 5 7234 (Franklin
County, OH Ct. Com. Pl. (Jan. 31, 2012) (entry of summary judgment
finding defendants processed ACH debits and remotely created checks
for fraudulent telemarketers that generated return rates ranging
from 19 to 68 percent); Ohio v. Cimicato, Civ. No. 06 H 3 04698
(Franklin County, OH Ct. Com. Pl. Oct. 12, 2012) (Stip. J.) (alleged
return rates ranging from 32 to 90 percent); Iowa v. Teledraft Inc.,
Civ. No. 4:04-90507 (S.D. Iowa Dec. 9, 2005) (Stip. J.) (defendants
allegedly processed ACH debits for merchants with total return rates
ranging from 51 to 77 percent); Vermont v. Amerinet, Inc., Civ. No.
642-10-05 (Super. Ct. filed Oct. 31, 2005) (defendants allegedly
continued to process bank debits despite return rates as high as 80
percent).
\75\ Many fraudulent telemarketers who engage in outbound
telemarketing violate NACHA's TEL rule by processing payments
through the ACH Network. See, e.g., FTC v. Elec. Fin. Group Inc.,
Civ. No. 03-211 (W.D. Tex. Mar. 23, 2004) (Stip. Perm. Inj.); FTC v.
First Am. Payment Processing, Inc., Civ. No. 04-0074 (D. Ariz. Nov.
2, 2004) (Stip. Perm. Inj.). When compared to the check fraud losses
experienced by banks, however, ``ACH transactions have had a
relatively good track record.'' Furst & Nolle, supra note 50, at 10-
11.
\76\ Since 1995, the Commission has filed more than 300 cases
involving violations of the TSR, many of which have included
fraudulent or unauthorized charges to consumers' credit card or bank
accounts.
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Therefore, telemarketers engaged in fraud and the payment
processors who assist them have increasingly turned to remotely created
checks and remotely created payment orders to defraud consumers.\77\
The systemic weaknesses of the check clearing system make it much more
accommodating for them than the credit card system or ACH Network. It
is much easier for a merchant to open an ordinary business checking
account and use it to create and deposit remotely created checks or
remotely created payment orders into the check clearing system than it
is to establish a credit card merchant account or qualify for ACH
origination services.
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\77\ See, e.g., FTC v. Landmark, supra note 63 (describing
defendants' promotion of their remotely created payment order
processing product as a less regulated alternative to ACH
transactions for merchants with a history of high return rates);
Expert Report of Dennis M. Kiefer, ]] 31-32 (Oct. 2, 2008), filed in
YMA, supra note 37 (describing the defendants' efforts to migrate
client merchants with high return rates from ACH to demand draft
transactions); see also George F. Thomas, Digital Transactions, It's
Time to Dump Demand Drafts, at 39 (July 2008), available at http://www.radixconsulting.com/TimetoDumpDemandDrafts.pdf (``[Y]ou will
find merchant-processing sites that advise merchants in high-risk
categories or with high unauthorized-return rates to avoid the
scrutiny of the ACH by using demand drafts.'').
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Moreover, based on current practices, it is impossible for banks to
systematically distinguish remotely created checks from conventional
checks, or to calculate their isolated rates of return. The reason for
this is rooted in the structure and history of the check collection
system, which is highly decentralized and originally paper-based. In
these respects, it stands in marked contrast to the credit card system
and the ACH Network. The interbank check clearing process involves one
bank (the ``depository bank'') presenting a check to another bank (the
``payor bank'') for payment. When a depository bank receives a check,
it encodes the amount of the check in magnetic ink at the bottom of the
check, and forwards the magnetic ink character recognition (``MICR'')
information to the payor bank for settlement.\78\ Enactment of the
Check 21 Act \79\ permits banks now to capture an image of the front
and back of the original check and exchange the image and MICR line
data in the clearing and

[[Page 41207]]

payment process instead of relying on the paper check.
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\78\ Before advances in electronic check processing, the
physical processing of checks relied on high-speed reader/sorter
equipment to scan the MICR line at the bottom of each check, which
contains very limited information--numbers that identify the bank
branch, bank routing number, check number, and account number at the
payor bank.
\79\ See supra note 38.
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Remotely created checks contain no unique identifier distinguishing
them as such; and they are cleared in the same manner as traditional
paper checks. Without examination of the signature block on each check,
there is currently no feasible way for banks to analyze the volume,
use, or return rate for remotely created checks.\80\
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\80\ In an attempt to quantify the number of remotely created
checks being automatically processed through the check clearing
system, in 2007, the Federal Reserve System conducted a check
sampling study of 30,000 randomly-selected checks. The study
required ``three independent investigators to `interrogate,' i.e.,
systematically collect information from, each sampled check.''
Federal Reserve System, The Check Sample Study: A Survey of
Depository Institutions for the 2007 Federal Reserve Payments Study,
8 (Mar. 2008) (``2007 Check Sample Study''), available at http://www.frbservices.org/files/communications/pdf/research/2007_check_sample_study.pdf. The study estimated that approximately 0.95
percent or 308 of the 32,448 checks sampled in 2006 were remotely
created. Id. at 33.
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Like remotely created checks, remotely created payment orders
cannot be distinguished from other check images deposited into the
check clearing system.\81\ Thus, the Federal Financial Institutions
Examination Council notes that:
---------------------------------------------------------------------------

\81\ See Proposed Rule; Regulation CC, supra note 40 and
accompanying text.

[w]hen a financial institution permits the creation of
electronic [remotely created] payment orders, substantial risk-
management oversight for unauthorized returns and other unlawful
activity is lost because the check-clearing networks do not provide
the level of technological and organizational controls of those in
the ACH network [or the credit card system]. This lack of systemized
monitoring of electronically created payment orders increases their
susceptibility to fraud by Web-based vendors and telemarketers.\82\
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\82\ FFIEC, Retail Payment Systems Booklet, supra note 41, at
16.

As a result of these combined factors, there exists no systemwide
transaction data available for remotely created checks or remotely
created payment orders that are returned through the check clearing
system,\83\ and scant data on the overall number of such transactions
that results in consumer complaints. Nevertheless, substantial harm
resulting from unauthorized remotely created checks is documented in a
number of enforcement cases.\84\
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\83\ Despite the continued decline in overall check volume, the
Federal Reserve's 2010 Payments Study revealed a significant
increase in the volume of remotely created checks from .95 percent
in 2006 to 2.1 percent in 2009. 2010 Payments Study, supra note 44,
at 37; 2007 Check Sample Study, supra note 80. See also Carroll,
supra note 36 (estimating the number of remotely created checks in
2006 at 286 million items, and noting the substantial adverse
consumer impact of fraudulent remotely created checks).
\84\ See, e.g., United States v. First Bank of Delaware, Civ.
No. 12-6500, Sec. Sec. 3, 73-75 (E.D. Pa. Nov. 19, 2012)
(settlement of case alleging defendant originated more than 2.6
million remotely created check transactions totaling approximately
$123 million ``on behalf of third-party payment processors in
cahoots with fraudulent Internet and telemarketing merchants,''
including Landmark Clearing, Check21, Check Site, and Automated
Electronic Checking); FTC v. FTN Promotions, Inc. (``Suntasia''),
Civ. No. 8:07-1279 (M.D. Fla. Dec. 30, 2008) (Stip. Perm. Inj.)
(defendants allegedly caused more than $171 million in unauthorized
charges to consumers' accounts for bogus travel and buyers clubs in
part by using unauthorized remotely created checks); FTC v.
Universal Premium Servs., Inc., Civ. No. 06-0849 (C.D. Cal. Feb. 27,
2007), aff'd, FTC v. MacGregor, 360 F.App'x. 891 (9th Cir. 2009)
(final order after summary judgment for more than $28 million
against defendants that used unauthorized remotely created checks as
payment in fake shopping spree scam); Dep't of Justice Press
Release, International Bank Fraud Ring Busted for Attempt to Debit
100,000 Customer Accounts for Over $20 Million, (Jan. 13, 2009)
(announcing the arrest of one of nine co-conspirators in a purported
telemarketing scheme that used ACH debits and remotely created
checks to make unauthorized withdrawals or attempted withdrawals
from approximately 100,000 consumer bank accounts), available at
http://www.justice.gov/usao/nj/Press/files/pdffiles/2009/sale0113%20rel.pdf. See also infra notes 91-104 and accompanying
text, describing numerous enforcement actions.
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As the law enforcement cases discussed in the next section
demonstrate, individual banks and payment processors, however, can
detect remotely created checks, investigate the total return rates of
their clients' check transactions, compare the percentage of returned
remotely created checks to the return rate for all checks transacted
through the national banking system (approximately one half of one
percent or .5 percent),\85\ attempt to categorize the specific reasons
for returns, compare their clients' return rates to industry average
return rates for other payment mechanisms (such as credit card payments
and ACH debits), and watch closely for other signs of suspicious or
fraudulent merchant activity. As the complaint in United States v.
First Bank of Delaware \86\ highlights, banks and payment processors
have perverse financial incentives to begin processing remotely created
checks for ``high-risk'' merchants and originators.\87\ This is because
they charge higher transaction fees to such merchants, and receive
additional fees for each returned check.\88\ Thus, unscrupulous banks
and payment processors often continue to process transactions for
fraudulent operations such as these, even in the face of high return
rates or other indicia of fraud.
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\85\ See infra note 107 and First Bank of Delaware, supra note
84, at Sec. 52.
\86\ First Bank of Delaware, supra note 84.
\87\ According to bank regulators, ``[e]xamples of high-risk
parties include online payment processors, certain credit-repair
services, certain mail order and telephone order (MOTO) companies,
illegal online gambling operations, businesses located offshore, and
adult entertainment businesses. These operations are inherently more
risky and incidents of unahtorized (sic) returns are more common
with these businesses.'' Office of the Comptroller of the Currency
(``OCC'') Bulletin 2006-39 (Sept. 1, 2006), available at http://www.occ.gov/news-issuances/bulletins/2006/bulletin-2006-39.html.
\88\ See, e.g., FTC v. Landmark, supra note 63 at ] 27
(defendants' pricing structure enabled them to earn significantly
higher fee income from returned transactions than the income
generated by cleared transactions); First Bank of Delaware, supra
note 84, at ]] 54 and 63 (bank allegedly took on higher risk for
potential profit and earned higher fees for unauthorized returns);
see also Kiefer, supra note 77, at ] 33 (``[YMA defendants] charged
fees resulting from bad ACH and [demand] Draft transactions that
were many multiples of the fees they otherwise would have
charged.'').
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3. Law Enforcement Experience with Remotely Created Checks and Remotely
Created Payment Orders in Fraudulent Telemarketing
There is substantial evidence that remotely created checks are
being widely misused in telemarketing, resulting in very significant
consumer injury.\89\ The Commission's law enforcement experience
demonstrates that telemarketers engaged in fraud use a variety of
methods to deceive or pressure consumers into divulging their bank
account information in order to debit money from their bank accounts.
Wrongdoers exploiting remotely created checks have promoted any number
of phony or pretextual offers,\90\ including: advance fee credit cards;
\91\ solicitations for bogus charities; \92\ purported medical

[[Page 41208]]

discount plans \93\ or pharmacy discount cards; \94\ useless fraud-
prevention services; \95\ and misrepresented products or deceptive
buyers club memberships.\96\ In these ways, fraudulent telemarketers
have bilked hundreds of millions of dollars from consumers using
remotely created checks.
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\89\ In the past, law enforcement actions primarily involved
remotely created checks and not remotely created payment orders. As
recent law enforcement actions demonstrate, remotely created payment
orders are subject to the same, if not greater, risks as remotely
created checks. See, e.g., FTC v. Landmark, supra note 63; First
Bank of Delaware, supra note 84. The Commission, therefore, proposes
that remotely created payment orders should be treated in the same
way as remotely created checks.
\90\ The majority of the Commission's fraud cases involving
remotely created checks have involved outbound telemarketing
campaigns; however, the risks associated with this payment method
exist equally in the inbound telemarketing context. See, e.g., FTC
v. LowPay, Inc., Civ. No. 09-1265 (D.O. Sept. 10, 2010) (stipulated
permanent injunction against advance fee credit card scheme using
inbound calls).
\91\ See, e.g., FTC v. Group One Networks, Inc., Civ. No. 09-
00352 (M.D. Fla. Mar. 19, 2010) (Stip. Perm. Inj.); FTC v. Capital
Choice Consumer Credit, Inc., Civ. No. 02-21050 (S.D. Fla. Feb. 19,
2004) (Stip. Perm. Inj.); FTC v. Bay Area Bus. Council, Inc., Civ.
No. 02-5762 (N.D. Ill. Apr. 14, 2003) (Summ. J.), aff'd, FTC v. Bay
Area Bus. Council, Inc., 423 F.3d 627 (7th Cir. 2005); FTC v. Sainz
Enters., LLC, Civ. No. 04-2078 (D. Colo. Nov. 4, 2004) (Stip. Perm.
Inj.).
\92\ See, e.g., FTC v. Handicapped & Disabled Workshops, Inc.,
Civ. No. 08-0908 (D. Ariz. Dec. 9, 2008) (stipulated permanent
injunction against defendants that allegedly used remotely created
checks to defraud elderly consumers out of nearly $10 million in
connection with high-pressure, deceptive sales of products that
purportedly help blind and disabled workers). In just two months,
Handicapped & Disabled Workshops' telemarketers allegedly used
unauthorized remotely created checks to withdraw over $5,513.55
(including $1,025.90 in a single day) from an 82 year old woman's
bank account. Id., Decl. of Patricia W. Bunge, ] 6 (Apr. 15, 2008).
\93\ See, e.g., FTC v. NHS Sys., Inc., Civ. No. 08-2215 (E.D.
Pa. Mar. 28, 2013) (Summ. J.); FTC v. 6554962 Canada, Inc., Civ. No.
1:08-02309 (N.D. Ill. Aug. 19, 2009) (Default J.); FTC v. 9107-4021
Quebec, Inc., Civ. No. 08-1051 (E.D. Ohio July 17, 2009) (Stip.
Perm. Inj.). See also, e.g., United States v. Borden, Cr. No. 1:08-
00196 (N.D.N.Y. sentenced Dec. 3, 2009) (defendant pleaded guilty
and was sentenced to 56 months' imprisonment in connection with a
fake medical benefits telemarketing scheme that used remotely
created checks to bilk elderly consumers).
\94\ See, e.g., FTC v. 3d Union Card Servs., Inc., Civ. No. S-
04-0712 (D. Nev. July 19, 2005) (Default J.) (complaint alleged
telemarketers initiated $10 million in unauthorized remotely created
checks and other debits from more than 90,000 consumers' accounts in
three months for fraudulent discount pharmacy cards).
\95\ FTC v. 4086465 Canada, Inc., Civ. No. 04-1351 (N.D. Ohio
Nov. 7, 2005) (stipulated permanent injunction against telemarketers
allegedly used unauthorized remotely created checks as payment for
fake consumer protection service that promised to protect consumers
from telemarketing and unauthorized banking).
\96\ See supra note 84.
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Numerous law enforcement actions show that telemarketers engaged in
fraud frequently rely on third-party processors to create, print, and
deposit remotely created checks drawn on consumers' accounts.\97\ By
providing the means to extract money from consumers' bank accounts via
remotely created checks and remotely created payment orders, payment
processors play an indispensable role in furtherance of their clients'
fraudulent and deceptive schemes.\98\ The Commission and the Department
of Justice have sued such non-bank payment processors, alleging they
engaged in unfair practices under Section 5 of the FTC Act, as well as
violations of mail and wire fraud statutes and the TSR's prohibition on
assisting and facilitating fraud by processing remotely created checks
for telemarketers, while knowing or consciously avoiding knowledge that
the telemarketers were violating the TSR.\99\
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\97\ United States v. Cimicato, Cr. No. 1:10-0012 (W.D.N.Y. Jan.
26, 2010) (defendant pled guilty to wire fraud in connection with
Integrated Check Technologies' processing of remotely created checks
for fraudulent Canadian telemarketers); United States v.
Guastaferro, Cr. No. 1:09-347 (W.D.N.Y. Jun. 27, 2011) (sentenced to
24 months in prison and fined $100,000 for his involvement in
Integrated Check Technologies' payment processing scheme); United
States v. Whitworth, Cr. No. 1:10-324 (W.D.N.Y. Jan 6, 2012) (same,
sentenced to 18 months); YMA, supra note 37; Payment Processing
Ctr., supra note 37; FTC v. Interbill, Ltd., Civ. No. 2:06-01644 (D.
Nev. 2007); FTC v. Windward Mktg., Ltd., Civ. No. 1:96-615 (N.D. Ga.
1996); see also Capital Payment Sys., supra note 74; Ohio v.
Cimicato, supra note 74; Iowa v. Teledraft, Inc., Civ. No. 04-90507
(S.D. Iowa filed Sept. 17, 2004). Cf., FTC v. Neovi, Inc., 598 F.
Supp. 2d 1104 (S.D. Cal. Sept. 16, 2008), aff'd, 604 F.3d 1150, 1158
(9th Cir. 2010) (defendants' Internet-based business facilitated
fraudulent operations that created more than 150,000 unauthorized
checks totaling more than $400 million).
\98\ As the FFIEC has advised, ``[s]ome higher-risk merchants
routinely use third parties to process their transactions because of
the difficulty they have in establishing a direct bank
relationship.'' FFEIC, Bank Secrecy Act Anti-Money Laundering
Examination Manual: Third-Party Payment Processors--Overview (2010),
at 240. See also George F. Thomas, Not Your Father's ACH, ICBA
Indep. Banker (July 2007), available at http://www.radixconsulting.com/icbaarticle.pdf (``Many of the merchants
that use third-party processors do so because they could not pass
the standard know-your-customer procedure if they approached [a]
financial institution directly. Like cockroaches, these merchants
cannot withstand the light of scrutiny.'').
\99\ For example, between June 23, 2004 and March 31, 2006, the
YMA defendants allegedly processed over $200 million in debits and
attempted debits to consumers' bank accounts, more than $69 million
of which were returned or rejected by consumers or their banks. YMA,
supra note 37, Compl. at ] 29; McEntee, supra note 59, ]] 44-46. One
of the Commission's experts in the case uncovered evidence that the
defendants intentionally shifted merchants with excessive return
rates from ACH debits to remotely created checks in order to
continue assisting merchants in defrauding consumers. Kiefer, supra
note 77, at ] 31.
In yet another case, the United States Attorney for the Eastern
District of Pennsylvania alleged that during a ten-month period, a
payment processor assisted telemarketers in attempting to withdraw
$142 million from consumers' accounts using unauthorized remotely
created checks, causing more than $50 million in consumer losses.
Payment Processing Ctr., supra note 37.
---------------------------------------------------------------------------

