Part 1: “Free Trial” Scams and The Main Operator Behind Them

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Have you ever ordered a dietary supplement or skin product that is offered on a “free trial” basis where you believed that the only cost was in the shipping and handling, only to later find out that you have received additional charges without your consent?   If so, you are not alone.

Millions of Americans have reported to government agencies and consumer complaint bureaus over the past 10 years that they’ve been scammed by various “free trial” schemes that never fully disclosed the terms and conditions of the sale.   Thereafter these consumers, in the masses, have claimed that they lost billions of dollars collectively.

The USA Herald has recently identified one of the primary “operators” of these “free trial” schemes that has had his billing methods called into question by tens of thousands of consumers, authorities, and the news media.   From our investigation, it appears that this operator has orchestrated millions of dollars of ill-gotten revenue via deceptive “free trials” scams.  These scams have received tens of thousands of consumer complaints to banking institutions and governmental agencies by consumers claiming fraud.

There’s only 1 catch:  the main operator of these “free trials” isn’t listed on any of the merchant agreements and on paper is not the direct beneficiary of the scheme.   Nevertheless, his company facilitated nearly all components of the activities for the “free trials” to take sales, including but not limited to shipping, advertising, chargeback management, private labeling, MID acquisitions, and customer service.

Through our investigation and detailed collection of data, we will reveal the great lengths this operator has gone through to make it difficult for authorities to track down what thousands of consumers are calling “fraud.”  As part of our research, it appears that a very sophisticated Visa/Mastercard merchant banking structure, of which we will analyze in great depth in subsequent articles, has enabled the operator to maintain the scam for years across a multitude of companies without getting caught.  And while there’s a very in-depth legal structure in place that is intended to make it hard to trace the free trial schemes back to the operator, it did not prevent us from discovering who he is.

For starters, selling a product on a “free trial” basis is not illegal within itself, however the “free trial” operator that we are investigating appears to have put together a complex scheme to deceptively advertise a range of products that obscure the terms of sale.

Tens of thousands of consumers have claimed that they unknowingly subscribed to recurring fees on a monthly basis for health and beauty supplements that they thought were free of charge, minus shipping fees in the $4.95 range.  Instead consumers claim that they were billed without their consent and had a very difficult time cancelling the charges, with long wait times and other challenges in the process of receiving refunds.  And all orders trace back to this operator’s business address.

The underpinnings of this scam boils down to the structure of the Visa/Mastercard merchant processing by the operator we are investigating, along with the multiple points of profit that the operator behind these schemes put in place in order to reap the rewards with ostensibly limited to no liability.   The schemes involve the registering of hundreds of merchant accounts in the names of individuals that are misled as to the true use of the merchant accounts, along with banks that receive applications with websites that are simply “fronts” to get more merchant accounts to get used to keep chargeback hard counts and percentages below the Visa/Mastercard fraud thresholds.

In conjunction with law enforcement, USA Herald will make some major announcements in the upcoming months around this topic, including naming one of the primary operators of these schemes that has coordinated an international effort to defraud consumers.

We are going to cover the following areas of the “free trial” scheme:

