Can I use someone else's merchant account to do my transactions?

Credit card laundering, sometimes referred to as "factoring," works like this: A company that does not have a credit card merchant account with a bank or credit card company recruits another company (that does have a merchant account) to process credit card transactions through its account. When the processing merchant receives payment for the credit card charges, it turns the money over to the company that doesn't have an account, but it keeps a previously agreed-upon percentage or other fee.

The reasons why some companies need other companies to process their credit card transactions are most often not the "hard luck" stories that the company representatives might tell you. In many cases, these companies need other merchants to process their credit card transactions because investigations and credit checks by banks and/or credit card companies have revealed that these companies are bad risks and may end up having excessive chargebacks.

When you agree to process another merchant's credit card charges, you take on the responsibility of paying for any chargebacks, which will very likely exceed any commissions you might earn. For example, disreputable companies can use other merchants to bill consumers for sales on which the goods are never delivered. After receiving payment from the merchants who processed the transactions, these disreputable companies often close their operations or move to new and undisclosed locations without ever sending the products to the consumers who ordered them. When these consumers find that the company has closed or disappeared, they contact the banks that issued their credit cards to challenge the charges on their bills.

Many merchants and banks have suffered substantial losses, including bankruptcy, as a result of voluminous chargebacks from laundering schemes.

Credit card laundering can also expose you to criminal or civil liability. In September 1988, Visa and MasterCard initiated a federal civil lawsuit against several telemarketers, their agents, and their processing merchants for various laundering schemes they had perpetrated throughout the world. The suit, filed in the U.S. District Court in San Francisco, sought $5 million in punitive damages. The causes for which Visa and MasterCard sued included fraud, unlawful business practices, breach of contract, interference with contractual relations, and trademark infringement.

The state of Florida has passed a law that expressly criminalizes credit card laundering. Other states and federal authorities may also pursue criminal prosecution under a variety of anti-fraud statutes, such as mail fraud.

Merchants who process credit card purchases on behalf of another company put themselves at serious risk of loss, even if there are not excessive chargebacks. Credit card laundering is a violation of a merchant agreement with a bank or credit card company, and discovery by the bank or credit card company will result in termination, even if the processing company is reputable. All banks and some credit card companies monitor merchant deposits with an eye out for sudden or marked increases. This alerts them to potential laundering schemes.

Once their accounts have been terminated, it will be difficult, or impossible, for merchants who agreed to participate in laundering schemes to obtain other merchant accounts in the future. In fact, Visa has publicly stated that it will permanently ban merchants who have been caught in a laundering scheme. Banks and credit card companies keep lists of companies terminated for cause, such as depositing a high percentage of unauthorized or otherwise fraudulent charges or engaging in laundering schemes. These lists may be available as references for evaluations of future applications for merchant accounts. In any business, especially an Internet business, the inability to accept credit card orders could result in a major loss of sales.

By engaging in credit card laundering, you also help perpetuate the fraudulent and unethical business practices of disreputable and financially unsound companies. This is in direct opposition to ethical business practices. It is in your interest as a credit card-accepting merchant to rid the marketplace of these practices.

Merchants should be especially cautious to stay away from all laundering scams. To avoid being duped into suffering major financial losses, or assuming civil or criminal liabilities, beware of the phony reasons used to induce merchants into participating in these fraudulent schemes. If a business approaches you with what seems like a great opportunity, stop and ask yourself, "Why couldn't this company get its own merchant account?" The answer should give you more than enough reason not to get involved with this company.