Unscrupulous merchants and third-party processors must establish
relationships with banks that accept deposits of remotely created
checks and remotely created payment orders. Aggressive action taken by
federal prosecutors and bank regulators against banks that engaged in
such fraud further illustrates the problematic use of remotely created
checks and remotely created payment orders in telemarketing. Most
recently, the United States Attorney for the Eastern District of
Pennsylvania obtained a $15 million civil penalty against First Bank of
Delaware, based on its origination of remotely created checks, remotely
created payment orders, and ACH debits on behalf of merchants and
payment processors engaged in fraud, including the defendants in FTC v.
Landmark.\100\ First Bank of Delaware allegedly ignored significant
signs of fraud, including the fact that its third-party payment
processors had aggregate return rates for remotely created checks
exceeding 50 percent from 2009 to 2011. In an earlier action against
First Bank of Delaware brought by the Federal Depository Insurance
Corporation (``FDIC''), the bank agreed to terminate, among other
things, ``any and all services, products and/or relationships
pertaining to or involving payment processing by or through an
automated clearing house, the origination and/or processing of remotely
created checks and/or merchant acquiring.'' \101\
---------------------------------------------------------------------------

\100\ First Bank of Delaware, supra note 84; Landmark, supra
note 42. According to the complaint filed by the Commission in FTC
v. Leanspa, First Bank of Delaware also processed payments for the
defendants, who allegedly used fake news Web sites to promote their
products, made deceptive weight-loss claims, and misrepresented the
terms of their ``free trial'' offers. FTC v. LeanSpa, Civ. No. 3:11-
1715 (Nov. 22, 2011) (Stip. Prelim. Inj.). See also, e.g. In the
Matter of Meridian Bank, FDIC 12-367b (Oct. 19, 2012) (consent order
requiring, among other things, cessation of all third party payment
processing unless and until bank completes comprehensive due
diligence on each payment processor and its merchant-clients),
available at http://www.fdic.gov/news/news/press/2012/pr12136a.html;
In the Matter of Metro Phoenix Bank, FDIC 111-083b (Jun. 21, 2011)
(same, including cessation of all third party payment processing for
CheckGateway LLC and Teledraft, Inc.), available at http://www.fdic.gov/bank/individual/enforcement/2011-06-001.pdf.
\101\ In the Matter of First Bank of Delaware, FDIC-11-669b, 2
(Dec. 3, 2011), available at http://fdic.gov/bank/individual/enforcement/2011-12-03.pdf.
---------------------------------------------------------------------------

In a 2006 proceeding, the Office of the Comptroller of the Currency
(``OCC'') alleged that telemarketers victimized more than 740,000
consumers using remotely created checks processed by three payment
processors through Wachovia accounts.\102\ All three of these payment
processors allegedly knew their clients had return rates well above
accepted industry standards.\103\ The bank agreed to pay over $150
million in

[[Page 41209]]

restitution to resolve the matter. Based on these and other
allegations, the U.S. Attorney's Office in the Southern District of
Florida and the Asset Forfeiture and Money Laundering Section of the
Criminal Division of the Department of Justice filed a criminal case
against Wachovia.\104\ The case resulted in a deferred prosecution
agreement and payment of $160 million in restitution and other
penalties.\105\
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\102\ OCC Press Release, OCC, Wachovia Enter Revised Agreement
to Reimburse Consumers Directly (Dec. 11, 2008), available at http://www.occ.gov/ftp/release/2008-143.htm.
\103\ The FTC previously had sued two of the three payment
processors (YMA and Suntasia) and the U.S. Department of Justice
sued the third (Payment Processing Center). The FTC also brought
cases against many of the telemarketers that worked with the three
processors. See, e.g., Universal Premium Servs. supra note 84; FTC
v. Sun Spectrum Commc'ns. Org., Inc., Civ. No. 03-81105 (S.D. Fla.
Oct. 3, 2004) (Stip. Perm. Inj.); FTC v. Xtel Marketing, Inc., Civ.
No. 04-7238 (N.D. Ill. July 22, 2005) (Stip. Perm. Inj.); FTC v.
120194 Canada, Ltd., Civ. No. 1:04-07204 (N.D. Ill. Mar. 8, 2007)
(Summ. J.); FTC v. Oks, Civ. No. 05-5389 (N.D. Ill. Mar. 18, 2008)
(Perm. Inj.); FTC v. Frankly Speaking, Inc., Civ. No. 1:05-60 (M.D.
Ga. May 14, 2005) (Stip. Perm. Inj.).
\104\ United States v. Wachovia, N.A., Cr. No. 10-20165 (S.D.
Fla. Mar. 16, 2010) (alleging that defendant maintained account
relationships with certain payment processors that deposited more
than $418 million using remotely-created checks into Wachovia
accounts on behalf of fraudulent telemarketers).
\105\ According to the press release announcing the deferred
prosecution, ``Wachovia admitted that it failed to identify, detect,
and report the suspicious transactions in the third-party payment
processor accounts, as required by the BSA [Bank Secrecy Act, 31
U.S.C 1051 et seq.], due to deficiencies in its anti-money
laundering program. Specifically, Wachovia failed to conduct
appropriate customer due diligence by delegating most of this
responsibility to business units instead of compliance personnel.
Wachovia also failed to monitor high return rates for remotely-
created checks and report suspicious wire transfer activity from the
processors' accounts.'' U.S. Att'y's Office (S.D. Fla.) Press
Release, Wachovia Enters Into Deferred Prosecution Agreement (Mar.
17, 2010), available at http://www.justice.gov/usao/fls/PressReleases/100317-02.html.
---------------------------------------------------------------------------

In another case, the OCC entered into a settlement agreement with T
Bank, N.A. in which it agreed to pay a $100,000 civil penalty and make
payments totaling $5.1 million in restitution to more than 60,000
consumers affected by the bank's relationships with a third-party
payment processor, Giact Systems Inc. The OCC alleged that Giact and
several of Giact's merchant-clients (telemarketers and Internet
merchants) used remotely created checks to make unauthorized
withdrawals from consumers' accounts.\106\ The OCC's investigation
revealed that over 60 percent of these remotely created checks were
returned to the bank by or on behalf of individuals who said they never
authorized the checks or that they had never received the products or
services promised by the telemarketers or merchants.\107\
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\106\ In the Matter of T Bank, N.A., 2010-068, AA-EC
09-103 (Apr. 15, 2010) (in addition, the formal agreement requires
the bank to develop and adhere to strict ``policies, procedures, and
standards for payment processor relationships'' before entering into
a banking relationship with a payment processor), available at
http://www.occ.gov/news-issuances/news-releases/2010/nr-occ-2010-45a.pdf. See also OCC Press Release, OCC, T Bank Enter Agreement to
Reimburse Consumers (Apr. 19, 2010), available at http://www.occ.gov/news-issuances/news-releases/2010/index-2010-news-releases.html.
\107\ To provide context for the return rates identified above,
in the 2010 Payments Study, the Federal Reserve Board estimated that
from 2006 to 2009, ``[t]he ratio of [unpaid] returned checks to paid
checks by value declined from 0.44 percent to 0.40 percent.'' Supra
note 44, at 9. In previous years, the Board estimated the return
rate for checks at 0.6 percent in 2000, and 0.5 percent in 2003.
Federal Reserve System, 2004 Federal Reserve Board Payments Study 6
(Dec. 15, 2004), available at http://www.frbservices.org/files/communications/pdf/research/2004PaymentResearchReport.pdf. Like the
return rates expected for legitimate merchants in the credit card
systems and ACH Network, the return rate for checks (including
remotely created checks) should be very low. McEntee, supra note 59,
& 44 (``[T]here is no legitimate business reason why there would be
a significant difference between ACH and demand draft return rates,
assuming the merchant is engaged in the same line of business.'').
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State Attorneys General also have sued payment processors along
with the telemarketers who have swindled consumers using remotely
created checks.\108\ In addition, state and Canadian law enforcement
authorities have been active in attempting to regulate and halt abuses
of remotely created checks. To combat the vulnerability of remotely
created checks to fraud, several states and the Canadian Payments
Authority (``CPA'') have restricted or prohibited the use of remotely
created checks in telemarketing transactions.\109\ In May 2005, thirty-
seven Attorneys General also signed a letter urging the Board of
Governors of the Federal Reserve to prohibit remotely created
checks.\110\
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\108\ See, e.g., Capital Payment Sys., supra note 74; Ohio v.
Cimicato, supra note 74; State of Ohio ex rel. v. Simplistic
Advertising, Inc., Civ. No. 08-7232 (Franklin County, OH Ct. Com.
Pl. filed May 16, 2008); State of Ohio ex rel. v. 6450903 Canada,
Inc., Civ. No. 05CVH7233 (Franklin County, OH Ct. Com. Pl. May 8,
2009) (Default J.).
\109\ In 2003, the CPA adopted a policy prohibiting the use of
remotely created checks (or ``tele-cheques'') as a preemptive
measure based on the heightened risk of fraud and unauthorized
payments. Ana Cavazos-Wright, Federal Reserve Bank of Atlanta, An
Examination of Remotely Created Checks, at n.8, available at http://www.frbatlanta.org/documents/rprf/rprf_resources/RPRF_wp_0510.pdf; see also, e.g., ARK. CODE ANN. Sec. 4-99-203 (1987)
(prohibiting telemarketers from obtaining or submitting for payment
a check drawn on a person's bank account without the consumer's
express written authorization); N.Y. GEN. BUS. LAW Sec. 399-pp
(McKinney 2006) (same); VT. STAT. ANN. tit. 9, Sec. 2464 (2006 &
Supp. 2010) (same).
\110\ Comment, National Association of Attorneys General,
Proposed Amendment to Regulation CC Remotely Created Checks, FRB
Dkt. No. R-1226 (May 9, 2005), available at http://www.federalreserve.gov/SECRS/2005/May/20050512/R-1226/R-1226_264_1.pdf.
---------------------------------------------------------------------------

Despite these efforts, telemarketers engaged in fraud face no
effective impediment to their use of remotely created checks and
remotely created payment orders. And, as the credit card systems and
ACH Network have redoubled their efforts to detect and deter fraud--by
monitoring returns and transaction data, imposing fines and penalties
on participants that violate their operating rules, and requiring banks
to conduct more robust up-front due diligence on client merchants--
wrongdoers are forced to turn to more novel payment methods that fall
outside this zone of increased scrutiny. To close off this avenue to
fraudulent telemarketers, the Commission therefore proposes to prohibit
the use of remotely created checks and remotely created payment orders
in all telemarketing transactions.
In doing so, the Commission recognizes that, for certain
transactions, remotely created checks and remotely created payment
orders may offer advantages over electronic fund transfers via the ACH
Network,\111\ such as same-day availability of funds for
merchants.\112\ In light of significant changes in the marketplace, and
to ensure that the rulemaking record adequately reflects the potential
impact of the proposed ban against remotely created checks and remotely
created payment orders on legitimate telemarketing businesses, the
Commission encourages the submission of comments describing the types
of telemarketing transactions in which remotely created checks or
remotely created payment orders are essential, including the types of
products or services involved, whether the telemarketing calls are
inbound or outbound, whether certain telemarketing transactions could
be processed via the ACH Network under NACHA's rules for recurring TEL
transactions, as well as the resulting cost increase or savings, if
any, from the use or avoidance of the ACH Network.
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\111\ Electronic fund transfers via the ACH Network are
available to all inbound telemarketers and to those outbound
telemarketers who have a pre-existing relationship with the
consumer. See supra note 70 (explaining NACHA's TEL rule).
\112\ NACHA, RCC and ACH Differentiators, supra note 60, at 9
(describing the advantage of using remotely created checks in
effectuating insurance coverage on the same day the payment is
submitted). The current ACH settlement schedules are next-day or,
for some credits, two days. NACHA has been exploring ways to reduce
the settlement times for certain types of ACH entries. Letter from
NACHA to Regional Payments Associations Direct Financial Institution
Members (revised July 10, 2012), available at https://www.nacha.org/EPS_SupplementalInfoandMaterials#epsattachments.
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4. The Use of Remotely Created Checks and Remotely Created Payment
Orders Is an Abusive Telemarketing Act or Practice
As explained in Section I.B above, when the Commission considers
identifying a telemarketing practice as abusive, it does so within the
purview of the Commission's traditional unfairness analysis.\113\ An
act or

[[Page 41210]]

practice is unfair under Section 5 of the FTC Act if it causes or is
likely to cause substantial injury to consumers, if the harm is not
outweighed by any countervailing benefits to consumers or competition,
and if the harm is not reasonably avoidable.\114\ The Commission
preliminarily concludes that the use of remotely created checks and
remotely created payment orders in telemarketing transactions meets
this unfairness test.
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\113\ Supra notes 3, 19--20 and accompanying text.
\114\ 15 U.S.C. 45(n).
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As discussed above, the Commission's law enforcement experience
demonstrates the substantial consumer injury that results from
telemarketers' use of remotely created checks and remotely created
payment orders.\115\ Second, the economic harm from the use of remotely
created checks and remotely created payment orders in telemarketing
outweighs any countervailing benefits to consumers or competition.\116\
The Commission is aware that remotely created checks and remotely
created payment orders processed through the bank clearing system may
make funds available to merchants more quickly than certain types of
electronic fund transfers, such as ACH debits, and are used for
recurring payments authorized by telephone.\117\ However, it is the
Commission's understanding that this advantage is less critical in
telemarketing transactions than in other contexts, such as making last
minute bill payments and collecting debts owed by consumers.
Innovations in payment cards and access devices have increased the
number and availability of convenient, fast, noncash payment
alternatives to the use of remotely created checks.\118\ These
alternatives offer both dispute resolution rights and protection
against unlimited liability for unauthorized charges to consumers and
are available to consumers who do not possess or do not wish to use
credit cards.\119\ Thus, it appears that the significant injury and
risk of harm to consumers is not outweighed by the benefits of using
remotely created checks and remotely created payment orders in
telemarketing transactions.\120\
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\115\ Remotely created checks are subject to the UCC and lack
both dispute resolution rights and protection against unlimited
liability for unauthorized charges, which compounds the injury
caused by fraudulent telemarketing. As previously discussed, it
remains unclear whether remotely created payment orders are subject
to the EFTA. Regardless, without changes to the interbank clearing
system that would enable banks to distinguish remotely created
payment orders from remotely created checks, banks may continue to
treat remotely created payment orders as if they are remotely
created checks covered by the UCC. See supra note 62 and
accompanying text.
\116\ Neovi, supra note 97, at 1116 (finding this prong of
unfairness test satisfied ``[w]hen a practice produces clear adverse
consequences for consumers that are not accompanied by an increase
in services or benefits to consumers or by benefits to
competition'').
\117\ See supra notes 70 and 112 (discussing NACHA operating
rules that permit recurring TEL transactions). Any person initiating
recurring electronic debits from a consumer's bank account must
comply with the preauthorized transfer rules of Regulation E, 12 CFR
1005.10(b). Regulation E requires the person to: (1) Obtain the
consumer's authorization for the recurring debits in a writing
signed or similarly authenticated; (2) provide the consumer a clear
and readily understandable statement of the terms of the agreement;
and (3) give to the consumer a copy of the signed authorization. Id.
\118\ According to the Federal Reserve Bank of Boston, 94.4
percent of American consumers have adopted one or more types of
payment card: credit (72.2 percent), debit (77.0 percent), or
prepaid (32.3 percent). Federal Reserve Bank of Boston, 2009 Survey
of Consumer Payment Choice, 41-42 (Apr. 2011).
\119\ See supra notes 49--52 (discussing EFTA protections for
various debit cards and ACH payments) and infra note 122 (discussing
protections for consumers using payment intermediaries, such as
PayPal).
\120\ In March 2010, NACHA's Risk Management Advisory Group
concluded: ACH debit transactions, such as TEL transactions, offer a
payment choice where the safeguards to [consumers] outweigh the
conveniences that RCCs currently offer to [merchants]. This
conclusion is based on the following factors: (1) The heightened
risk profile of RCC transactions that bear no evidence of
authorization, (2) the fact that ACH transactions can be identified
and monitored with relative ease, and (3) the fact that the Rules
include clear and explicit authorization requirements for capturing
evidence of a consumer's authorization of a transaction.
NACHA, RCC and ACH Differentiators, supra note 60, at 12.
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Finally, it appears that consumers cannot reasonably avoid the
injury. When consumers give their bank account numbers to a
telemarketer to make a purchase, they have little or no ability to
control whether the telemarketer will process the charge via the ACH
system, which is monitored for fraud and provides EFTA and Regulation E
protections, or as a remotely created check or remotely created payment
order. In addition, consumers do not understand the differences in
protections they have with a payment that clears through the ACH system
and those that are available when a payment is processed as a remotely
created check or remotely created payment order. Finally, consumers
cannot avoid injury by checking their account records and disputing any
unauthorized charges that may be there. As discussed above, disputing
an unauthorized remotely created check or remotely created payment
order is a long and time-consuming process that may be futile, since
the UCC lacks significant consumer protections.
Telemarketers that choose to use remotely created checks and
remotely created payment orders effectively deprive consumers of the
anti-fraud monitoring, accountability, and dispute resolution
mechanisms of other payment methods.\121\ Thus, the harm to consumers
is unavoidable; and the harm, in the form of unauthorized charges and
limited consumer protections against fraud, is significant and does not
appear to be outweighed by any countervailing benefits to consumers or
competition given the widespread availability of alternative payment
methods that provide greater consumer protection.
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\121\ 2003 TSR Amendments, 68 FR at 4605.
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B. Cash-to-Cash Money Transfers and Cash Reload Mechanisms