  1. The name of the head operator behind the free trial fraud scheme.
  2. The names of the companies registered and actions taken against them by government agencies, including an AG office in the south east.
  3. The names of the merchant account providers and banks used in this scheme.
  4. The points of profit from the operator whom has profited yet has kept “clean hands” along the process.  These points of profit include referral agreement to make a percentage of the fees from the credit card transactions processed; fulfillment fees; product fees; labeling fees; chargeback representment fees; advertising fees; and more.
  5. The federal statutes that may have been violated, including bank fraud that carries stiff criminal penalities.
  6. All of the parties that are involved in the scheme and their exact roles and purpose behind their roles.
  7. The lawyers that were actively involved in assisting in the process, both of whom are under investigation by their State Bar.   We will go into details around their relationship with the operator.
  8. Recent FTC actions that mirror the actions that this operator has been able to avoid.
  9. The Jeremy Johnson case, which set precedent for criminal actions around illegal banking structures with commentary from U.S. Attorney for Utah John Huber.   We will draw striking similarities to the structure of this operators business practices to that of Jeremy Johnson.
  10. The pattern of conduct of this operator, which includes the facilitation of other “free trial” schemes that have amassed thousands of complaints from customers all throughout the United States, United Kingdom, and Canada.
  11. The names of the governmental agencies that you can reach out to in order to report the activities if you were a victim.
  12. A change.org petition to prompt authorities to take action to shut down this group.
  13. A glossary of terms that are relevent to the article for the layman reader, which we have included below and will reference in an additional article.  Here we will go into how these terms apply to the alleged criminal conspiracy that we are investigating:

Shell Corp: A shell corporation is a corporation without active business operations or significant assets. These types of corporations are not all necessarily illegal, but they are sometimes used illegitimately, such as to disguise business ownership from law enforcement or the public.

Shell Game: A deceptive and evasive action or ploy.  For the purposes of this story, Shell Game references the acquisition of a large number of Visa/Mastercard merchant accounts under different people’s names for the purpose of spreading transactions across each individual merchant account for the purpose of staying below fraud thresholds on any individual merchant account.  That way credit card bureaus are less likely to detect a pattern of fraud to alert authorities and take internal actions to shut down the accounts.

Signers:  Signers are individuals that sign their names on merchant accounts at the direction of a UBO to create the illusion that each merchant account is a separate business, as legally they are.  In many cases, the signers are completely unaware of the real use of the merchant account they signed up for, and the result is that they often end up with unexpected tax liabilities along with credit issues due to merchant accounts getting terminated due to excessive chargebacks, adding them to the match list.

UBO (ultimate beneficiary):  Beneficial owner refers to the natural person(s) who ultimately50 owns or controls a customer51 and/or the natural person on whose behalf a transaction is being conducted. It also includes those persons who exercise ultimate effective control over a legal person or arrangement.

TMF (Terminated Merchant File AKA the MATCH List):  MATCH is a system created and managed by MasterCard. It is essentially a database that houses information about businesses (and their owners) whose credit card processing privileges have been terminated for reasons which I’ll discuss later.

It is used by acquiring banks (aka merchant processing banks) to screen potential applicants to see if that applicant has been terminated in the past. Acquiring banks also have the ability to add or remove merchants to or from the MATCH database, given they have justification.

In a nutshell, the MATCH file is like a “blacklist” that banks can cross-check when they take on new business. That way, they won’t get stuck with any bad apples.

Chargeback: the return of funds to a consumer, mainly used in the United States, forcibly initiated by the issuing bank of the instrument used by a consumer to settle a debt. Specifically, it is the reversal of a prior outbound transfer of funds from a consumer’s bank account, line of credit, or credit card.

Excessive Chargebacks:  if a merchant account receives over 100 chargebacks in a month it can place the signer of the merchant account and the business as a whole on the Visa/Mastercard watch list.

Merchant Services:  Merchant Services, or better known as credit card processing is the handling of electronic payment transactions for merchants. Merchant processing activities involve obtaining sales information from the merchant, receiving authorization for the transaction, collecting funds from the bank which issued the credit card, and sending payment to the merchant.

Merchant:  the person that is behind the business and signs on the Visa/Mastercard merchant account to get a unique MID.

MID:  A merchant identification number (MID) is a unique number assigned to a merchant account to identify it throughout the course of processing activities.

When merchants process credit-card transactions over a computer network, those networks are interconnected with a credit card front-end processing center and a back-end settlement network via a network gateway. The merchant account comprises a merchant identification number (MID), one or more terminal identification numbers (TID), and a gateway identification number (GID).

