A Payment Processor Will Pay $12 Million for Banking More Than 1,000 Shell Merchants. Chargebacks Ran About Ten Times the Acceptable Rate.

A consumer who is billed for something they never bought rarely deals with the company that took the money. They deal with their card issuer. Somewhere behind that transaction sits a payment processor that gave the merchant access to the card networks in the first place. On September 8 the Federal Trade Commission put a $12 million judgment on one of those processors.

What a processor is supposed to do

A merchant cannot take card payments by itself. It needs an account obtained through an acquiring bank or a processor, and the processor is expected to underwrite that merchant - to establish that the business is real, that it sells what it says it sells, and that it is not an operation the card networks have already thrown out. That underwriting duty is the pressure point in this case.

What the FTC alleged

The Commission said Humboldt Merchant Services opened and maintained accounts for more than 1,000 merchants that functioned as shell entities or pass-throughs for fraudulent operations billing consumers without authorisation, and that it did so despite red flags - or by consciously avoiding them.

The number that was hard to miss

Every card scheme watches chargebacks, because a chargeback is a customer telling their bank that a charge was wrong. Rates are expressed as a share of transactions and the networks set a level above which a merchant is treated as excessive.

• Chargebacks on the accounts at issue ran at approximately ten times the rate the card brands consider excessive.
• The FTC says Humboldt used load balancing - routing transactions through affiliated, lower-risk accounts - to keep the measured rate on any single account below monitoring thresholds.

That second point matters more than the first. A high chargeback rate is a fact about a merchant. Spreading it across accounts to keep it out of view is a decision about what to do with that fact.

What the order forbids

The stipulated order, entered in the U.S. District Court for the Eastern District of Michigan, imposes permanent bans rather than conduct commitments with an expiry date.

• Processing for merchants at high risk of fraud.
• Credit card laundering and presenting fraudulent sales drafts.
• Processing for straw companies; for merchants on Mastercard's MATCH list; for entities subject to law enforcement action; and for e-commerce businesses using a third-party mailbox as their sole address in combination with negative option billing, new status, or no processing history.
• Providing false information to obtain merchant accounts, and using load balancing or other tactics to evade fraud monitoring.

The order also imposes affirmative screening and chargeback-monitoring duties on the clients it does take on.

Humboldt was processing payments for companies despite red flags indicating they were scamming consumers.

A scheme the FTC had already shut

Among the merchants named is Legion Media, an operation the FTC shut down in 2024. The sequence is the point: the scheme ended, and the processing relationship that had carried it is only being addressed now.

This article reports a published enforcement action and is not legal or financial advice.