Cash-to-cash money transfers offer individuals a fast and
convenient method for sending funds to someone they know and trust in a
different location.\122\ This speed and ease, however, make these money
transfers a preferred payment method in telemarketing to perpetrate
cross-border fraud. To initiate a cash-to-cash money transfer, a sender
provides currency to a money transfer provider (such as Western Union
or MoneyGram), fills out a ``send form'' designating the name and
address of the recipient to whom the money transfer is to be sent, and
pays a transaction fee.\123\ The money transfer provider's employee or
agent inputs the transaction information into a computer network,
whereupon the value of the money the sender paid is made available
within minutes to the recipient. At that point, the recipient can claim
the funds in cash at any of the money transfer provider's locations,
with little or no need to provide any personal identification or
identifying

[[Page 41211]]

information in order to do so.\124\ For example, when initiating money
transfers of less than $900 at MoneyGram, the sender has the option of
using a ``Test Question and Answer,'' which enables the recipient to
claim the funds without presenting photo identification by instead
correctly answering the sender's test question.\125\
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\122\ As explained below in Section IV.A, and used in this NPRM,
the term ``cash-to-cash money transfer'' describes a transfer of
cash from one person to another person in a different location that
is sent by a money transfer provider and received in cash. This term
would include a ``remittance transfer,'' as defined in section
919(g)(2) of the EFTA, that is a cash-to-cash transaction. See infra
note 129 (discussing Remittance Transfer Rule). It does not include
a remittance transfer or other transfer--such as a transfer from a
consumer's account balance with a payment service provider or at a
financial institution--that is an electronic fund transfer subject
to the EFTA or Regulation E, or a transaction subject to the TILA or
Regulation Z. See Ronald J. Mann, Regulating Internet Payment
Intermediaries, 82 Tex. L. Rev. 681, 695 (2004) (noting that
payments made via an online payment intermediary (e.g., PayPal) may
be covered by the TILA (when funded by a credit card) or the EFTA
(when funded by a consumer's account at a financial institution)).
\123\ U.S. Gov't Accountability Office, Rep. to the S. Comm. on
Banking, Hous., and Urban Affairs, International Remittances:
Information on Products, Costs, and Consumer Disclosures, 10-11
(Nov. 2005) (``GAO Report''), available at http://www.gao.gov/new.items/d06204.pdf.
\124\ GAO Report, supra note 123, at 10-11.
\125\ MoneyGram's Web site states: ``In the absence of a proper
ID, test questions can serve as an identification method for most
transaction[s] below a certain dollar amount. Test questions can be
included in a transaction, and should address something only the
receiver could answer.'' MoneyGram, Money Transfers, Receiving a
Money Transfer, What if my receiver doesn't have identification?,
available at https://www.moneygram.com/wps/portal/moneygramonline/home/CustomerService/FAQs (located under the ``MoneyGram'' tab and
``Receiving a Money Transfer'').
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Like a cash-to-cash money transfer, a cash reload mechanism offers
a convenient method for consumers to convert cash into electronic form.
A cash reload mechanism acts as a virtual deposit slip for consumers
who wish to load funds onto a general-use prepaid debit card without
the use of a bank transfer or direct deposit. A consumer simply pays
cash, plus a small fee, to a retailer that sells cash load mechanisms
such as MoneyPak or REloadit. In exchange, the consumer receives a
unique access or authorization code that corresponds with the specific
amount of funds paid. Using the authorization code, a consumer can load
the funds onto any existing prepaid debit card within the same prepaid
network or an online account with a payment intermediary (e.g., PayPal)
using the phone or Internet.\126\ The primary function of a cash reload
mechanism is to provide a method for consumers to add money to their
own prepaid cards and online accounts, or to transfer money to a
relative or friend by supplying the authorization code that corresponds
to the funds.\127\ The consumer's relative or friend simply uses the
authorization code to load the funds onto her own prepaid card or
online account. Thus, the cash reload mechanism itself is not a
general-use prepaid card that can be swiped or redeemed at a retail
location or automated teller machine (``ATM'').
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\126\ Currently, Green Dot's MoneyPak is the only cash reload
mechanism accepted by PayPal as a funding source. PayPal, Now
There's A New Way to Add Cash* to Your PayPal Account With MoneyPak,
available at https://www.paypal.com/webapps/mpp/greendot-moneypak.
\127\ Green Dot also enables MoneyPak consumers to make same-day
payments to certain billers using a MoneyPak. However, only approved
billing partners are authorized to accept MoneyPak authorization
codes directly from consumers as a method of payment. See, e.g.,
GreenDot MoneyPak, Where can I use a MoneyPak? available at https://www.moneypak.com/WhoAccepts.aspx. In contrast, scam artists must
load the funds onto a prepaid card before they can withdraw the
money at an ATM or spend down the balance.
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Fraudulent telemarketers demand or request payment by cash-to-cash
money transfer and cash reload mechanism because they are essentially
equivalent to a cash payment B once the money is picked up or offloaded
from a prepaid card, there is virtually no chance for the sender to
recover the money, obtain a refund, or even verify the identity of the
recipient.\128\ When a consumer is deceived into transferring money in
these ways--particularly across national borders--a telemarketer can
receive it anonymously. A cash-to-cash money transfer can be picked up
at any one of multiple locations within minutes. Similarly, once a scam
artist obtains the authorization code for a cash reload mechanism from
a consumer over the phone, he can quickly load the funds onto an
existing prepaid card and withdraw the funds immediately at an ATM.
This makes it difficult to identify or track down the perpetrator of
the fraud and return funds to defrauded consumers.
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\128\ Unlike cash-to-cash money transfers which can be
completely anonymous, electronic fund transfers to and from accounts
maintained at financial institutions or with online payment service
providers require senders and recipients to open and maintain
accounts, which may be identified and traced to a particular person
or entity. See, e.g., FFEIC, Bank Secrecy Act Anti-Money Laundering
Examination Manual, Customer Identification Program--Overview,
available at http://www.ffiec.gov/bsa_aml_infobase/pages_manual/OLM_011.htm (describing the Customer Identification Program rules
requiring banks to obtain, at a minimum, the name, date of birth,
address, and identification number from each customer before opening
an account). Similarly, bank secrecy and anti-money laundering laws
require issuers of prepaid cards to verify the identity of each
prepaid cardholder. Fraudulent telemarketers, however, frequently
register cards using the personal information of identity theft
victims. See infra note 135 (discussing the new Prepaid Access
Rule).
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1. Existing Regulation of Money Transfers Fails to Protect Consumers
Against Telemarketing Fraud
New federal remittance transfer rules, as well as existing federal
and state laws pertaining to money transfers, are designed to regulate
money transfer providers, not to protect consumers from telemarketing
fraud. Specifically, the Remittance Transfer Rule is aimed at
preventing money transfer providers from taking advantage of their
customers, many of whom are foreign-born workers sending payments back
to their home country.\129\ As a result, the Rule's disclosure and
error resolution procedures apply only to covered ``remittance
transfers'' B those transfers that originate in the United States and
are received in another country.\130\ In addition, the definition of
remittance transfer excludes cash reload mechanisms, which are not
``sent by a remittance transfer provider'' \131\ to a ``designated
recipient,'' \132\ but instead are provided directly to consumers by a
retailer at the point of sale. Moreover, the disclosure and error
resolution procedures in the Remittance Rule focus on the transparency
and accuracy of the transaction between the remittance sender and the
remittance provider.\133\

[[Page 41212]]

Thus, the Rule fails to ameliorate the need for restrictions on cash-
to-cash money transfers and cash reload mechanisms in telemarketing,
where a telemarketer fraudulently induces the consumer to initiate the
money transfer or provide access to a cash reload mechanism.\134\
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\129\ Section 1073 of the Dodd-Frank Act mandated changes to the
EFTA that resulted in some coverage of cross-border money transfers
(i.e., ``remittance transfers'' initiated in the United States and
sent to recipients in other countries). In 2012, the CFPB issued the
Remittance Rule in three parts to implement the remittance transfer
provisions of the Dodd-Frank Act by adding a new Subpart B to
Regulation E (12 CFR 1005.30-36). Final Rule; Remittance Transfer
Rule, Electronic Fund Transfers (Regulation E), 77 FR 6194 (Feb. 7,
2012); Technical Correction to Final Remittance Transfer Rule;
Electronic Fund Transfers (Regulation E), 77 FR 40459 (Jul. 10,
2012); Final Remittance Transfer Rule; Official Interpretation, 77
FR 50244 (Aug. 20, 2012). The Rule covers these cross-border
remittance transfers, whether or not the sender holds an account
with the remittance transfer provider and whether or not the
remittance transfer is also an ``electronic fund transfer,'' as
defined in section 903 of the EFTA.
On January 22, 2013, the CFPB announced that it would continue
to temporarily postpone the original February 2013 effective date
for the Rule until after the Bureau issued a new proposal to refine
three elements of the Rule: ``(1) errors resulting from incorrect
account numbers provided by senders of remittance transfers; (2) the
disclosure of certain foreign taxes and third-party fees; and (3)
the disclosure of sub-national, foreign taxes.'' David Silberman,
CFPB, Temporarily Delaying the Implementation of Our International
Remittance Transfer Rule (Jan. 22, 2013), available at http://www.consumerfinance.gov/blog/temporarily-delaying-the-implementation-of-our-international-remittance-transfer-rule/; CFPB,
CFPB Bulletin 2012-08 Re: Remittance Rule Implementation (Subpart B
of Regulation E) (Nov. 27, 2012), available at http://files.consumerfinance.gov/f/201211_cfpb_remittance-rule-bulletin.pdf. On April 30, 2013, the CFPB announced final revisions
to the Rule with an effective date of October 28, 2013. The text of
the final rule is available at http://files.consumerfinance.gov/f/201211_cfpb_remittance-rule-bulletin.pdf.
\130\ 12 CFR 1005.30(e) (definition of remittance transfer).
\131\ Official Staff Commentary, 12 CFR part 1005 (Supp. I),
Comment 30(e)(2) (explaining that ``sent by a remittance transfer
provider'' ``means that there must be an intermediary that is
directly engaged with the sender to send an electronic transfer of
funds on behalf of the sender to a designated recipient.'').
\132\ Official Staff Commentary, 12 CFR part 1005 (Supp. I),
Comment 30(c)(2)(iii) (clarifying that when a remittance transfer
provider mails or delivers a prepaid card (for example) directly to
the consumer, there is no ``designated recipient'' because ``the
provider does not know whether the consumer will subsequently send
the prepaid card to a recipient in a foreign country.'').
\133\ Among other things, remittance transfer providers must
disclose transfer fees and exchange rates, and provide error
resolution procedures in the event the provider transmitted funds in
error (e.g., to the wrong recipient or in the wrong amount). 12 CFR
1005.31-33. In addition, for covered remittance transfers, a
provider must comply with a sender's timely request to cancel a
transfer, as long as the funds have not been picked up by the
recipient or deposited into an account held by the recipient. Id. at
1005.34.
\134\ Unless the remittance provider commits an error (i.e.,
sending the wrong amount, transferring to the wrong recipient,
etc.), the victim of telemarketing fraud would have little recourse
under the Remittance Rule.
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Similarly, other federal and state laws pertaining to cash-to-cash
money transfers and cash reload mechanisms do not address the abuse of
these payment methods by fraudulent telemarketers and con artists, and
fail to provide consumers with the means to recoup their money once
they discover the fraud. The Bank Secrecy Act and related laws target
terrorism financing, tax evasion, and money laundering activity,\135\
and state statutes provide licensing requirements for money transfer
providers.\136\ The proposed TSR ban on cash-to-cash money transfers
and cash reload mechanisms would serve to close this regulatory gap and
fortify the existing regulatory regime. The Commission's experience in
combating telemarketing fraud operators that use these transfers to
pocket consumers' money, and pursuing the third parties that assist and
facilitate them, suggests that the use of these transfers in
telemarketing is an unfair practice, and that prohibiting them would
serve the public interest.
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\135\ The Financial Crimes Enforcement Network (``FinCEN'')
provides the following explanation of the Bank Secrecy Act
regulations:
The Currency and Foreign Transactions Reporting Act of 1970
(which legislative framework is commonly referred to as the ``Bank
Secrecy Act'' or ``BSA'') . . . requires [financial institutions] to
keep records of cash purchases of negotiable instruments, file
reports of cash transactions exceeding $10,000 (daily aggregate
amount), and to report suspicious activity that might signify money
laundering, tax evasion, or other criminal activities. It was passed
by the Congress of the United States in 1970. The BSA is sometimes
referred to as an `anti-money laundering' law (>AML=) or jointly as
>BSA/AML=. Several AML acts, including provisions in Title III of
the USA PATRIOT Act of 2001, have been enacted up to the present to
amend the BSA. (See 31 USC 5311-5330 and 31 CFR Chapter X [formerly
31 CFR Part 103]).
U.S. Department of Treasury, FinCEN, Statutes & Regulations:
Bank Secrecy Act, available at http://www.fincen.gov/statutes_regs/bsa/. In 2011, FinCEN issued the Prepaid Access Rule, which amended
the money services businesses rules of the Bank Secrecy Act
regulations to mandate similar reporting and transactional
information collection requirements on providers and sellers of
certain types of prepaid access. Final Rule; Bank Secrecy Act
Regulations--Definitions and Other Regulations Relating to Prepaid
Access, 76 FR 45403-02 (Jul. 29, 2011).
\136\ See, e.g., Ariz. Rev. Stat. Sec. 6-1202 (2011) (licensing
requirements for money transfer providers); Kan. Stat. Ann. Sec. 9-
509 (2010 Supp.) (same).
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2. Survey Data Linking Cash-to-Cash Money Transfers to Telemarketing
Fraud
The Commission has observed a striking correlation between cash-to-
cash money transfers and telemarketing fraud through its survey of
consumers who sent money transfers via MoneyGram, one of the largest
commercial money transfer services in the United States. The FTC survey
demonstrated that at least 79 percent of all MoneyGram transfers of
$1,000 or more from the United States to Canada over a four-month
period in 2007 were fraud-induced.\137\ A similar survey of Western
Union customers, conducted by Attorneys General in several states,
concluded that approximately one-third of the person-to-person
transfers of over $300 to Canada were fraud-induced.\138\ The Western
Union survey revealed that fraud-induced transfers represented 58
percent of the total dollars transferred by the surveyed consumers, and
that the average transfer by a defrauded consumer was $1,500.\139\
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\137\ FTC v. MoneyGram Int'l., Inc., Civ. No. 1:09-06576, Sec.
27 (N.D. Ill. Oct. 19, 2009) (Stip. Perm. Inj.).
\138\ The survey was conducted by the Attorneys General of North
Carolina and six other states in 2003. Virginia H. Templeton & David
N. Kirkman, Fraud, Vulnerability and Aging, published in 8
ALZHEIMER'S CARE TODAY 265-277 (2007), available at http://www.ftc.gov/bcp/workshops/fraudforum/docs/ACTElderFraudArticle9-07.pdf.
\139\ Id.
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In addition, the Commission, consumer advocates, AARP, and the
Better Business Bureau have observed a significant increase in the
number of scams involving cash reload mechanisms.\140\ These schemes
have involved payments made to cover taxes on purported lottery
winnings, settle phony debts, pay for advertised goods and services,
and obtain advance fee loans. Consumers have reported that
telemarketers required them to purchase a cash reload mechanism from a
local retailer and provide the authorization code as payment for the
promised goods or services. With the authorization code in hand, the
scam artist can quickly load the funds to existing prepaid card and
withdraw the money at an ATM or by spending down the balance. Despite
fraud warnings provided by two major cash reload networks on their Web
sites \141\ and packaging,\142\ telemarketers engaged in fraud continue
to extract money from consumers using cash reload mechanisms.
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\140\ See, e.g., AARP Bulletin, Scam Alert: Beware of Green Dot
MoneyPak Scams--The crooks' other preferred payment method has
become the weapon of choice (Apr. 23, 2012), available at http://www.aarp.org/money/scams-fraud/info-04-2012/avoid-moneypak-scams.html; Better Business Bureau, Fraud Task Force Warns Consumers
Of Scams Using Western Union, MoneyGram, Green Dot MoneyPaks (Aug.
2, 2012), available at http://www.bbb.org/us/article/fraud-task-force-warns-consumers-of-scams-using-western-union-moneygram-green-dot-moneypaks-36126.
\141\ On its Web site, Blackhawk Network, Inc. warns its
REloadit Pack customers:
REloadit should ONLY be used to reload your prepaid cards or for
accounts that YOU control.
Beware of any offers that do not accept a VISA or MasterCard
payment and asks for you to purchase a REloadit Pack where you
provide the REloadit Pack number and PIN in an email or over the
phone.
Never use a REloadit Pack to pay for taxes or fees on foreign
lottery winnings, grants, or any offer that requires you to pay
first before getting something back. REloadit, Frequently Asked
Questions: What is the best way to protect my REloadit Pack?,
available at https://reloadit.com/faqs2.aspx#safe. GreenDot
Corporation includes similar warnings to consumers on its Web site.
GreenDot MoneyPak, MoneyPak FAQs: 7 Tips on How to Protect Yourself
From Fraud, available at https://www.moneypak.com/ProtectYourMoney.aspx.
\142\ On the back of each MoneyPak card, Green Dot posts the
following warning:
FRAUD ALERT: Use your MoneyPak number only with businesses
listed at moneypak.com. If anyone else asks for your MoneyPak
number, it's probably a scam. If a criminal gets your money, Green
Dot is not responsible to pay you back. (Emphasis original.)
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3. Law Enforcement Experience With Cash-to-Cash Money Transfers and
Cash Reload Mechanisms Used in Telemarketing Fraud
The experience of the Commission and other federal and state law
enforcers further documents the high risk to consumers and widespread
injury caused by fraud-induced money transfers and cash reload
mechanisms in inbound and outbound telemarketing. The Commission has
sued telemarketers for using a variety of means to dupe or pressure
consumers into sending cash-to-cash money transfers, including fake
foreign lottery or sweepstakes prizes,\143\ phony mystery shopper
scams,\144\ and

