INCOMING: FBI probing negative option bank fraud schemes


According to sources, the FBI is actively investigating several negative option billing schemes and the vendors that are helping faciliate them.

The negative-option bank fraud diet and beauty schemes work like this:

Step 1:  An advertiser (merchant) that seeks to promote a product signs up for a CRM that has the capabilities to load balance the transactions.

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Step 2:  Thereafter, the advertiser connects with a website designer that knows how to put together a bank page.   The bank page is the page that the advertiser presents to banks to acquire the merchant accounts, aka MIDs, to handle the transactions.

Bank pages are compliant websites that are designed to acquire the merchant processing (MIDs) to process credit card transctions.

Step 3:  With the assitance of the CRM provider, whom makes intros to MID providers and/or provides MIDs themselves, the advertiser registers dozens of shell companies to acquire MIDs for the sole purpose of using the CRM to load balance the transactions to stay beneath the Visa/Mastercard fraud thresholds of 100 or less chargebacks per month.

This is referred to as the shell game, and in essence is bank fraud.  The reason why it is bank fraud is that the “bank page” is not the intended product that advertiser seeks to sell, rather it is a bait and switch scheme to acquire MIDs.

Once the MIDs are acquired, the advertiser then launches a non-compliant website selling 1 non-compliant negative option product across the dozens of merchant accounts that are registered across the dozens of companies that were ostensibly setup as “separate” negative option compliant websites.   Merchant bank providers like REDACTED are the banks of choice for many of these negative option advertisers.

Step 4:   The advertiser finds a private label supplier of supplements, similar to what Tarr Inc. did, and discovers a fulfillment center to pick, pack, and ship the products.

This allows for the advertiser to pay for only product they ship, that way if their MIDs are shut down they can cut their losses without having too much product overhead.

Step 5:   The advertiser needs a way to advertise the negative option trial with hidden terms & conditions.   Since Facebook, Instagram, and Google disallow their type of advertising, they turn to affiliate networks to attract rogue affiliates.

Rogue affiliates get attracted to the negative option campaigns that offer $30-50 CPA (cost per acquisition) bounties per free-trial credit card submit.

In order to maximize their returns, rogue affiliates cloak Facebook, Instagram, and Google to get their fake news sites live promoting the negative options scams.

Unwary consumers see stars endorsing the advertiser’s product, fall for the fake news, and then make the mistake of signing up for a free trial.

The affiliate collects on the CPA and the advertiser manages by the metrics, using sophisticated CRM software to calibrate the rebill % minus any refunds/chargebacks.  It becomes a game of math.

Step 6:  The advertiser signs up for chargeback mitigation services to win as many chargebacks as possible.

Step 7:  The advertiser gets more MIDs, balances more transactions, and fly’s below the radar.   By utilizing a number of organizations designed to manage these processes the advertiser, whom thinks they are king temporarily, grows their trial practice.

Part of this process involves submitting what is called “friendlies,” transactions that use prepaid cards that ramp up the sales volume for the sole purpose of diluting the chargebacks thresholds on each MID.    Merchant providers make a killing during this process.

Step 8:   Data monetization services help the advertiser squeeze as much money as possible from the unwary consumer by cross-selling product.  For instance Garcinia trials sell Colon Cleansers, Teeth Whiteners, and E-Cig trials as cross-sells.

The advertiser, whom thinks the whole way that they are savvy businessmen, are really the suckers in the process that take on the majority of the liability while all of the vendors profit off of the advertisers risk.

In most cases the times catch up to the advertisers and they lose their MIDs, get TMF’ed, and/or get sued by the FTC and lose all of their money in a civil forfeiture.

Part of the business model is to put high-powered law firms on retainer prior to the civil forfeiture, ensuring that capital is on legal retainers prior to the civil forfeiture to ensure the savvy advertiser can mount a strong defense.

Special thanks to Cristin Severance, 9 time emmy winner and Consumer Justice Investigative Reporter at CBS 11, for her research into the negative option industry.  You’re goin to win a 10th emmy and maybe even Pulitzer Prize from your reporting here…indeed you’ve just scratched the surface.

Reporting on a multi-billion dollar annual industry filled with sociopaths that view consumers as “IDs” that were sent from affilaite “sub_ids” as numbers…not real humans…just wait to the legal backlash these folks will bring.   Happy hunting Cristin.