Colorado Springs News, Sports & Business

Gazette Premium Content MONEY & THE LAW: Settlement shines light on payment order fraud

By JIM FLYNN - Published: December 31, 2013

Thanks to the Federal Trade Commission, some people are receiving a little extra cash this holiday season. On Dec. 11, the FTC said it was mailing 34,859 checks to consumers whose bank accounts had been debited without their consent by a now defunct Nevada corporation called Automated Electronic Checking Inc. The funds come from the FTC's settlement with AEC, which included $950,000 in restitution.

To back up a bit, AEC was in the business of processing payments on behalf of telemarketers whose activities were often fraudulent. AEC did not itself defraud consumers, but facilitated banking transactions that resulted in money being taken out of the checking accounts of the telemarketers' victims. The system worked like this:

A telemarketer would, by one means or another, obtain the bank routing number and account number associated with a victim's checking account. The telemarketer would then generate a document called a "remotely created payment order."

These look like checks, but where the account owner's signature normally goes there is a statement saying "Authorization on File." The telemarketer would give the remotely created payment order to AEC and AEC would deposit it into its account at a friendly bank willing to overlook what was happening. The payment order would then zoom through the banking system like a regular check, resulting in money being taken out of the victim's checking account. AEC not only processed these remotely created payment orders for telemarketers engaged in fraud, it taught them "the best way to fly under the bank radar." The telemarketers, AEC, and the banks accepting AEC's deposits all made money at the expense of the telemarketers' victims.

AEC, over the course of several years, used numerous banks as a place to deposit remotely created payment orders. At least two of these banks failed. Several others were put on a short leash by bank regulatory agencies and told they could no longer do business with AEC. (Fittingly, AEC's CEO was named Lawless.)

In Colorado, remotely created payment orders are called "demand drafts." These have a legitimate place in the banking system and are used by many people to pay obligations that repeat on a monthly basis. In 2001, the Colorado Legislature enacted changes to the Uniform Commercial Code, a law that regulates how payments are processed through the banking system, making it clear demand drafts can be used. These changes also made it clear that, if a demand draft results in money being wrongfully taken out of an account and the wrongdoer disappears (which frequently happens), the loss will fall on the bank that first dealt with the wrongdoer.

To be thorough on this subject, many automatic payment plans now rely on electronic fund transfers processed through a different system than demand drafts. Under either system, however, it's important to review your bank statement promptly and notify your bank immediately if you find an unauthorized withdrawal. Otherwise, the loss could be shifted back to you.

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