[[Page 41213]]

work-at-home opportunities.\145\ In some of the scams, wrongdoers used
counterfeit checks to trick consumers into sending money back to them
via money transfer.\146\ In all of these cases, consumers received
nothing in exchange for their payments, and had no ability to reclaim
their money once they discovered the fraud.
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\143\ See, e.g., FTC v. Bezeredi, Civ. No 05-1739 (W.D. Wash.
Apr. 3, 2007) (Summ. J.); FTC v. 627867 B.C. Ltd., No C03-3166 (W.D.
Wash. Aug. 4, 2006) (Stip. Perm. Inj.); FTC v. World Media Brokers,
Inc., No. 02C6985 (N.D. Ill. June 22, 2004), aff'd, 415 F.3d 758
(7th Cir. 2005) (Partial Summ. J.).
\144\ In mystery shopping scams, fraud artists call U.S.
consumers or send them direct mail in which they claim to be hiring
consumers to visit well-known retail stores to evaluate MoneyGram's
money transfer operations. The telemarketers send consumers a
cashier's check, and instruct them to deposit it in their checking
account and send most of the money back to the telemarketer using a
cash-to-cash money transfer. By the time the counterfeit checks
bounce, however, the scam artists have already vanished with the
money. See, e.g., FTC Consumer Alert, Mystery Shopper Scams (Nov.
2012), available at http://www.ftc.gov/bcp/edu/pubs/consumer/alerts/alt151.shtm.
\145\ See, e.g., FTC v. USS Elder Enters., Inc., Civ. No. 04-
1039 (C.D. Cal. Jul. 26, 2005) (default judgment against defendants
using telemarketing sales pitches and ads in various Spanish-
language newspapers and magazines to lure consumers to transfer
money for a bogus work-at-home opportunity, causing at least
$885,196 in consumer injury).
\146\ See, e.g., United States v. Alexander, Cr. No. 1:2008-
00105 (D.R.I. Apr. 23, 2009) (defendant sentenced to a year in
prison for participating in a $1.7 million fraud scheme in which
wrongdoers sent victims counterfeit checks, instructed them to cash
the checks, keep some of the money, and wire the balance of the
money to the perpetrators of the scam). See also Neovi, supra note
97 (defendants' Internet-based business facilitated fraud by, among
other things, creating unauthorized checks that malefactors could
send to victims, instructing them to cash the checks, keep some of
the money, and wire the balance back to the wrongdoer).
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For example, in the Cash Corner case,\147\ the defendants sent
letters to consumers with fake checks and instructions on how to claim
a cash prize the consumers had purportedly won. When a consumer called,
as instructed, to claim her prize, a Cash Corner representative
directed her to deposit the check she had received, which appeared to
be drawn on a legitimate U.S. bank in an amount ranging from $2,500 to
$3,800. The representative then instructed the consumer to send Cash
Corner a MoneyGram transfer to cover the fees or taxes associated with
her ``winnings.'' Only after depositing the check and wiring the money,
did consumers later find out that the checks they had deposited and had
been posted to their accounts failed to clear because the checks were
counterfeit. In some cases, instead of sending counterfeit checks, Cash
Corner's telemarketers cold-called consumers and persuaded them to send
the ``required'' taxes or fees in advance via money transfer to receive
their prize winnings. Despite sending thousands of dollars via money
transfers, none of these consumers received anything in return for
their payments.
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\147\ FTC v. B.C. Ltd. 0763496, Civ. No. 07-1755 (W.D. Wash.
Jan. 30, 2009) (default judgment against foreign lottery). The U.S.
Attorney in Los Angeles filed a criminal action against Cash Corner
defendant Odowa Roland Okuomose, who was arrested in British
Columbia on November 6, 2007, on a U.S. warrant based on a criminal
indictment for mail and wire fraud filed in federal court in Los
Angeles. See United States v. Okuomose, Cr. No. 2:10-00507 (C.D.
Cal. May 20, 2010). See also FTC Consumer Alert, Customized Cons
(June 2002), warning consumers about calls from telemarketers posing
as Customs agents and requesting payment by money transfer of taxes
and fees in order to release a prize or package supposedly being
held at the U.S.-Canada border for the consumer. The alert was
prompted by the proliferation of the scheme, based on evidence
collected by a U.S. Customs officer assigned to Project Colt in
Montreal and confirmed by data compiled in the FTC's Consumer
Sentinel system.
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The Department of Justice and state Attorneys General also have
targeted telemarketing operations that used fraud-induced money
transfers to steal millions of dollars from consumers.\148\ For
example, in 2006 and 2007, the Department of Justice indicted 45
individuals involved in an enormous Costa Rican telemarketing scam
targeting American senior citizens.\149\ The defendants operating the
scheme defrauded consumers of millions of dollars by telling them that
each had won a large monetary prize in a sweepstakes contest. The
telemarketers claimed they were from the ``Sweepstakes Security
Commission'' and told consumers that to receive their prize, they had
to send a money transfer to Costa Rica for a refundable ``insurance
fee.'' The telemarketers made their calls from Costa Rica using Voice
over Internet Protocol (``VoIP''), which disguised the originating
location of the calls. To date, the case has yielded at least 34 guilty
pleas and more than 280 years in combined prison sentences.
---------------------------------------------------------------------------

\148\ See, e.g., United States v. Porcelli, Cr. No. 3:07-30037
(S.D. Ill. Oct. 29, 2007) (defendant sentenced to 13 years
imprisonment for his role in an advance fee credit card
telemarketing scheme that used money transfers to defraud
individuals throughout the United States of approximately $12
million); Dep't. of Justice Press Release, Four Defendants Indicted
In Nigerian ``Advance-Fee'' Fraud Scam (Mar. 23, 2006), available at
http://www.justice.gov/opa/pr/2006/March/06_crm_167.html; Dep't.
of Justice Press Release, Eleven Arrested in Israel on U.S. Charges
for Phony ``Lottery Prize'' Scheme that Targeted Elderly Victims in
U.S. (Jul. 21, 2009), available at http://newyork.fbi.gov/dojpressrel/pressrel09/nyfo072109.htm.
\149\ A description of the cases and links to case summaries is
available on the Department of Justice Web site at http://www.justice.gov/criminal/vns/caseup/costarican.html.
---------------------------------------------------------------------------

In some cases, the receiving agents of the money transfer company
may be complicit in the fraud.\150\ These agents have a strong
financial incentive to continue facilitating such transactions despite
unmistakable signs of fraud. In November 2012, the U.S. Attorney for
the Middle District of Pennsylvania filed a criminal case against
MoneyGram charging the company with knowingly and intentionally aiding
and abetting wire fraud and failing to implement an effective anti-
money laundering program from early 2003 through 2009.\151\ The charges
were based on MoneyGram's willful disregard of obvious signs that its
money transfer network was being used by fraudulent telemarketers and
other con-artists, including its own money transfer agents. To resolve
the case, MoneyGram entered into a deferred prosecution agreement that,
among other things, required the company to forfeit $100 million,
undertake enhanced compliance monitoring procedures, and employ a
corporate compliance monitor.\152\
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\150\ See, e.g., Press Release, U.S. Attorney for the Middle
District of Pennsylvania, Three Receive Prison Sentences, Nine
Indicted in Continuing Federal Prosecution of Mass-marketing Schemes
(Mar. 1, 2012), available at http://www.justice.gov/usao/pam/news/2012/MoneyGram_3_1_2012.htm (announcing the sentencing of three
Moneygram agents to imprisonment of up to 135 months and new
indictments of nine others as part of investigation of fraudulent
telemarketing schemes using MoneyGram and Western Union money
transfer systems to defraud thousands of U.S. citizens); Cash
Corner, supra note 147 (foreign lottery scheme perpetrated by
defendant who was a money transfer agent); Okuomose, supra note 147
(indictment of defendant in Cash Corner for mail and wire fraud);
United States v. Asieru, Cr. No. 2:09-00457- (C.D. Cal. Jan. 25,
2010) (former MoneyGram agent sentenced to 97 months in federal
prison for his role in a scheme that bilked hundreds of victims out
of more than $1.5 million in lottery scam); United States v.
Bellini, Cr. No. 2:07-01402 (C.D. Cal. July 21, 2010) (guilty plea
of defendant who was one of at least 22 defendants indicted on
federal fraud-related criminal charges for their roles in a Canadian
cross-border sweepstakes fraud; five of the defendants allegedly
operated money transfer stores to which some of the victims were
instructed to wire money).
\151\ United States v. MoneyGram Int'l, Inc., Cr. No. 1:12-291
(M.D. Pa. Nov. 9, 2012).
\152\ Id.
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The Commission previously sued MoneyGram, alleging that from 2004
through 2009, the company's money transfer agents helped fraudulent
telemarketers trick U.S. consumers into sending more than $84 million
to wrongdoers located in Canada and within the United States.\153\ The
Commission claimed that MoneyGram knew that its system was being used
to defraud people but did very little about it, and that in some cases
its agents in Canada actually participated in these schemes. MoneyGram
agreed to a permanent injunction to settle the case, and paid $18
million which was distributed by the Commission to consumers.\154\
Attorneys General in

[[Page 41214]]

forty-six states separately reached a settlement with MoneyGram
requiring the company to implement an extensive anti-fraud program and
notify consumers about fraud-induced money transfers.\155\
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\153\ FTC v. MoneyGram, supra note 137.
\154\ Id. MoneyGram's settlement with the Commission requires it
to implement a comprehensive anti-fraud program and to provide
important disclosures to consumers. As a part of this anti-fraud
program, MoneyGram must conduct background checks on prospective
agents; educate and train its employees about consumer fraud; and
review and analyze transaction data to flag MoneyGram agents with
any unusual or suspicious money transfer activities. The settlement
also requires MoneyGram to provide clear and conspicuous fraud
warnings on the front of all its money transfer forms and on its Web
site. These notifications urge consumers not to send money to
strangers; describe the most common types of scams currently
utilizing MoneyGram's money transfer system; and warn consumers that
after the money is collected by the recipient, consumers cannot
obtain a refund from MoneyGram even if the transfer was the result
of fraud. The settlement also requires MoneyGram to cancel and
refund money transfers if consumers claim the transfer was the
result of fraud and if the recipient has not yet picked up the
money.
\155\ A copy of the 2008 Assurance of Voluntary Compliance
between these states and MoneyGram can be found on the Web site of
the Texas Attorney General at https://www.oag.state.tx.us/newspubs/releases/2008/070208moneygram_avc.pdf.
---------------------------------------------------------------------------

Similarly, in 2005, Attorneys General in forty-seven states and the
District of Columbia entered into a settlement with Western Union,
resolving allegations of consumer fraud involving the company's money
transfer system.\156\ The settlement required Western Union to pay more
than $8 million for consumer education programs, take steps to
discipline wayward agents, track fraud complaints, cancel transactions
and refund fees (if the recipient had not yet picked up the money), and
warn consumers about the risks of fraud-induced money transfers in
telemarketing.
---------------------------------------------------------------------------

\156\ See, e.g., State of Alaska Department of Law Press
Release, Western Union Enters Agreement with Majority of States'
Attorneys General to Fund a Consumer Protection Awareness Program
Aimed at Reducing Risks of Fraudulent Wire Transfers (Nov. 14,
2005), available at http://www.law.state.ak.us/press/releases/2005/111405-WesternUnion.html.
---------------------------------------------------------------------------

Although the Commission's law enforcement record primarily involves
cash-to-cash money transfers, federal and state criminal authorities
have prosecuted individuals who tricked consumers into providing the
authorization codes for cash reload mechanisms over the phone.\157\
Telemarketers engaged in fraud are using familiar tactics and schemes
to induce consumers to provide cash reload mechanisms, including phony
prizes or sweepstakes winnings, fake debt collection, and bogus sales
of goods advertised online.\158\ Cash reload mechanisms offer a quick
and irreversible method of payment, and are subject to the same risks
as cash-to-cash money transfers. The Commission, therefore, proposes
that cash reload mechanisms should be treated in the same way as cash-
to-cash money transfers.
---------------------------------------------------------------------------

\157\ See, e.g., United States v. Moynihan, 2:12-cr-00248-JAM
(E.D. Cal. Jul. 31, 2012) (guilty plea to access device fraud
involving use of MoneyPak to obtain money from victims); K. Dickers,
News, Couple gets prison time for ticket scam, Coshocton Trib. (Feb.
9, 2012), available at 2012 WLNR 2797286; Jeremy Hunt, Police
Investigating Phone Scam in City, Daily News-Rec. (Sept. 21, 2011),
available at 2011 WLNR 22028079.
\158\ See, e.g., North Dakota Attorney General's Office, Green
Dot MoneyPak Card Scam Involving Phony Publishers Clearinghouse
Calls (Nov. 12, 2012), available at http://www.ag.nd.gov/NewsReleases/2012/11-20-12.pdf; Idaho Attorney General's Office,
Consumer Alert: Prepaid Cash Cards Lottery Scam Won't End With the
First Loss (Jul. 9, 2012), available at http://www.ag.idaho.gov/media/consumerAlerts/2012/ca_07092012.html; Oklahoma Attorney
General's Office, Attorney General Issues Green Dot Card Scam
Warning (Jun. 21, 2012), available at http://www.oag.state.ok.us/oagweb.nsf/srch/DAFA7D5B8A59BDC986257A24007325B8?OpenDocument.
---------------------------------------------------------------------------

4. The Use of Cash-to-Cash Money Transfers and Cash Reload Mechanisms
in Telemarketing Is an Abusive and Unfair Act or Practice
The Commission has preliminarily determined that the use of cash-
to-cash money transfers and cash reload mechanisms in telemarketing is
an abusive practice under the TSR and an unfair act or practice in
violation of Section 5 of the FTC Act because it causes or is likely to
cause substantial injury to consumers that is not outweighed by
countervailing benefits and is not reasonably avoidable.\159\ First,
there has been substantial injury to consumers resulting from the
misuse of cash-to-cash money transfers in telemarketing, and the injury
resulting from cash reload mechanisms is mounting. As survey data and
recent law enforcement cases demonstrate, consumers have paid hundreds
of millions of irretrievable dollars to fraudulent telemarketers and
con artists via such transfers.
---------------------------------------------------------------------------

\159\ See supra notes 19-20 (discussing the Commission's use of
its unfairness analysis when identifying certain telemarketing
practices as abusive).
---------------------------------------------------------------------------

Second, this enormous economic harm is not outweighed by
countervailing benefits to consumers or competition. Although the
benefits of cash-to-cash money transfers and cash reload mechanisms in
other contexts may be clear (e.g., when sending money to family members
located abroad and reloading a consumer's own prepaid debit card), the
use of these payment methods in telemarketing appears to be unnecessary
and to generate only harm to consumers. Today, there are numerous low-
cost and electronic payment alternatives that offer the same or more
convenience as cash-to-cash money transfers and cash reload mechanisms,
but with better consumer protection features or, at the very least,
that provide less anonymity for a wrongdoer. These payment alternatives
may include credit cards, electronic fund transfers, such as debit
cards (including certain prepaid debit cards), ACH debits, and the use
of online payment intermediaries (e.g., PayPal) to facilitate transfers
from a consumer's online account balance. Despite the availability of
these lower cost and time-saving payment alternatives, the Commission's
law enforcement experience and consumer complaint data suggest that
fraudulent telemarketers frequently request or demand payment by money
transfers. ``[W]hen a practice produces clear adverse consequences for
consumers that are not accompanied by an increase in services or
benefits to consumers or by benefits to competition,'' the second prong
of the unfairness test is satisfied.\160\
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\160\ FTC v. J.K. Publ'ns, Inc., 99 F. Supp. 2d 1176, 1201 (C.D.
Cal. 2000) (citing FTC v. Windward Mktg., Ltd., 1997 WL 33642380, at
*11 (N.D. Ga. 1997)).
---------------------------------------------------------------------------

