How Mastercard and Visa Tolerate Scams and Fraud

Paul Paolucci, the best cop for one of the largest credit card companies in the world, certainly had some interesting friends.

One made a fortune promoting porn websites that needed access to Mastercard and Visa payment networks. Paolucci, who oversaw Mastercard’s merchant fraud screening, was photographed frolicking around the Las Vegas Hard Rock Hotel with him and a group of women in white corset minidresses.

A second was an e-commerce tycoon driving Lamborghini with whom Paolucci used to celebrate family holidays. The tycoon ended up in prison for a financial crime he committed, in part, using the Mastercard network.

An executive of a notorious corrupt European bank claimed to have dined with Paolucci and enlisted his help to evade Mastercard regulations.

It was Paolucci’s job to make sure the banks and businesses using Mastercard’s network played by the rules. He himself got around those rules by getting close to the kinds of high-risk companies he was supposed to watch like a hawk — so close, in fact, that they sometimes seemed to work together. Eventually, one of these friendships led to him completely breaking the rules, and it cost him his job. But although Paolucci has crossed a line, for Mastercard – and its global rival, Visa – a permissive relationship with fraudulent, exploitative or, in some cases, even criminal companies is no exception. It’s the norm.

A year-long investigation by BuzzFeed News reveals that Mastercard and Visa, which together process three-quarters of all credit card payments in the United States, transfer money to companies with extensive histories of fraud, which which allows them to continue defrauding customers, sometimes for years. The credit card giants take a percentage of every sale, legitimate or not.

BuzzFeed News’ review, based on tens of thousands of pages of court records, confidential investigative reports, secret recordings, internal corporate records and more than 120 interviews, shows how Mastercard and Visa continue to host thousands of businesses that have been flagged for issues including lying to customers, lying to banks and breaking the law.

As credit cards have become an essential part of global commerce, they have also become a common tool for fraud, with scammers on every continent using card networks to sell fake miracle cures, multi-party marketing schemes levels, fake educational opportunities and pump and- dump large-scale investment scams.

Both credit card giants have the prerogative to kick scammers off their grids, effectively locking them out of a huge chunk of potential customers. Mastercard even maintains an extensive database of companies that have had issues at other financial institutions. Still, both companies say locking down scammers and other bad actors just isn’t their job. A Visa executive testified that the card company doesn’t think it’s worth it because it would be possible to circumvent it. Mastercard has sometimes locked businesses, but usually after intense public scrutiny.

Card companies also have the prerogative to cut off banks that process fraudulent transactions, but they almost never choose to do so. Mastercard told BuzzFeed News that it “levies financial penalties and has suspended or terminated the license ‘from banks’ based on specific incidents.” He refused to say what they were. As for these fines, banks usually pass them on to offending companies, which can simply ignore them as a cost of doing business.

And the public is not informed of all this.

This might surprise anyone who has received a notice of a suspicious credit card transaction, perhaps a transaction made in a city you’ve never been to. These notifications, and the assurance that the cardholder is not responsible, reinforce the reputation of card companies as tireless watchdogs committed to protecting consumers. Mastercard and Visa promise customers “zero liability”.

In fact, these card companies have no responsibility. When consumers are scammed, a bank must reimburse them. Mastercard and Visa — unlike its competitors American Express and Discover, which operate on a different model — suffer no consequences. They have no direct financial incentive to stop the fraud and they bear no responsibility when it continues under their banner.

About Matthew Berkey

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