This Week in AML

Fraud Schemes Just Keep Coming.

The US Department of Justice has announced that a federal grand jury has indicted representatives of Electronic Transactions Systems Corporation, a payment processor, for fraud and money laundering. The indictment alleges that during the multi-year scheme, the company defrauded 7,000 customers out of millions of dollars. John and Elliot discuss the indictment and the scope of the alleged fraud. They also chat about a letter from US Treasury Secretary Janet Yellin, supporting the funding in the Inflation Reduction Act to modernize the IRS.



Fraud Schemes Just Keeping Coming. TRANSCRIPT


Elliot Berman: John, how are you today?

John Byrne: Hi, Elliot. Thanks for dialing in during vacation. Really appreciate it. I hope you're having a good time. 

Elliot Berman: Yeah, having a great time. Thanks for asking. So even though I'm on vacation, I'm trying to pay attention to the ever-emerging news. Did you see the press release from the US attorney's office in the Eastern District of Texas about the card payment fraud indictment they received?

John Byrne: Yeah, it was interesting on a couple of levels. I did see it, and the case is being investigated by the FBI's Washington field office. And as you just mentioned, being prosecuted by US attorneys in the Eastern District of Texas, but this sort of touches a variety of spaces that our community cares about, and that's, you know, fraud, detection, prevention, money laundering, and payment processing.

So, according to the press release, the grand jury indicted former executives at ETS. I think people are familiar with ETS, the Electronic Transaction Systems Corporation, and accused them of defrauding about 7,000 merchant clients. Defrauding them out of millions. There's a lot here to unpack. A short press release, but a lot here to unpack. One is that ETS, as I know, and, you know, cuz your previous life working with trade associations. It's a card processing company located in Virginia, and they do equipment and services that facilitate credit and debit card payment transactions for merchant clients.

And so the indictment says that many of these merchants were defrauded by ETS disguise, a portion of their processing fees. So they would embed the fees in what they call interchange fees, and they would also deliberately miss. Obviously, I think they'll have to be proven, but it's alleged that they misled the clients, and emails and contracts didn't disclose the true fee structure. So all that in there was, again, a whole host of different types of frauds.

Elliot Berman: Yes. And you mentioned the other thing that's interesting, you know, in the payment world, many merchant processors end up focusing on particular industries, and their focal industries are kind of interesting in that they were focusing on charities and municipalities, many of whom begun to have their fees payable by credit or debit card. So kind of an interesting twist there because these are not high-flying companies, you know, selling luxury goods.

John Byrne: Right. And according to again, to the indictment, the president directed these other defendants to do the defrauding. The president and one other person mentioned in the indictment there obtained these funds and personally enriched themselves with bonuses and high-end real estate. The president apparently received an additional 107 million because of the concealment prior to their acquisition, ETS acquisition.

So, there's also a money laundering charge, obviously, in addition to the wire fraud and the other types of fraud, we haven't seen the actual indictment, and we should mention as lawyers, we know it's an allegation and all the defendants are obviously innocent until proven guilty. But this is, I think, a fairly unusual press release.

I'm sure there have been others based on the grand jury indictment, but this just seemed to be a little bit more. We wanted to get this out there as soon as we could.

Elliot Berman: Yeah, I agree with that. So, in addition to this press release, I know you've been following the news. What else have you seen that you thought was interesting this week in our world?

John Byrne: Well, you know, there's been a bunch of things going on, as everybody knows. The search warrant issued against the former president is big news and big in the news because of the reaction of certain parts of the political spectrum, which relates to this other point. The other point being the inflation reduction act had passed the Senate.

Included in it is funding additional funding for IRS. And as we know, because of good friends and relationships with the IRS, especially in the CI section that, they have been struggling for a number of years. Once they've lost agents to bring in new agents, resources, and all of that. And there's so much that IRS needs in terms of funding.

So this funding is part of the package, and almost immediately, again, certain spectrums of the political world attacked it as IRS agents will now be auditing everybody. And, you know, we should be worried about that, which is obviously both ridiculous and fails to recognize the tax evasion problem.

From high-income earners and some corporations that we know have been going on for a long period of time, you just don't have the resources to deal with it. But, to your point, the Secretary of the Treasury, Janet Yellin, did something I thought was pretty unusual. She published and sent a letter to the IRS commissioner. Supporting the funding. So actually goes through in the letter why this is needed for a bunch of reasons. And you know, that was because they've seen the attacks in the media again from basically Republicans that are saying that we don't wanna give more resources to an agency that's so dependent upon updating their infrastructure from its issues. When agents move on to the private sector, filling those slots. So in the letter, which was published and issued publicly, they talk about a couple of things in there that I thought were interesting, enforcement resources.

They say we'll focus on high-end non-compliance. Their sustained multi-year funding is critical to the agency's ability to make the investments needed to pursue what they're calling a robust attack on the tax gap by targeting crucial challenges. As we said, large corporations, high net worth individuals, and complex pass-throughs.

Where today IRS has the resources to initiate just 7,500 audits a year out of more than 4 million returns received in that space, and so that's why you need sophisticated revenue agents and sophisticated resources, and that's why Yellin makes it very clear that these resources will, as they say, support a much-needed upgrade of technology that's decades outta date and investment in a taxpayer service.

So the IRS can communicate with taxpayers, and that's something everybody wants, right? When you send in your tax returns, and you think you're getting a response, you know, or you're getting, you're getting money back, whatever it is, you want customer service to be top-notch. And they just have not been able to do that for a number of years because of resource issues.

So, the letter ends by saying this is a historic investment, and it'll accomplish two objectives. It'll raise substantial revenue to address the deficit and create a fair system where those at the top who do not comply with tax obligations will get the service from the IRS that they deserve.

And I think that's the issue here. Tax evasion is a major, major problem. And as we know from previous weeks, we've talked about the creation of shell companies. The need for more beneficial ownership information ties it all together. So I think that's a key, and I would be remiss if I just didn't also say, you know, the men and women of IRS CI and all of IRS, but we've worked very closely with them, in a partnership to help improve our fraud detection and money laundering prevention. And we're just so fortunate to have those relationships, and they need support now. They don't need to be attacked. 

Elliot Berman: Yeah, I think, as you pointed out, this is quite unique to have the Secretary of the Treasury publish a public letter essentially

on a topic like this. And generally, in the past, while there may be disagreements during the legislative process, we haven't seen necessarily. So as you and I have talked other times, you know, there are many things in our government that people disagree about, but a fair tax system that supports all taxpayers and the betterment of the whole country is something that seems as if it should have general support or at least once the legislative process is complete, you know, should be allowed to move forward without a lot of negative conversation.

John Byrne: Right. So, I want to get you back to your vacation. I wanna remind people that on August 25th, we have a webinar that's gonna cover issues related to transparency and corruption issues like that.

So we have two excellent presenters, Gary Kalman from Transparency International and Jonathan Lopez, a former DOJ lawyer in private practice. They are gonna cover issues that are both important domestically and globally. And talk a little bit about what we mentioned, I think a few weeks ago, The Enablers Act, because the Transparency International folks have been pretty instrumental in moving that.

And they certainly have a view on that. We'd like to hear that. So that'll be on August 25th, one o'clock Eastern time information is on our website.

Elliot Berman: And that's where you can register as well. So, John, you have a great weekend, and we will talk again next week.

John Byrne: All right. Take care of yourself. Stay safe. Talk soon.

Elliot Berman: You too. Bye-bye. Bye.