Finally, consumers cannot reasonably avoid the economic injury
caused by the use of these types of payments in telemarketing.
Telemarketers that direct consumers to pay via cash-to-cash money
transfers and cash reload mechanisms effectively and deliberately
deprive consumers of the anti-fraud monitoring, accountability, and
dispute resolution rights of other payment methods. Given the
complexity of regulations governing various payment methods, consumers
do not understand the effect of the telemarketer's choice on their
important consumer protections. Furthermore, the Commission's law
enforcement record shows that telemarketers often use these payment
mechanisms in connection with deceptive and high-pressure sales
pitches, which are orchestrated to distract consumers from fully
appreciating the risks associated with sending a cash-to-cash money
transfer or providing a cash reload mechanism to a telemarketer.\161\
Thus, the substantial and unavoidable injury to consumers resulting
from the use of cash-to-cash money transfers and cash

[[Page 41215]]

reload mechanisms in telemarketing is not outweighed by the benefit to
consumers or competition.
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\161\ As the Commission explained in its 1980 Policy Statement
on Unfairness: However, it has long been recognized that certain
types of sales techniques may prevent consumers from effectively
making their own decisions, and that corrective action may then
become necessary. . . . [Such cases] are brought, not to second-
guess the wisdom of particular consumer decisions, but rather to
halt some form of seller behavior that unreasonably creates or takes
advantage of an obstacle to the free exercise of consumer
decisionmaking.
Unfairness Policy Statement, In re Int'l Harvester Co., supra
note 20, at *97.
---------------------------------------------------------------------------

As discussed above, the enforcement experience of the Commission
and other federal and state authorities, as well as consumer complaint
evidence and industry guidance to consumers, indicate that
telemarketers committing fraud engage in the prevalent and widespread
use of cash-to-cash money transfers \162\ and they are increasingly
turning to cash reload mechanisms.\163\ At the same time, the
Commission wishes to explore whether there might be legitimate reasons
that telemarketers use these payment methods instead of other available
payment alternatives. To understand any potential problems posed for
legitimate businesses by the proposed ban on the use of cash-to-cash
money transfers and cash reload mechanisms, the Commission welcomes
comments from the public in response to the questions posed in Section
VIII. In particular, the Commission seeks information and data
describing any type of legitimate commercial telemarketing transactions
for which these payment methods are needed, including the types of
products involved, whether the telemarketing calls are inbound or
outbound, and whether the need is limited to certain groups of
consumers--e.g., those who do not have bank accounts. In addition, the
Commission seeks information as to why these transactions could not be
conducted using safer and less anonymous payment alternatives,
including what additional costs, if any, would result from using such
payment methods.
---------------------------------------------------------------------------

\162\ Because of the well-documented abuse of money transfers in
telemarketing, the Commission, law enforcement, and consumer
advocates contend that consumers should never use money transfers to
send money to a stranger or in response to a telemarketing offer.
See, e.g., FTC Videos, Scam Watch: Money Transfer Scams (Aug. 22,
2012), available at http://www.ftc.gov/video-library/index.php/for-consumers/scam-watch/money-transfer-scams/1402334883001; FTC
Consumer Alert, Money Transfers Can Be Risky Business (Oct. 2009),
available at http://permanent.access.gpo.gov/gpo17968/alt034.pdf;
FBI, Common Fraud Schemes, available at http://www.fbi.gov/majcases/fraud/fraudschemes.htm; Texas Att'y Gen. Gregg Abbott, Avoid
Fraudulent Check-Cashing Scheme (Aug. 2008), available at http://www.oag.state.tx.us/agency/weeklyag/2008/0808ckcashing.pdf; Kayce T.
Ataiyero & Jon Yates, AARP, Con men see an opportune time to prey on
desperate public (Jan. 1, 2009), available at http://www.aarp.org/money/scams-fraud/info-01-2009/con_men_see_an_opportune_time_to_prey_on_a_desperate_public.html.
\163\ See supra notes 140-142 (alerts and consumer warnings
about the risks of fraud-induced cash reload mechanisms in
telemarketing schemes).
---------------------------------------------------------------------------

III. Abusive Telemarketing of Recovery Services

Telemarketers pitching ``recovery services'' contact consumers who
have lost money, failed to win a promised prize, or never received
merchandise purchased in a previous scam. They promise to recover the
lost money, or obtain the promised prize or merchandise, in exchange
for a fee paid in advance. After the fee is paid, consumers rarely
receive the promised services or recoup their losses. To protect
consumers from this abusive practice, the Rule prohibits any
telemarketer or seller from requesting or receiving payment for such
recovery services ``until seven (7) business days after such money or
other item is delivered to that person.'' \164\
---------------------------------------------------------------------------

\164\ 16 CFR 310.4(a)(3).
---------------------------------------------------------------------------

As originally proposed in the 1995 Notice of Proposed Rulemaking,
the recovery services provision was not limited to the recovery of
money or value lost as the result of a telemarketing transaction.\165\
The provision was revised in the Final Rule, however, to address the
concerns of several commenters, including one who opined that this
section, as proposed, could impair the ability of newspapers to accept
classified advertisements for lost and found items.\166\ Moreover, at
the time the original Rule was promulgated, the Commission's experience
with recovery services was limited to the recovery of money lost
through telemarketing fraud.\167\ Thus, the scope of this provision was
restricted to services claiming to recover money consumers lost ``in a
previous telemarketing transaction.'' \168\
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\165\ 1995 Notice of Proposed Rulemaking, 60 FR 8313, 8330 (Feb.
14, 1995).
\166\ 1995 Revised Notice of Proposed Rulemaking, 60 FR 30406,
30416 (June 8, 1995).
\167\ Id. During 1995 and 1996, the Commission initiated or
settled lawsuits involving nearly a dozen recovery services
operations. 68 FR at 4614 n.403. See, e.g., FTC v. Meridian Capital
Mgmt., Inc., Civ. No. S-96-63 (D. Nev. Nov. 20, 1996) (Stip. Perm.
Inj.); FTC v. Fraud Action Network, Inc., Civ. No. S-96-191 (D. Nev.
July 30, 1996) (Default J.); FTC v. Telecomm. Prot. Agency, Inc.,
Civ. No. 96-344 (E.D. Okla. Dec. 9, 1996) (Stip. Perm. Inj.).
\168\ 16 CFR 310.4(a)(3).
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Since then, numerous advances in technology, including the
widespread commercial use of the Internet, have increased the
communication channels used by wrongdoers to defraud their
victims.\169\ Consumer complaints and the Commission's law enforcement
experience reveal that such Internet transactions are susceptible to
the same unfair and deceptive acts and practices as telemarketing
transactions. For example, in 2011 the Department of Justice (upon
referral from the Commission) sued Business Recovery Services and its
principal, Brian Hessler, for allegedly telemarketing recovery services
to consumers who lost money to business opportunity and work-at-home
scams.\170\ Although the defendants targeted victims of both online and
telemarketing scams, the TSR counts of the complaint were necessarily
limited to the victims of prior telemarketing fraud.
---------------------------------------------------------------------------

\169\ For example, Internet (E-commerce) sales accounted for
50.6 percent of the more than $260 billion of 2010 non-store
merchandise sales, indicating how common such purchases have become.
U.S. Census Bureau, 2010 E-commerce Multi-sector Report, Table 6--
U.S. Electronic Shopping and Mail-Order Houses (NAICS 4541)--Total
and E-Commerce Sales by Merchandise Line: 2010 and 2009 (May 10,
2012), available at http://www.census.gov/econ/estats/2010/all2010tables.html.
\170\ United States v. Business Recovery Services LLC, Civ. No.
2:11-0390-PHX-JAT (D. Ariz. Apr. 15, 2011) (Prelim. Inj.).
---------------------------------------------------------------------------

The Commission's Consumer Sentinel data show that the vast majority
of companies identified in those complaints use the Internet to reach
their victims. In 2012, for example, the Internet--including email and
Web sites--was the method of contacting consumer victims in 50 percent
of fraud complaints.\171\ Similarly, in 2011 the Internet Crime
Complaint Center (``IC3''),\172\ a clearinghouse for receiving,
developing, and referring complaints regarding Internet crime, reported
receiving 314,246 complaints of online crime and fraud involving money
loss, including work-at-home scams, non-delivery of merchandise, and
auto-auction frauds.\173\ Like victims of telemarketing fraud,
consumers who lose money in these online schemes are susceptible to
telemarketing pitches for advance fee recovery services.
---------------------------------------------------------------------------

\171\ FTC, Consumer Sentinel Network Data Book for January-
December 2012, at 9 (Feb. 2013), (``2012 Consumer Sentinel Data
Book''), available at http://www.ftc.gov/sentinel/reports/sentinel-annual-reports/sentinel-cy2012.pdf. In 2012, 608,958 (57 percent) of
consumers reported this information in their Consumer Sentinel
Network complaints. Id.
\172\ IC3 is a joint operation of the National White Collar
Crime Network and the FBI.
\173\ IC3, 2011 Internet Crime Report, Appendix II, at 2 (2011),
available at http://www.ic3.gov/media/annualreport/2011_IC3Report.pdf.
---------------------------------------------------------------------------

Today, telemarketers selling recovery services are just as likely
to obtain lists of victims of online scams as they are to obtain lists
of victims of telemarketing fraud. In fact, telemarketers engaged in
recovery frauds now can easily avoid the Rule's advance fee prohibition
simply by targeting only victims of online scams. Moreover, as with the
original provision, the impact of this proposed change would not be to
ban the telemarketing of such recovery services,

[[Page 41216]]

but instead would require telemarketers to abstain from requesting or
receiving payment for recouping money, value, or non-delivered
merchandise until seven business days after the consumer received the
recovered money or merchandise.\174\
---------------------------------------------------------------------------

\174\ Lost and found advertisements are not likely to qualify
for coverage under the Rule, which applies to sellers or
telemarketers engaged in ``telemarketing,'' as defined in section
310.2(dd).
---------------------------------------------------------------------------

As the Commission determined in prior rulemaking proceedings,
including in particular the 2002 Notice of Proposed Rulemaking, the
abusive practices relating to recovery services meet the criteria for
unfairness. The same analysis supports expanding the scope of the
Rule's current restriction on when telemarketers can ask for and accept
payment from consumers for recovery services. The Commission therefore
proposes to amend section 310.4(a)(3) to prohibit telemarketers and
sellers of recovery services from accepting advance fees from consumers
who have lost money in any prior transaction until seven business days
after the consumers receive the recovered money or item, without regard
to whether the loss occurred in a telemarketing transaction, on the
Internet, or through some other means or medium.

IV. Proposed Revisions

In view of changes in the marketplace, and the harmful ways in
which unscrupulous telemarketers have adapted their schemes to take
advantage of consumers, the Commission is proposing to amend the TSR in
the manner and for the reasons discussed in Sections II and III
above.\175\ The Commission invites written comments on the proposed
amendments, and, in particular, seeks answers to the specific questions
set forth in Section VIII below to assist it in determining whether it
should amend the TSR as proposed, and whether the amendments under
consideration strike an appropriate balance between protecting
consumers from deceptive and abusive telemarketing and imposing
unnecessary compliance burdens on legitimate businesses.
---------------------------------------------------------------------------

\175\ Section IV of the preamble was edited to meet the
requirements for official publication in the Federal Register. Text
setting out verbatim proposed changes to the current TSR text can be
viewed at http://www.ftc.gov/os/2013/05/130521telemarketingsalesrulefrn.pdf.
---------------------------------------------------------------------------

In addition, as discussed below, the Commission proposes to amend
the TSR to make explicit five requirements of the TSR that have been
overlooked or inadequately understood by the industry. These proposed
amendments would: (1) Expressly state that a seller or telemarketer
bears the burden of demonstrating that the seller has an existing
business relationship (``EBR'') with a customer whose number is listed
on the Do Not Call Registry, or has obtained an express written
agreement (``EWA'') from such a customer, as required by section
310.4(b)(1)(iii)(B)(i); (2) clarify that any recording made to
memorialize a customer's or donor's express verifiable authorization
pursuant to section 310.3(a)(3)(ii) must include an accurate
description, clearly and conspicuously stated, of the goods or services
or charitable contribution for which payment authorization is sought;
(3) clarify that the exemption for calls to businesses in section
310.6(b)(7) extends only to calls inducing a sale or contribution from
the business, and not to calls inducing sales or contributions from
individuals employed by the business; (4) modify the prohibition
against sellers sharing the cost of registry fees to emphasize that the
prohibition is absolute; and (5) illustrate the types of impermissible
burdens on consumers that violate section 310.4(b)(1)(ii) by denying or
interfering with their right to be placed on a seller's or
telemarketer's entity-specific do-not-call list. A related amendment
would specify that a seller's or telemarketer's failure to obtain the
information needed to place a consumer on a seller's entity-specific
do-not-call list pursuant to section 310.4(b)(1)(ii) will disqualify it
from relying on the safe harbor for isolated or inadvertent violations
in section 310.4(b)(3).

A. Section 310.2--Proposed Amendments of Definitions

The proposed Rule would retain all of the definitions from the
original Rule, as amended in 2010.\176\ The Commission proposes adding
four new definitions: ``remotely created check,'' ``remotely created
payment order,'' ``cash-to-cash money transfer,'' and ``cash reload
mechanism'' in connection with the proposed amendments to section
310.4(a)(9) and (10), which would prohibit telemarketers or sellers
from using these payment methods in telemarketing.
---------------------------------------------------------------------------

\176\ In 2011, the Commission issued a technical amendment to
make minor corrections to the text of TSR. TSR Correcting
Amendments, 76 FR 58716 (Sept. 22, 2011), available at http://www.gpo.gov/fdsys/pkg/FR-2011-09-22/pdf/2011-24361.pdf.
---------------------------------------------------------------------------

The proposed Rule would define ``remotely created check'' as a
check that is not created by the paying bank and that does not bear a
signature applied, or purported to be applied, by the person on whose
account the check is drawn. For purposes of this definition, account
means an account as defined in Regulation CC, Availability of Funds and
Collection of Checks, 12 CFR part 229, as well as a credit or other
arrangement that allows a person to draw checks that are payable by,
through, or at a bank.\177\
---------------------------------------------------------------------------

\177\ Regulation CC, 12 CFR 229.2(a).
---------------------------------------------------------------------------

This definition is the same as the definition of ``remotely created
check'' found in Regulation CC, 12 CFR 229.2(fff). The Federal Reserve
Commentary to the 2005 amendments to Regulation CC clarifies that the
inclusion of the phrase ``signature applied by, or purported to be
applied by, the person on whose account the check is drawn'' refers to
``the physical act of placing the signature on the check.'' \178\ This
proposed definition thus includes unsigned checks that have been
converted into electronic form, but excludes all signed checks, even
those that have been converted into electronic form pursuant to Check
21 standards.\179\
---------------------------------------------------------------------------

\178\ Commentary to Regulations J and CC, 12 CFR parts 210 and
229, at 8 (Nov. 21, 2005), available at http://www.federalreserve.gov/boarddocs/press/bcreg/2005/20051121/attachment.pdf (``The term signature as used in this definition has
the meaning set forth at U.C.C. 3-401. The term `applied by' refers
to the physical act of placing the signature on the check.''). Id.
at 16. The Electronic Signatures in Global and National Commerce Act
(``ESIGN Act''), 15 U.S.C. 7001 et seq., governs, among other
things, the acceptance of electronic signatures in contracts and
many commercial transactions. The ESIGN Act, however, expressly
exempts from coverage, among other things, negotiable instruments
governed by the UCC. Id. at 7003(a)(3).
\179\ Commentary to Regulations J and CC, supra note 178, at 16
(``A check that bears the signature applied, or purported to be
applied, by the person on whose account the check is drawn is not a
remotely created check . . . The definition of a remotely created
check includes a remotely created check that has been reconverted to
a substitute check.'').
---------------------------------------------------------------------------

The proposed Rule would define a ``remotely created payment order''
as a payment instruction or order drawn on a person's account that is
initiated or created by the payee and that does not bear a signature
applied, or purported to be applied, by the person on whose account the
order is drawn, and which is cleared through the check clearing system.
The term does not include payment orders cleared through the Automated
Clearinghouse Network or subject to the Truth in Lending Act, 15 U.S.C.
1601 et seq., and Regulation Z, 12 CFR part 1026.
This definition is limited to electronic payment orders that most
closely resemble remotely created checks--payment orders that are
unsigned, created by the payee, and sent through the check clearing
system. Thus, a payment order sent through the ACH Network would not
qualify as a remotely created payment order. Similarly, a payment order
or electronic

