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11/13/2016

PacNet Services: What you need to know

A new criminal empire has been recently discovered that is shaking up the AML/BSA/Compliance community and regulators. No, this is not an organized criminal gang, a drug cartel, or wealthy individuals avoiding their taxes. 

Background

PacNet Services (“PacNet”) is a Canadian international payment processing company that specializes in providing payment solutions to entities around the globe. This seemingly innocuous company is now being called by media outlets, the “Mail Fraud Mafia” [1]. The U.S Treasury Department is calling PacNet Services, one of the world’s most illicit criminal organizations.  “PacNet, an international payments processor and money services business, has a lengthy history of money laundering by knowingly processing payments on behalf of a wide range of mail fraud schemes that target victims in the United States and throughout the world,” the Treasury wrote. [2]

The scheme started over 20 years ago when PacNet was founded by Rosanne Day in 1994. Mrs. Day worked at a bank where certain client accounts were shut down because the clients were direct marketers and the amount of money being deposited was suspicious. Mrs. Day then left the bank and created her own payment processing company designed to facilitate payments and bank accounts for direct marketing companies utilizing illegal methods and overcharging unsuspecting people via mail fraud. Essentially, PacNet Services was onboarding customers that were too risky for banks. PacNet committed a litany of felonies for its clients including but not limited to money laundering, mail fraud, moving money by plane and deceiving customs officials.

Despite the overwhelming evidence, PacNet has taken to social media to deny the allegations, stating, “We absolutely and categorically reject the allegations made against us regarding our processing for direct mail campaigns. We will vigorously defend ourselves against these unproven allegations."

This Canadian based company heretofore having a lower profile (along with a group of its 12 top executives and directors, and more than 20 subsidiaries and related businesses) is the first payment services company to be designated a “transnational criminal organization” by the Office of Foreign Asset Control (“OFAC’). PacNet Services is now on a U.S government black list, previously made up of only the world's most dangerous drug cartels, gangs and organized crime rings.[3]  Due to the severity and scale of the crimes committed by PacNet, there will likely be AML implications for financial institutions.

 

Implications for Financial Institutions

Payment processing companies such as PacNet, can help obscure criminal operations from authorities because banks will shut down high-risk accounts and file suspicious activity reports with regulators, but payment processing companies may not have the same regulatory requirements and scrutiny. PacNet utilized foreign banks to open accounts and facilitate payments on behalf of criminal scammers, which by association, has implicated certain banks.  Much of the banking impact of this scandal will affect Foreign Exchange (“FX”) Brokers at financial institutions because PacNet owns an entity called “Counting House”, which was a provider of Foreign Exchange payment processing services for FX Brokers. FX Brokers utilized the third-party payment processors (such as Counting House) since large financial institutions had more recently been turning away business from FX Brokers. “This means that not only do brokers have limited options as to where to store their operating capital and client funds,” a media outlet stated, “but are also now becoming the target of thefts from corporate bank accounts because FX brokers are being increasingly forced to use third-degree banks in less than salubrious regions, which, according to our research, is causing great difficulties in security of funds.”[4]  Accordingly, the regulatory impact of the PacNet scandal will likely be felt in numerous areas within the financial services industry.

 

Broad Anti-Money Laundering Implications

 

PacNet’s fraud scheme is a significant concern for U.S. and global regulators. As noted previously, the U.S Department of the Treasury has put PacNet on a black list only reserved for the worst financial criminals. PacNet "engages in an ongoing pattern of serious criminal activity" and "threatens the national security, foreign policy, or economy of the United States” according to the U.S. Treasury Department.[5] PacNet has been profiting off the multi-billion dollar a year mail fraud industry that prays upon the weak, elderly and disabled. U.S. regulators now have mail fraud, direct marketing firms, payment processors, and FX brokers in the spotlight and realize that third party payment processors are attractive to scammers looking to move funds and launder money.  New regulations and investigations are to be expected for the payment processing industry and banks that have payment processors as clients.

 

Conclusion

 

PacNet has been implicated in a global fraud scheme that has become a top priority for global and domestic regulators. PacNet knowingly covered up and facilitated payments for its client’s schemes that stole money from thousands across the globe. The mail fraud industry normally targets elderly or disabled people, and despite this, PacNet continued to take funds from these fraudsters. In the near future, global and domestic regulators will be widening their focus on direct marketers, payment processors, FX brokers, and banks with payment processor clients.

 
 
  • Key Takeaways

    • PacNet has been labeled a global criminal organization by U.S. regulators;
    • FX Brokers will be facing increasing scrutiny by regulators;
    • Expanded investigations expected by regulators into payment processors;
    • Mail Fraud and direct marketers are on the radar screen of the regulators;
    • Banks are advised to review activity with payment processors such as PacNet.
    • Stay tuned for further regulatory updates related to the PacNet Services case.

     

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