Processor pays $12M to settle FTC “sham merchant” case

Humboldt Merchant Services, an ISO focused on gambling and adult processing, agreed to pay $12 million to resolve an FTC lawsuit over more than 1,000 “sham merchant accounts.” For PSPs and acquirers, the point is simple: when a high-risk portfolio starts looking like merchant laundering, the network and regulatory exposure tends to follow.

1. According to the FTC, Humboldt processed payments for more than 1,000 merchants that were “shell entities” used as fronts or pass-throughs for fraudulent companies engaged in unauthorized billing scams. The agency said the company processed about $100 million through those accounts between 2021 and 2023.
2. The lawsuit was filed Tuesday against 5967 Ventures, the Tempe, Arizona-based business behind Humboldt Merchant Services, in the U.S. District Court of Eastern Michigan. The FTC filed the settlement agreement at the same time for court approval.
3. Humboldt said the agreement “formalizes many processes and controls already put into place,” and said it will close the matter “with no admissions of wrongdoing.” The company also said the conduct described in the lawsuit occurred “under former Humboldt leadership.”
4. The FTC said Humboldt catered to small and midsize businesses, specializing in “tough to place” or “high risk” merchants — businesses often rejected by other processors because of disqualifying credit, reputational, or regulatory risk. Humboldt’s website lists adult, gaming and pharmacy transactions, including firearms, online gambling and internet dating.
5. The company says it accepts Visa, Mastercard, American Express and Discover cards and works as a registered ISO of Chicago-based BMO Harris Bank. The FTC also pointed to card-network rules prohibiting one company’s card transactions from being processed through another company’s merchant account, calling the practice “credit card laundering.”

The FTC’s complaint frames the core risk neatly: laundering helps fraudulent merchants get around underwriting and risk-monitoring criteria they could not satisfy if they disclosed their real identity, for example after being flagged for excessive chargebacks or fraud. As part of the deal, Humboldt will not engage in or assist others in credit card laundering, and it will stop processing for straw companies, merchants on the Mastercard Alert to Control High-Risk list, merchants that have been subject to law enforcement action, and e-commerce companies.