[[Page 41217]]

check that is either initiated or signed by a consumer, for example,
via a smart-phone application, would not be covered by the definition
because it is not created by the merchant and it is signed by the
consumer.
The terms ``cash-to-cash money transfer'' and ``cash reload
mechanism'' are referenced in proposed section 310.4(a)(10), which
would prohibit telemarketers or sellers from accepting or receiving
payment via a cash-to-cash money transfer or cash reload mechanism for
goods or services or charitable contributions in telemarketing. The
proposed definition of ``cash-to-cash money transfer'' is limited to
transfers of cash--and excludes any transfers that are electronic fund
transfers under the EFTA, and thus subject to the full protections of
that Act, as amended by section 1073 of the Dodd-Frank Wall Street
Reform and Consumer Protection Act (``Dodd-Frank Act'').\180\ Unlike
the transfers covered by the new Remittance Rule, however, the proposed
TSR provision includes no geographic limitations. Thus, the proposed
ban against the receipt of such money transfers in telemarketing would
extend to those sent within or outside of the U.S., whether or not such
transfers are also covered by the Remittance Rule.
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\180\ See supra note 129 and accompanying text (explaining the
new Remittance Transfer Rule).
---------------------------------------------------------------------------

Accordingly, the Commission proposes to define ``cash-to-cash money
transfer'' as the electronic (as defined in section 106(2) of the
Electronic Signatures in Global and National Commerce Act (15 U.S.C.
7006(2)) transfer of the value of cash received from one person to
another person in a different location that is sent by a money transfer
provider and received in the form of cash. The term includes a
remittance transfer, as defined in section 919(g)(2) of the Electronic
Fund Transfer Act (``EFTA''), 15 U.S.C. 1693a, that is a cash-to-cash
transaction; however it does not include any transaction that is (1) an
electronic fund transfer as defined in section 903 of the EFTA; (2)
covered by Regulation E, 12 CFR 1005.20, pertaining to gift cards; or
(3) subject to the Truth in Lending Act, 15 U.S.C. 1601 et seq. For
purposes of this definition, money transfer provider means any person
or financial institution that provides cash-to-cash money transfers for
a person in the normal course of its business, whether or not the
person holds an account with such person or financial institution.
The proposed definition of ``cash reload mechanism'' would include
virtual deposit slips that enable consumers to convert cash into
electronic form, so that it can be loaded onto an existing prepaid card
or an online account with a payment intermediary, such as PayPal. As
described above, the cash reload mechanism does not function as a
prepaid card that can be swiped at retail locations or ATMs, and it is
not intended for use in purchasing goods and services. To implement the
proposed ban against the use of cash reload instruments in
telemarketing, the Commission proposes to define ``cash reload
mechanism'' as a mechanism that makes it possible to convert cash into
an electronic (as defined in section 106(2) of the Electronic
Signatures in Global and National Commerce Act (15 U.S.C. 7006(2)) form
that a person can use to add money to a general-use prepaid card, as
defined in Regulation E, 12 CFR 1005.2, or an online account with a
payment intermediary. For purposes of this definition, a cash reload
mechanism (1) is purchased by a person on a prepaid basis, (2) enables
access to the funds via an authorization code or other security
measure, and (3) is not itself a general-use prepaid card.

B. Section 310.3(a)(3)(ii)--Proposed Amendment of Oral Verification
Recording Requirements

Section 310.3(a)(3) prohibits sellers and telemarketers from
billing for telemarketing purchases or donations without a customer's
or donor's ``express verifiable authorization,'' unless payment is made
by a credit or debit card. Section 310.3(a)(3)(ii) permits the use of
an audio recording to produce the required verification of an express
oral authorization, provided that the recording ``evidences clearly
both the customer's or donor's authorization of payment for the goods
or services or charitable contribution that are the subject of the
telemarketing transaction,'' and the customer's or donor's receipt of
specified material information about the transaction.\181\
---------------------------------------------------------------------------

\181\ 16 CFR 310.3(a)(3)(ii). This section also specifies
additional disclosures the seller or telemarketer must make and
include in the recording; namely, the number of debits, charge or
payments (if more than one; the date(s) the debit(s), charge(s), or
payment(s) will be submitted for payment; the amount(s) of the
debit(s), charges(s), or payment(s); the customer's or donor's name;
the customer's or donor's billing information identified with
sufficient specificity that the customer or donor understands what
account will be used to collect payment for the goods or services or
charitable contraction that are the subject of the telemarketing
transaction; a telephone number for customer or donor inquiry that
is answered during normal business hours; and the date of the
customer's or donor's oral authorization. Id. at 310.3(a)(3)(ii)(A)-
(G).
---------------------------------------------------------------------------

Although it is difficult to imagine how a verification recording
could ``evidence clearly'' a payment authorization ``for the goods or
services or charitable contribution that are the subject of the
telemarketing transaction'' without mentioning the goods, services, or
charitable contribution, Commission staff have found that sellers and
telemarketers often omit this information from their audio recordings,
contrary to this provision's mandate to include it. In fact, the
Commission's law enforcement record indicates that in some cases the
omission has been intentional and has concealed from consumers the real
purpose of the verification recording and the fact that they will be
charged.\182\
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\182\ See, e.g., FTC v. Integrity Fin. Enters., LLC, Civ. No.
8:08-914 (M.D. Fla. Dec. 5, 2008) (stipulated permanent injunction
preventing corporate defendants from allegedly changing pre-sale
description of promised general purpose credit cards in their
verification recordings); FTC v. NHS Sys., Inc., supra note 93
(defendants used deception to obtain recorded verifications from
defrauded consumers); FTC v. Publishers Bus. Servs., Inc., Civ. No.
2:08-00620 (D. Nev. Apr. 7, 2010) (summary judgment against
defendants that allegedly changed material terms of initial offer of
free or low-cost magazine subscriptions in verification call); FTC
v. 4086465 Canada, Inc., Civ. No. 10:4-1351 (N.D. Ohio Nov. 7, 2005)
(stipulated permanent injunction preventing defendants from
allegedly misrepresenting themselves as government or bank officials
to obtain recorded authorizations after falsely representing that
goods or services were free or would be charged in low monthly
payments).
---------------------------------------------------------------------------

Accordingly, in order to make explicit the requirement that a
verification recording describe the goods, services or charitable
contribution for which payment authorization is sought, the Commission
proposes to amend section 310.3(a)(3)(ii) by adding a requirement that
the telemarketer or seller include an accurate description, clearly and
conspicuously stated, of the goods or services or charitable
contribution for which payment authorization is sought.

C. Section 310.4(a)--Abusive Practices in Telemarketing

1. Proposed Section 310.4(a)(3)--Expansion of Advance Fee Ban on
Recovery Services
To protect consumers from unscrupulous telemarketers that have
adapted their methods to defraud consumers, the Commission proposes to
expand the scope of the Rule's advance fee ban on recovery services.
Accordingly, the text of the proposed amended section 310.4(a)(3) would
be amended to eliminate the word ``telemarketing'' from the phrase
``previous telemarketing transaction''.

[[Page 41218]]

2. Proposed Sections 310.4(a)(9) and (10)--Prohibitions Against Use of
Certain Retail Payment Methods
As discussed above in Section II, telemarketers engaged in
fraudulent practices are exploiting the systematic and regulatory
weaknesses of certain payment methods to siphon money from the
consumers they defraud. The Commission's law enforcement experience
demonstrates that neither the TSR's prohibition against false and
misleading statements to induce payment,\183\ nor its authorization
requirements,\184\ have prevented the substantial consumer injury that
results from the use of remotely created checks, remotely created
payment orders, cash-to-cash money transfers, and cash reload
mechanisms. In view of the significant consumer injury involved, and
the alternative payment mechanisms now widely available that afford
greater protections to consumers, the Commission has preliminarily
concluded that the unavoidable harm associated with remotely created
checks, remotely created payment orders, cash-to-cash money transfers,
and cash reload mechanisms in telemarketing outweighs the benefits to
consumers or competition.
---------------------------------------------------------------------------

\183\ 16 CFR 310.3(a)(4).
\184\ 16 CFR 310.3(a)(3).
---------------------------------------------------------------------------

For these reasons, the Commission believes that section 310.4(a) of
the Rule should be amended to include new subsections (9) and (10) that
would provide that it is an abusive practice for a seller or
telemarketer to engage in (1) creating or causing to be created,
directly or indirectly, a remotely created check or a remotely created
payment order as payment for goods or services offered or sold through
telemarketing or as a charitable contribution solicited or sought
through telemarketing; or (2) accepting from a customer or donor,
directly or indirectly, a cash-to-cash money transfer or cash reload
mechanism as payment for goods or services offered or sold through
telemarketing or as a charitable contribution solicited or sought
through telemarketing.

D. Section 310.4(b)--Proposed Amendments of Do Not Call Provisions

1. Proposed Section 310.4(b)(1)(ii)--Amendment of Prohibition Against
Denying or Interfering With A Consumer's Right to Opt-Out
Section 310.4(b)(1)(ii) prohibits sellers and telemarketers from
``[d]enying or interfering in any way, directly or indirectly'' with a
consumer's right to be placed on an entity-specific do-not-call
list.\185\ Although the TSR Compliance Guide provides some examples of
actions that ``deny or interfere with'' a consumer's right to be placed
on such an entity-specific do-not-call list, such as harassing
consumers who make such a request, hanging up on them, and failing to
honor the request,\186\ the Commission has received recurring consumer
complaints about these very practices. The Commission also has received
complaints about companies that require consumers to listen to a sales
pitch before accepting a do-not-call request, requiring a person to
call a different number to submit the request, refuse to accept such a
request unless the consumer can identify the seller responsible for the
call, and fail to honor a request because they neglected to ask for
(or, where an automated opt-out system is used, give the consumer an
opportunity to speak or key in) the telephone number that received the
call.
---------------------------------------------------------------------------

\185\ 16 CFR 310.4(b)(1)(ii) (emphasis added).
\186\ FTC, Complying with the Telemarketing Sales Rule (February
2011), available at http://business.ftc.gov/documents/bus27-complying-telemarketing-sales-rule.
---------------------------------------------------------------------------

In the Commission's view, all of these practices violate section
310.4(b)(1)(ii). Consumers are often uncertain about the identity of
the seller on whose behalf a call is made. Even telemarketers with
multiple clients are in a better position than consumers to determine
from their calling lists or other call records the seller on whose
behalf the call was made. The Commission believes there is no reason
why a multi-client telemarketer could not determine which of its
clients' calls prompted the request. Such a determination could easily
be made, for example, by obtaining the telephone number of the consumer
making the request.
Because telemarketers place calls pitching specific products on
behalf of specific sellers, they obviously are in a better position
than consumers to have or be able to obtain the information they need
to honor a do-not-call request. Thus, the TSR places the burden of
doing so squarely on the telemarketer. The telemarketer must be able to
identify the seller on whose behalf it is placing a call. Consequently,
if a telemarketer with multiple clients lacks the means to identify the
sellers on whose behalf it has placed calls that result in do-not-call
requests, the TSR withholds from such a telemarketer the benefits of
the safe harbor provided by section 310.4(b)(3).
For these reasons, in order to make the prohibition more explicit
and to put sellers and telemarketers clearly on notice of the practices
it prohibits, the Commission proposes to amend section 310.4(b)(1)(ii)
to prohibit sellers and telemarketers from denying or interfering in
any way, directly or indirectly, with a person's right to be placed on
any registry of names and/or telephone numbers of persons who do not
wish to receive outbound telephone calls established to comply with
Sec. 310.4(b)(1)(iii)(A), including, but not limited to, harassing any
person who makes such a request; terminating a telephone call with a
person making such a request; failing to honor the request; requiring
the person to listen to a sales pitch before accepting the request;
assessing a charge or fee for honoring the request; requiring a person
to call a different number to submit the request; or requiring the
person to identify the seller making the call or on whose behalf the
call is made.
In addition, in order to clarify that the burden of obtaining the
information necessary to honor an opt-out request falls on sellers and
telemarketers, the Commission proposes to amend Section 310.4(b)(3)(vi)
as follows: Any subsequent call otherwise violating Sec.
310.4(b)(1)(ii) or (iii) is the result of error and not of failure to
obtain any information necessary to comply with a request pursuant to
Sec. 310.4(b)(1)(iii)(A) not to receive further calls by or on behalf
of a seller or charitable organization.
2. Proposed Section 310.4(b)(1)(iii)(B)--Amendment of Outbound Call Ban
Exception for Express Written Agreements and Established Business
Relationships
The Commission proposes to amend section 310.4(b)(1)(iii)(B) to
make it unmistakably clear that the burden of proof for establishing an
express written agreement (``EWA'') or existing business relationship
(``EBR'') falls on the seller or telemarketer relying on it. As
exceptions to the general prohibition against outbound calls to
consumers whose numbers are on the Registry, the EWA and EBR exemptions
each provide a defense on which a seller or telemarketer is entitled to
rely if--and only if--it can demonstrate that the exemption applies to
the telemarketing calls it has made to consumers whose numbers are on
the Registry. Reliance on either exemption thus serves as an
affirmative defense to a Commission complaint alleging that a seller or
telemarketer has placed calls to numbers on the Registry in violation
of section 310.4(b)(1)(iii)(B). Accordingly, as the Commission has
previously stated, the burden of proof of that

[[Page 41219]]

affirmative defense falls on the seller or telemarketer asserting
it.\187\
---------------------------------------------------------------------------

\187\ Denial of Petition for Proposed Rulemaking, 71 FR 58716,
58723 & n.89 (Oct. 5, 2006); see also 71 FR at 58719; 2008 TSR
Amendments, 73 FR at 51181.
---------------------------------------------------------------------------

For these reasons, the Commission proposes to amend section
310.4(b)(1)(iii)(B) to clarify that calls are permitted to a person
listed on the Registry only if the seller or telemarketer (1) can
demonstrate that the seller has obtained the express agreement, in
writing, of such person to place calls to that person. Such written
agreement shall clearly evidence such person's authorization that calls
made by or on behalf of a specific party may be placed to that person,
and shall include the telephone number to which the calls may be placed
and the signature of that person; or (2) can demonstrate that the
seller has an established business relationship with such person, and
that person has not stated that he or she does not wish to receive
outbound telephone calls under paragraph (b)(1)(iii)(A) of this
section.
Although the Commission believes that the current TSR language is
clear, and that no amendment therefore is necessary for transparency,
the Commission also wishes to emphasize that neither the EWA nor EBR
exception is available to sellers or telemarketers with respect to
calls to numbers on the Registry resulting from the use of calling
lists purchased from third-party list brokers. Section
310.4(b)(1)(iii)(B)(i) plainly states that an EWA is limited to the
``specific party'' from which a person listed on the Registry wishes to
receive calls, permitting such calls only if the seller has obtained
the express agreement, in writing, of such person to place calls to
that person. Such written agreement shall clearly evidence such
person's authorization that calls made by or on behalf of a specific
party may be placed to that person, and shall include the telephone
number to which the calls may be placed and the signature of that
person.\188\
---------------------------------------------------------------------------

\188\ 16 CFR 310.4(b)(1)(iii)(B)(i).
---------------------------------------------------------------------------

Similarly, section 310.4(b)(1)(iii)(B)(ii) states that an EBR is
limited to the ``seller'' that has an EBR with a person whose number is
on the Registry, allowing calls only if the ``seller'' has an
established business relationship with such person, and that person has
not stated that he or she does not wish to receive outbound telephone
calls under paragraph (b)(1)(iii)(A) of this section.\189\
---------------------------------------------------------------------------

\189\ 16 CFR 310.4(b)(1)(iii)(B)(ii).
---------------------------------------------------------------------------

Consequently, the use of calling lists obtained from a third-party
for ``cold calls'' to consumers whose numbers are on the Registry is
not permitted by either of these two exceptions to the prohibition
against outbound calls to numbers on the Registry.