In particular, the MID uniquely identifies the merchant, while the TID specifies a particular profit center, location or facility from which credit-card transactions are being processed. The GID identifies the particular network gateway through which credit card transactions from the merchant will be routed (to the front-end processing center and back-end settlement network). The MID specifies the merchant, but all of the identifiers taken together will confirm each facet of the transaction for greater security.

Advertiser:  typically the UBO that profits from all of the individual signers on merchant accounts.   The advertiser controls how the “free trial” is advertised and orchestrates the entire process.   Advertisers of “free trials” are often referred to as “free trial advertiser.”

Affiliate Marketer: an individual that is contracted to advertise the free trial offer the advertiser has.   Affiliate marketers have been sued countless times by the Federal Trade Commission.

Offer: this is the “free trial” product that the advertiser is utilizing affiliate marketers to advertise to consumers. Behind the “free trial” offers these days are often dozens of unique MIDs that are used to keep chargebacks below the 100 hard count number to avoid fraud detection radars at Visa/Mastercard.

Cloaking (notably Facebook and Google cloaking):  due to the heavy restrictions on Facebook and Google that disallows most free trial offers in the health and beuaty industry, affiliate marketers utilize cloaking to falsely misreprent the offer being promoted, therefore making it through compliance checks at Facebook and Google.

Load Balancing:  A load balancer is a software tool that distributes “free trial” transaction across a number of merchant accounts for the primary purpose of keeping the chargeback count per each MID under 100 chargebacks per month.   These tools are typically a part of CRMs.

Friendlies:  prepaid debit card transactions that are processed to increase the total number of transactions to keep the chargeback ration below 1%.

CRM (Customer Relationship Management):  this is a software tool used to manage customer relationships.

R.I.C.O. Act:  The Racketeer Influenced and Corrupt Organizations Act, commonly referred to as the RICO Act or simply RICO, is a United States federal law that provides for extended criminal penalties and a civil cause of action for acts performed as part of an ongoing criminal organization.

Free Trial:  a product or service that is offered to customers for free for a short period of time so they can try using it.   Often times free trial schemes in the health and beauty industry go to great lengths to hide terms and conditions of sales.

Visa/Mastercard Chargeback Thresholds: there are the thresholds that merchants have to keep their charebacks under.

Bank Page: the website that is shown to the bank by the merchant at the UBO’s direction to acquire the MIDs to process Visa/Mastercard transactions.  This is a legally compliant website and is not the actual website that the user will use to promote the offer.

Landing Page:  this is the website that the UBO has his affiliate marketers promote and is non-compliant.   The reason for promoting the non-compliant page is that it converts consumers into customers at higher rates.  Often the consumers don’t know that they were enrolled in a continuity plan and this is by design so the UBO makes more money.

ISO:  A merchant account is established under an agreement between an acceptor and a merchant acquiring bank for the settlement of payment card transactions. In some cases a payment processor, independent sales organization (ISO), or member service provider (MSP) is also a party to the merchant agreement.

Bank Fraud: the use of potentially illegal means to obtain money, assets, or other property owned or held by a financial institution, or to obtain money from depositors by fraudulently posing as a bank or other financial institution. In many instances, bank fraud is a criminal offence.

U.S. Postal Fraud: U.S. Postal Inspectors investigate any crime in which the U.S. Mail is used to further a scheme–whether it originated in the mail, by telephone, or on the Internet. The use of the U.S. Mail is what makes it mail fraud.

If evidence of a postal violation exists, Postal Inspectors may seek prosecutive or administrative action against the violator. However, if money is lost through a fraudulent scheme conducted via the mail, Postal Inspectors lack the authority to ensure you receive a refund and can’t require that products, services, or advertisements–on the Internet or elsewhere–be altered.

Postal Inspectors base investigations of mail fraud on the number, pattern, and substance of complaints received from the public.

Read Part 2: FTC Sues RevGuard Founder Blair McNea – Criminal Charges Coming