E. Section 310.6--Proposed Amendments of Exemptions to the TSR

Sections 310.6(b)(5) and (b)(6) of the TSR exempt consumer-
initiated calls responding, respectively, to general media
advertisements (such as ads appearing in newspapers or on radio,
television, or the Internet), or to direct mail solicitations that
clearly, conspicuously, and truthfully disclose all material
information required by section 310.3(a)(1).\190\ Each of these
exemptions, however, excludes several types of offers that have been
susceptible to fraud--advance fee loans, credit card loss protection
plans, credit repair services, investment opportunities, business
opportunities other than business arrangements covered by the Franchise
or Business Opportunity Rules, debt settlement services, and prize
promotions.\191\ In addition, the Rule expressly excludes upsell
transactions from each of these two exemptions.\192\
---------------------------------------------------------------------------

\190\ Direct mail solicitations include, but are not limited to,
postcards, letters, or other advertisements sent ``via facsimile
transmission or similar electronic mail, and other methods of
delivery in which a solicitation is directed to specific address(es)
or person(s).'' 16 CFR 310.6(b)(6).
\191\ Franchise Rule, 16 CFR part 436; Business Opportunity
Rule, 16 CFR part 437.
\192\ The Rule's definition of ``upselling'' encompasses any
solicitation for goods or services that follows an initial
transaction of any sort in a single telephone call--whether or not
the subsequent solicitation is made by or on behalf of the same
seller involved in the initial transaction. Thus, the Rule covers
both internal and external upsells. 2003 TSR Amendments, 68 FR at
4596.
---------------------------------------------------------------------------

The Commission proposes to add four new exclusions to the general
media and direct mail exemptions that would prohibit sellers and
telemarketers from accepting payment by remotely created checks,
remotely created payment orders, cash-to-cash money transfers, and cash
reload mechanisms. Specifically, these new exclusions would require
telemarketers and sellers that receive inbound calls from consumers in
response to general media advertisements and direct mail solicitations
to comply with the proposed prohibitions on payment enumerated in
sections 310.4(a)(9) and (10). Thus, the direct mail and general media
exemptions would be available to a seller or telemarketer only if the
seller or telemarketer did not accept these novel payment methods
during an otherwise exempt inbound telemarketing call.
As discussed above, in the outbound or inbound context, remotely
created checks, remotely created payment orders, cash-to-cash money
transfers, and cash reload mechanisms are fraught with fraud monitoring
and consumer protection weaknesses, and have been misused to harm
consumers. Given the widespread availability of other payment
mechanisms for inbound telemarketers and sellers, the Commission
believes there is no evident justification for limiting the protections
of proposed sections 310.4(a)(9) and (10) to outbound telemarketing
calls; however, the Commission seeks comment on that question in
Section VIII and expects these proposed amendments will be among the
topics examined in detail.
In sum, to implement the proposed changes discussed above, the text
of the direct mail and general media exemptions in section 310.6(b)
would be amended to exclude calls that do not comply with the new
prohibition on accepting remotely created checks, remotely created
payment orders, cash-to-cash money transfers, and cash reload
mechanisms.
1. Section 310.6(b)(7)--Proposed Amendment of Business Exemption
The exemption in section 310.6(b)(7) for telephone calls between a
telemarketer and a business is designed to exempt only business-to-
business solicitations. It has never been construed by the Commission
to exempt calls to a business to solicit its individual employees to
buy products or services for their own use, or to make a personal
charitable contribution. Indeed, the Commission has permitted business
telephone numbers to be listed in the National Do Not Call Registry,
because, among other reasons, telemarketers who seek to circumvent the
Registry have solicited employees at their places of business to buy
goods or services such as dietary products, auto warranties, and credit
assistance. Thus, in order to emphasize that this exemption is limited
to business-to-business solicitations, the Commission proposes to amend
the provision so that telephone calls between a telemarketer and any
business to induce the purchase of goods or services or a charitable
contribution by the business, except calls to induce the retail sale of
nondurable office or cleaning supplies; provided, however, that Sec.
310.4(b)(1)(iii)(B) and Sec. 310.5 of this Rule shall not apply to
sellers or telemarketers of nondurable office or cleaning supplies.

[[Page 41220]]

F. Section 310.8(c)--Proposed Amendment of Fee Sharing Prohibition

Section 310.8(c), which specifies the fees sellers and
telemarketers must pay to access the National Do Not Call Registry,
also prohibits them from sharing the cost of Registry access.\193\
---------------------------------------------------------------------------

\193\ 16 CFR 310.8(c).
---------------------------------------------------------------------------

The Commission adopted this prohibition to conform the TSR's fee
requirements to the Do Not Call Registry fee provisions previously
adopted by the Federal Communications Commission (``FCC''). The FCC
provisions absolutely ban any sharing or division of costs for
accessing the Do Not Call Registry,\194\ and that was also the
Commission's intent.
---------------------------------------------------------------------------

\194\ 2003 TSR Amendments, 68 FR at 45136 n.27 (citing 47 CFR
64.1200(c)(2)(i)(E), as amended July 3, 2003).
---------------------------------------------------------------------------

The Commission proposes to amend this prohibition to prevent any
possibility that it might be read as permitting a person to sign up to
access the Registry and, before ever actually accessing it, sell or
transfer the registration for consideration to others wishing to share
the cost of Registry access, contrary to the Commission's intent.
Accordingly, the Commission proposes to clarify that no person may
participate in any arrangement to share the cost of accessing the
National Do Not Call Registry, including any arrangement with any
telemarketer or service provider to divide the costs to access the
registry among various clients of that telemarketer or service
provider.

V. Regulatory Flexibility Act

The Regulatory Flexibility Act of 1980 (``RFA'') \195\ requires a
description and analysis of proposed and final rules that will have a
significant economic impact on a substantial number of small
entities.\196\ The RFA requires an agency to provide an Initial
Regulatory Flexibility Analysis (``IRFA'') \197\ with the proposed Rule
and a Final Regulatory Flexibility Analysis (``FRFA'') \198\ with the
final rule, if any. The Commission is not required to make such
analyses if a rule would not have such an economic effect,\199\ or if
the rule is exempt from notice-and-comment requirements.\200\
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\195\ 5 U.S.C. 603(a), 604(a).
\196\ The RFA definition of ``small entity'' refers to the
definition provided in the Small Business Act, which defines a
``small-business concern'' as a business that is ``independently
owned and operated and which is not dominant in its field of
operation.'' 15 U.S.C. 632(a)(1).
\197\ 5 U.S.C. 603.
\198\ 5 U.S.C. 604.
\199\ 5 U.S.C. 605(b).
\200\ See supra note 195.
---------------------------------------------------------------------------

The Commission does not have sufficient empirical data at this time
regarding the industry to determine whether the proposed amendments to
the Rule may affect a substantial number of small entities as defined
in the RFA. It is also unclear whether the proposed amendments to the
Rule would have a significant economic impact on small entities. Thus,
to obtain more information about the impact of the proposed rule on
small entities, the Commission has decided to publish the following
IRFA pursuant to the RFA and to request public comment on the impact on
small businesses of the proposed amendments.

A. Description of the Reasons Why Action by the Agency Is Being
Considered

As described in Section II above, the proposed amendments are
intended to address telemarketing sales abuses arising from the use of
remotely created checks, remotely created payment orders, cash-to-cash
money transfers, cash reload mechanisms, recovery services, and entity-
specific do-not-call requests. Other proposed amendments would clarify
several TSR requirements in order to reflect longstanding Commission
enforcement policy.

B. Succinct Statement of the Objectives of, and Legal Basis for, the
Proposed Amendments

The objective of the proposed amendments is to curb deceptive and
abusive practices occurring in telemarketing. The legal basis for the
proposed amendments is the Telemarketing Act.

C. Description and Estimate of the Number of Small Entities To Which
the Proposed Amendments Will Apply

The proposed amendments to the Rule affect sellers and
telemarketers engaged in ``telemarketing,'' as defined by the Rule to
mean ``a plan, program, or campaign which is conducted to induce the
purchase of goods or services or a charitable contribution, by use of
one or more telephones and which involves more than one interstate
telephone call.'' \201\ For the majority of entities subject to the
proposed amendments--sellers and telemarketers--a small business is
defined by the Small Business Administration as one whose average
annual receipts do not exceed $7 million.\202\
---------------------------------------------------------------------------

\201\ 16 CFR 310.2(dd). The Commission notes that, as mandated
by the Telemarketing Act, the interstate telephone call requirement
in the definition excludes small business sellers and the
telemarketers who serve them in their local market area, but may not
exclude some sellers and telemarketers in multi-state metropolitan
markets, such as Washington, DC.
\202\ These numbers represent the size standards for most
sellers in retail and service industries ($7 million total
receipts). The standard for ``Telemarketing Bureaus and Other
Contact Centers'' (NAICS Code 561422) is also $7 million. A list of
the SBA's current size standards for all industries can be found in
SBA, Table of Small Business Size Standards Matched to North
American Industry Classification System Codes, available at http://www.sba.gov/sites/default/files/files/Size_Standards_Table.pdf.
---------------------------------------------------------------------------

Determining a precise estimate of how many of these are small
entities, or describing those entities further, is not readily feasible
because the staff is not aware of published data that report annual
revenue or employment figures for the industry. The Commission invites
comment and information on this issue.

D. Description of the Projected Reporting, Recordkeeping and Other
Compliance Requirements of the Proposed Amendments, Including an
Estimate of the Classes of Small Entities That Will Be Subject to the
Requirement and the Type of Professional Skills Necessary for
Preparation of the Report or Record

The Commission does not believe that the proposed amendments impose
any new disclosure, reporting, recordkeeping or other compliance
burdens. Rather, the proposed amendments do no more than add to or
revise existing TSR prohibitions and clarify existing requirements. The
new prohibitions would: (1) Add new prohibitions barring the use of
remotely created checks, remotely created payment orders, cash-to-cash
money transfers, and cash reload mechanisms in both outbound and
inbound telemarketing; and (2) revise the existing prohibition on
advance fee recovery services, now limited to recovery of losses in
prior telemarketing transactions, to include recovery of losses in any
previous transaction.
The proposed amendments also include a number of minor technical
revisions that do not impose any new disclosure, reporting,
recordkeeping or other compliance burdens, but merely clarify existing
TSR requirements to reflect Commission enforcement policy. These
amendments would state expressly (1) that the seller or telemarketer
bears the burden of demonstrating under 16 CFR 310.4(b)(1)(iii)(B) that
the seller has an existing business relationship (``EBR'') with a
customer whose number is listed on the Do Not Call Registry, or has
obtained the express written agreement (``EWA'') of such a customer to
receive a telemarketing call, as previously stated

[[Page 41221]]

by the Commission; (2) the requirement in 16 CFR 310.3(a)(3)(ii) that
any recording made to memorialize a customer's or donor's express
verifiable authorization must include an accurate description, clearly
and conspicuously stated, of the goods or services or charitable
contribution for which payment authorization is sought; (3) that the
business-to-business exemption in 16 CFR 310.6(b)(7) extends only to
calls inducing a sale or contribution from the business itself, and not
to calls inducing sales or contributions from individuals employed by
the business; (4) that under 16 CFR 310.8(c) no person can participate
in an arrangement to share the cost of accessing the National Do Not
Call Registry; and (5) the types of impermissible burdens on consumers
that violate 16 CFR 310.4(b)(1)(ii) by denying or interfering with
their right to be placed on a seller's or telemarketer's entity-
specific do-not-call list. A related amendment would specify that a
seller's or telemarketer's failure to obtain the information necessary
to honor a consumer's request to be placed on a seller's entity-
specific do-not-call list pursuant to 16 CFR 310.4(b)(1)(ii) will
disqualify it from relying on the safe harbor in 16 CFR 310.4(b)(3) for
isolated or inadvertent violations.
The classes of small entities affected by the proposed amendments
include telemarketers or sellers engaged in acts or practices covered
by the Rule. The Commission does not believe that any professional
skills would be required for compliance with the proposed amendments
because the amendments do not impose any new reporting, recordkeeping,
disclosures or other compliance requirements, and do not extend the
scope of the TSR to cover additional entities. The Commission invites
comment on this issue.

E. Identification, to the Extent Practicable, of All Relevant Federal
Rules That May Duplicate, Overlap or Conflict With the Proposed
Amendments

The FTC has not identified any other federal statutes, rules, or
policies currently in effect that may duplicate, overlap or conflict
with the proposed rule. The Commission invites comment and information
regarding any potentially duplicative, overlapping, or conflicting
federal statutes, rules, or policies.

F. Description of any Significant Alternatives to the Proposed
Amendments

The Commission believes that there are no significant alternatives
to the proposed amendments. Nonetheless, in formulating the proposed
amendments, the Commission has made every effort to avoid imposing
unduly burdensome requirements on sellers and telemarketers. To that
end, the Commission has limited the applicability of the TSR to inbound
calls that violate the proposed prohibitions on the use of remotely
created checks and payment orders, cash-to-cash money transfers, and
cash reload mechanisms, so that inbound marketers that comply with
these prohibitions will remain otherwise exempt from the TSR's
requirements. The Commission believes that the proposed amendments
regarding the advance fee ban on recovery services and the
inapplicability of the safe harbor for telemarketers that fail to
obtain the information necessary to honor a request to be placed on a
seller's entity-specific do-not-call list do not add additional
disclosure or recordkeeping burdens or unduly expand the scope of the
TSR, and are necessary to protect consumers.
The Commission seeks comments on the ways in which the proposed
amendments could be modified to reduce any costs or burdens for small
entities.

VI. Paperwork Reduction Act

The proposed amendments would not create any new recordkeeping or
disclosure requirements, or expand the existing coverage of those
requirements to marketers not previously covered by the TSR.
Accordingly, they do not invoke the Paperwork Reduction Act.\203\
---------------------------------------------------------------------------

\203\ 44 U.S.C. 3501-3521. The PRA also addresses reporting
requirements, but neither the TSR nor the proposed amendments
present them.
---------------------------------------------------------------------------

The new prohibitions on the use of remotely created checks,
remotely created payment orders, cash-to-cash money transfers, and cash
reload mechanisms would apply not only to marketers making outbound
calls that are currently subject to the TSR, but also to those who
receive inbound calls from consumers as a result of direct mail or
general media advertising. Although these inbound calls are now exempt
from the TSR,\204\ these proposed amendments would cover them only to
the extent that one of the new proposed prohibitions is violated, but
this would not trigger the TSR's disclosure or recordkeeping
obligations.
---------------------------------------------------------------------------

\204\ 16 CFR 310.6(b)(5)-(6).
---------------------------------------------------------------------------

The proposed expansion of the current TSR ban on advance fees for
recovery services to apply to funds lost in any prior transaction also
has no discernible PRA ramifications because it, too, requires no
disclosures or recordkeeping. The same is true for the proposed
amendment making sellers and telemarketers ineligible for the safe
harbor for isolated or inadvertent TSR violations if they fail to
obtain the information necessary to honor a request to be placed on a
seller's entity-specific do-not-call list. Nothing in this proposed
amendment requires any disclosure or recordkeeping.\205\ Likewise, the
Commission believes that the five proposed technical amendments
intended to make explicit the existing requirements of the TSR would
not impose any new disclosure or recordkeeping obligations.
---------------------------------------------------------------------------

\205\ Even though some sellers and telemarketers, in order to
prove that they are eligible for the safe harbor, might seek to
document the fact that they have honored such requests, neither the
proposed amendment nor the TSR requires them to do so.
---------------------------------------------------------------------------

VII. Communications by Outside Parties to the Commissioners or Their
Advisors

Written communications and summaries or transcripts of oral
communications respecting the merits of this proceeding from any
outside party to any Commissioner or Commissioner's advisor will be
placed on the public record.\206\
---------------------------------------------------------------------------

\206\ See 16 CFR 1.26(b)(5).
---------------------------------------------------------------------------

VIII. Request for Comments

You can file a comment online or on paper. For the Commission to
consider your comment, we must receive it on or before July 29, 2013.
Write ``Telemarketing Sales Rule, 16 CFR Part 310, Project No.
R411001,'' on your comment. Your comment--including your name and your
state--will be placed on the public record of this proceeding,
including, to the extent practicable, on the public Commission Web
site, at http://www.ftc.gov/os/publiccomments.shtm. As a matter of
discretion, the Commission tries to remove individuals' home contact
information from comments before placing them on the Commission Web
site.
Because your comment will be made public, you are solely
responsible for making sure that your comment does not include any
sensitive personal information, such as anyone's Social Security
number, date of birth, driver's license number or other state
identification number or foreign country equivalent, passport number,
financial account number, or credit or debit card number. You are also
solely responsible for making sure that your comment does not include
any sensitive health information, such as medical records or other
individually identifiable health information. In addition, do not
include any ``[t]rade secret or any commercial or

[[Page 41222]]

financial information which is obtained from any person and which is
privileged or confidential,'' as provided in Section 6(f) of the FTC
Act, 15 U.S.C. 46(f), and FTC Rule 4.10(a)(2), 16 CFR 4.10(a)(2). In
particular, do not include competitively sensitive information such as
costs, sales statistics, inventories, formulas, patterns, devices,
manufacturing processes, or customer names.
If you want the Commission to give your comment confidential
treatment, you must file it in paper form, with a request for
confidential treatment, and you have to follow the procedure explained
in FTC Rule 4.9(c), 16 CFR 4.9(c).\207\ Your comment will be kept
confidential only if the FTC General Counsel, in his or her sole
discretion, grants your request in accordance with the law and the
public interest.
---------------------------------------------------------------------------

\207\ In particular, the written request for confidential
treatment that accompanies the comment must include the factual and
legal basis for the request, and must identify the specific portions
of the comment to be withheld from the public record. See FTC Rule
4.9(c), 16 CFR 4.9(c).
---------------------------------------------------------------------------

Postal mail addressed to the Commission is subject to delay due to
heightened security screening. As a result, we encourage you to submit
your comments online. To make sure that the Commission considers your
online comment, you must file it at https://ftcpublic.commentworks.com/FTC/tsrantifraudnprm by following the instructions on the web-based
form. If this Notice appears at http://www.regulations.gov/#!home, you
also may file a comment through that Web site.
If you file your comment on paper, write ``Telemarketing Sales
Rule, 16 CFR Part 310, Project No. R411001'' on your comment and on the
envelope, and mail or deliver it to the following address: Federal
Trade Commission, Office of the Secretary, Room H-113 (Annex B), 600
Pennsylvania Avenue NW., Washington, DC 20580. If possible, submit your
paper comment to the Commission by courier or overnight service.
Visit the Commission Web site at http://www.ftc.gov to read this
NPRM and the news release describing it. The FTC Act and other laws
that the Commission administers permit the collection of public
comments to consider and use in this proceeding as appropriate. The
Commission will consider all timely and responsive public comments that
it receives on or before July 29, 2013. You can find more information,
including routine uses permitted by the Privacy Act, in the
Commission's privacy policy, at http://www.ftc.gov/ftc/privacy.htm.

A. General Questions for Comment

The Commission invites members of the public to comment on any
issues or concerns they believe are relevant or appropriate to the
Commission's consideration of proposed amendments to the TSR. The
Commission requests that comments provide factual data upon which they
are based. In addition to the issues raised above, the Commission
solicits public comment on the costs and benefits to industry members
and consumers of each of the proposals as well as the specific
questions identified below. These questions are designed to assist the
public and should not be construed as a limitation on the issues on
which public comment may be submitted.
1. What would be the impact (including any benefits and costs), if
any, of the proposed amendments on consumers?
2. What would be the impact (including any benefits and costs), if
any, of the proposed amendments on individual firms (including small
businesses) that must comply with them?
3. What would be the impact (including any benefits and costs), if
any, on industry, including those who may be affected by the proposed
amendments but not obligated to comply with the Rule?
4. What changes, if any, should be made to the proposed amendments
to minimize any costs to consumers or to industry and individual firms
(including small businesses) that must comply with the Rule?
5. How would each change suggested in response to Question 4 affect
the benefits that might be provided by the proposed amendment to
consumers or to industry and individual firms (including small
businesses) that must comply with the Rule?
6. How would the proposed amendments impact small businesses with
respect to costs, profitability, competitiveness, and employment? What
other burdens, if any, would the proposed amendments impose on small
businesses, and in what ways could the proposed amendments be modified
to reduce any such costs or burdens?
7. How many small businesses would be affected by each of the
proposed amendments?
8. With respect to each of the proposed amendments, are there any
potentially duplicative, overlapping, or conflicting federal statutes,
rules, or policies that are currently in effect?

B. Questions on Specific Issues

In response to each of the following questions, please provide: (1)
Detailed comment, including data, statistics, consumer complaint
information, and other evidence, regarding the issue referred to in the
question; (2) comment as to whether the proposed amendment adequately
solves the problem it is intended to address, and why or why not; and
(3) suggestions for additional changes that might better maximize
consumer protections or minimize the burden on industry and on small
businesses within the industry.
Novel Payment Methods: Remotely Created Checks, Remotely Created
Payment Orders, Cash-to-Cash Money Transfers, and Cash Reload
Mechanisms
9. Does the proposed definition of ``remotely created check''
adequately, precisely, and correctly describe this payment alternative?
If not, please provide alternative language or suggestions as to how
the Commission could improve the definition.
10. Does the proposed definition of ``remotely created payment
order'' adequately, precisely, and correctly describe this payment
mechanism? If not, please provide alternative language or suggestions
as to how the Commission could improve the definition.
11. Does the proposed definition of ``cash-to-cash money transfer''
adequately, precisely, and correctly describe this payment mechanism?
If not, please provide alternative language or suggestions as to how
the Commission could improve the definition.
12. Does the proposed definition of ``cash reload mechanism''
adequately, precisely, and correctly describe this payment mechanism?
If not, please provide alternative language or suggestions as to how
the Commission could improve the definition.
13. Should the Commission amend the TSR to prohibit the use in
telemarketing of remotely created checks, remotely created payment
orders, cash-to-cash money transfers, and cash reload mechanisms as
payment options?
14. What, if any, systematic fraud monitoring exists for remotely
created checks, remotely created payment orders, cash-to-cash money
transfers, and cash reload mechanisms?
15. What, if any, dispute resolution rights for consumers are
provided in connection with remotely created checks, remotely created
payment orders, cash-to-cash money transfers, and cash reload
mechanisms?
16. Are there widely available payment alternatives to remotely
created checks, remotely created payment orders, cash-to-cash money

[[Page 41223]]

transfers, and cash reload mechanisms sufficient for use in
telemarketing by consumers who lack access to credit or traditional
debit cards? If not, please describe the reasons why these novel
payment methods are necessary and the types of telemarketing
transactions for which these novel payment methods are necessary,
including the types of products or services involved, whether the
telemarketing calls are inbound or outbound, etc.
17. What, if any, adverse effect would a prohibition on the use of
remotely created checks and remotely created payment orders in
telemarketing have on legitimate electronic bill payment transactions?
18. Do banks have any feasible way of distinguishing among
traditional checks, remotely created checks, images of remotely created
checks and remotely created payment orders flowing through the check
clearing system?
19. Is it feasible to obtain systematic, centralized monitoring of
the volume, use, or return rates of remotely created checks and
remotely created payment orders flowing through the check clearing
system?
20. Do payment processors and depositary banks typically receive
additional fees when processing payments and returns for merchants with
high return rates? Do they incur additional costs in dealing with
merchants with high return rates? Please describe the nature and amount
of any such fees and costs, including how the additional fees charged
compare to the increased costs incurred by the payment processors and
banks.
21. Do consumers generally understand the differences among
different payment options for purchases with regard to their dispute
resolution rights and ability to recover payments procured by fraud?
22. Are there legitimate uses for cash-to-cash money transfers and
cash reload mechanisms in telemarketing? If so, please describe the
reasons why such transfers are necessary and the types of telemarketing
transactions for which such transfers are necessary, including the
types of products involved, whether the telemarketing calls are inbound
or outbound, and whether the need is limited to certain groups of
consumers--e.g., those who do not have bank accounts. In addition,
please provide information as to why these transactions could not be
conducted using alternative payment mechanisms such as electronic fund
transfers or debit or credit cards, including what additional costs, if
any, would result from using such payment alternatives.
23. What specific costs and burdens would the proposed prohibition
on the use of remotely created checks, remotely created payment orders,
cash-to-cash money transfers, and cash reload mechanisms in
telemarketing impose on industry and individual firms (including small
businesses) that would be required to comply with the prohibition, or
on consumers?
24. Is the harm caused by remotely created checks, remotely created
payment orders, cash-to-cash money transfers, and cash reload
mechanisms in telemarketing outweighed by countervailing benefits to
consumers or competition? If so, please identify and quantify the
countervailing benefits.
25. Are there other payment mechanisms used in telemarketing that
cause or are likely to cause unavoidable consumer harm without
countervailing benefits to consumers or competition that the Commission
should consider prohibiting or restricting?
Advance Fees for Recovery Services
26. Is there any material difference between telemarketing sales
and Internet sales that would require the use of advance fees for
recovery services aimed at victims of Internet fraud?
27. What, if any, specific costs and burdens would the proposed
expansion of the advance fee ban on recovery services impose on
industry and individual firms (including small businesses)?
28. Please describe the types of businesses that seek advance fees
for recovery services, and whether these businesses require significant
capital or labor outlays prior to providing the services.
General Media Exemption
29. How many sellers and how many telemarketers that accept payment
by remotely created checks, remotely created payment orders, cash-to-
cash money transfers, or cash reload mechanisms solicit calls from
consumers by means of general media advertisements?
30. What specific costs or burdens, if any, would the proposed
exclusion from the general media exemption for calls to sellers or
telemarketers that accept payment by remotely created checks, remotely
created payment orders, cash-to-cash money transfers, or cash reload
mechanisms impose on industry, on individual firms (including small
businesses) that would be required to comply with the prohibition, or
on consumers?
31. Does the TSR's general media exemption have so many exclusions
that the Commission should consider eliminating the exemption entirely?
Direct Mail Exemption
32. How many sellers and how many telemarketers that accept payment
by remotely created checks, remotely created payment orders, cash-to-
cash money transfers, or cash reload mechanisms solicit calls from
consumers by means of direct mail offers?
33. What specific costs or burdens, if any, would the proposed
amendment to the direct mail exemption impose on industry, on
individual firms (including small businesses) that would be required to
comply with the prohibition, or on consumers?
34. Should the proposed changes to the direct mail exemption be
limited to certain types of industries (or goods or services) that are
susceptible to abuse?

IX. Proposed Rule

List of Subjects in 16 CFR Part 310

Telemarketing, trade practices.

For the reasons set forth in the preamble, the Federal Trade
Commission proposes to amend title 16, Code of Federal Regulations, as
follows:

PART 310--TELEMARKETING SALES RULE 16 CFR PART 310

0
1. The authority citation for part 310 continues to read as follows:

Authority: 15 U.S.C. 6101-6108.
0
2. Amend Sec. 310.2 by redesignating paragraphs (f) through (z) as
paragraphs (h) through (bb), redesignating paragraphs (aa) through (ee)
as paragraphs (ee) through (ii), and adding new paragraphs (f) through
(g) and (cc) through (dd), to read as follows:

Sec. 310.2 Definitions.

* * * * *
(f) Cash-to-cash money transfer means the electronic (as defined in
section 106(2) of the Electronic Signatures in Global and National
Commerce Act (15 U.S.C. 7006(2)) transfer of the value of cash received
from one person to another person in a different location that is sent
by a money transfer provider and received in the form of cash. The term
includes a remittance transfer, as defined in section 919(g)(2) of the
Electronic Fund Transfer Act (``EFTA''), 15 U.S.C. 1693a, that is a
cash-to-cash transaction; however it does not include any transaction
that is:
(1) An electronic fund transfer as defined in section 903 of the
EFTA;
(2) Covered by Regulation E, 12 CFR 1005.20, pertaining to gift
cards; or
(3) Subject to the Truth in Lending Act, 15 U.S.C. 1601 et seq. For
purposes

[[Page 41224]]

of this definition, money transfer provider means any person or
financial institution that provides cash-to-cash money transfers for a
person in the normal course of its business, whether or not the person
holds an account with such person or financial institution.
(g) Cash reload mechanism makes it possible to convert cash into an
electronic (as defined in section 106(2) of the Electronic Signatures
in Global and National Commerce Act (15 U.S.C. 7006(2)) form that a
person can use to add money to a general-use prepaid card, as defined
in Regulation E, 12 CFR 1005.2, or an online account with a payment
intermediary. For purposes of this definition, a cash reload mechanism:
(1) Is purchased by a person on a prepaid basis;
(2) Enables access to the funds via an authorization code or other
security measure; and
(3) Is not itself a general-use prepaid card.
* * * * *
(cc) Remotely created check means a check that is not created by
the paying bank and that does not bear a signature applied, or
purported to be applied, by the person on whose account the check is
drawn. For purposes of this definition, account means an account as
defined in Regulation CC, Availability of Funds and Collection of
Checks, 12 CFR part 229, as well as a credit or other arrangement that
allows a person to draw checks that are payable by, through, or at a
bank.
(dd) Remotely created payment order means a payment instruction or
order drawn on a person's account that is initiated or created by the
payee and that does not bear a signature applied, or purported to be
applied, by the person on whose account the order is drawn, and which
is deposited into or cleared through the check clearing system. The
term does not include payment orders cleared through the Automated
Clearinghouse Network or subject to the Truth in Lending Act, 15 U.S.C.
1601 et seq., and Regulation Z, 12 CFR part 1026.
* * * * *
0
3. Amend Sec. 310.3 by redesignating paragraphs (a)(3)(ii)(A) through
(G) as paragraphs (a)(3)(ii)(B) through (H), and adding new paragraph
(a)(3)(ii)(A) to read as follows:

Sec. 310.3 Deceptive telemarketing acts or practices.

(a) * * *
(3) * * *
(ii) * * *
(A) An accurate description, clearly and conspicuously stated, of
the goods or services or charitable contribution for which payment
authorization is sought;
* * * * *
0
4. Amend Sec. 310.4 by:
0
a. Revising paragraph (a)(3);
0
b. Amending paragraph (b)(7)(ii)(B) by removing ``or'' from the end of
the paragraph;
0
c. Amending paragraph (b)(8) by removing the final period and adding a
semicolon in its place;
0
d. Adding new paragraphs (a)(9) and (10); and
0
e. Revising paragraphs (b)(1)(ii), (b)(1)(iii)(B), and (b)(3)(vi), to
read as follows:

Sec. 310.4 Abusive telemarketing acts or practices.

(a) * * *
(3) Requesting or receiving payment of any fee or consideration
from a person for goods or services represented to recover or otherwise
assist in the return of money or any other item of value paid for by,
or promised to, that person in a previous transaction, until seven (7)
business days after such money or other item is delivered to that
person. This provision shall not apply to goods or services provided to
a person by a licensed attorney;
* * * * *
(9) Creating or causing to be created, directly or indirectly, a
remotely created check or a remotely created payment order as payment
for goods or services offered or sold through telemarketing or as a
charitable contribution solicited or sought through telemarketing; or
(10) Accepting from a customer or donor, directly or indirectly, a
cash-to-cash money transfer or cash reload mechanism as payment for
goods or services offered or sold through telemarketing or as a
charitable contribution solicited or sought through telemarketing.
* * * * *
(b) * * * (1) * * *
(ii) Denying or interfering in any way, directly or indirectly,
with a person's right to be placed on any registry of names and/or
telephone numbers of persons who do not wish to receive outbound
telephone calls established to comply with Sec. 310.4(b)(1)(iii)(A),
including, but not limited to, harassing any person who makes such a
request; hanging up on that person; failing to honor the request;
requiring the person to listen to a sales pitch before accepting the
request; assessing a charge or fee for honoring the request; requiring
a person to call a different number to submit the request; and
requiring the person to identify the seller making the call or on whose
behalf the call is made;
(iii) * * *
(B) That person's telephone number is on the ``do-not-call''
registry, maintained by the Commission, of persons who do not wish to
receive outbound telephone calls to induce the purchase of goods or
services unless the seller or telemarketer:
(i) Can demonstrate that the seller has obtained the express
agreement, in writing, of such person to place calls to that person.
Such written agreement shall clearly evidence such person's
authorization that calls made by or on behalf of a specific party may
be placed to that person, and shall include the telephone number to
which the calls may be placed and the signature \6\ of that person; or
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\6\ For purposes of this Rule, the term ``signature'' shall
include an electronic or digital form of signature, to the extent
that such form of signature is recognized as a valid signature under
applicable federal law or state contract law.
---------------------------------------------------------------------------

(ii) Can demonstrate that the seller has an established business
relationship with such person, and that person has not stated that he
or she does not wish to receive outbound telephone calls under
paragraph (b)(1)(iii)(A) of this section; or
* * * * *
(3) * * *
(vi) Any subsequent call otherwise violating Sec. 310.4(b)(1)(ii)
or (iii) is the result of error and not of failure to obtain any
information necessary to comply with a request pursuant to Sec.
310.4(b)(1)(iii)(A) not to receive further calls by or on behalf of a
seller or charitable organization.
* * * * *
0
5. Amend Sec. 310.6 by revising paragraphs (b)(5)-(7) to read as
follows:

Sec. 310.6 Exemptions.

* * * * *
(b) * * *
(5) Telephone calls initiated by a customer or donor in response to
an advertisement through any medium, other than direct mail
solicitation, provided, however, that this exemption does not apply to:
(i) Calls initiated by a customer or donor in response to an
advertisement relating to investment opportunities, debt relief
services, business opportunities other than business arrangements
covered by the Franchise Rule or Business Opportunity Rule, or
advertisements involving offers for goods or services described in
Sec. Sec. 310.3(a)(1)(vi) or 310.4(a)(2)-(4);
(ii) Calls to sellers or telemarketers that do not comply with the
prohibitions in Sec. Sec. 310.4(a)(9) or (10); or
(iii) Any instances of upselling included in such telephone calls;

[[Page 41225]]

(6) Telephone calls initiated by a customer or donor in response to
a direct mail solicitation, including solicitations via the U.S. Postal
Service, facsimile transmission, electronic mail, and other similar
methods of delivery in which a solicitation is directed to specific
address(es) or person(s), that clearly, conspicuously, and truthfully
discloses all material information listed in Sec. 310.3(a)(1), for any
goods or services offered in the direct mail solicitation, and that
contains no material misrepresentation regarding any item contained in
Sec. 310.3(d) for any requested charitable contribution; provided,
however, that this exemption does not apply to:
(i) Calls initiated by a customer in response to a direct mail
solicitation relating to prize promotions, investment opportunities,
debt relief services, business opportunities other than business
arrangements covered by the Franchise Rule or Business Opportunity
Rule, or goods or services described in Sec. Sec. 310.3(a)(1)(vi) or
310.4(a)(2)-(4);
(ii) Calls to sellers or telemarketers that do not comply with the
prohibitions in Sec. 310.4(a)(9) or (10); or
(iii) Any instances of upselling included in such telephone calls;
and
(7) Telephone calls between a telemarketer and any business to
induce the purchase of goods or services or a charitable contribution
by the business, except calls to induce the retail sale of nondurable
office or cleaning supplies; provided, however, that Sec.
310.4(b)(1)(iii)(B) and Sec. 310.5 shall not apply to sellers or
telemarketers of nondurable office or cleaning supplies.
0
6. Amend Sec. 310.8 by revising paragraph (c) to read as follows:

Sec. 310.8 Fee for access to the National Do Not Call Registry.

* * * * *
(c) The annual fee, which must be paid by any person prior to
obtaining access to the National Do Not Call Registry, is $54 for each
area code of data accessed, up to a maximum of $14,850; provided,
however, that there shall be no charge to any person for accessing the
first five area codes of data, and provided further, that there shall
be no charge to any person engaging in or causing others to engage in
outbound telephone calls to consumers and who is accessing area codes
of data in the National Do Not Call Registry if the person is permitted
to access, but is not required to access, the National Do Not Call
Registry under this Rule, 47 CFR 64.1200, or any other Federal
regulation or law. No person may participate in any arrangement to
share the cost of accessing the National Do Not Call Registry,
including any arrangement with any telemarketer or service provider to
divide the costs to access the registry among various clients of that
telemarketer or service provider.
* * * * *

By direction of the Commission.
Donald S. Clark,
Secretary.
[FR Doc. 2013-12886 Filed 7-8-13; 8:45 am]
BILLING CODE 6750-01-P