Here’s what you need to know about EBT fraud, fake merchant accounts, and what steps can be taken to prevent it:

1. How EBT Fraud Works

EBT fraud usually involves taking advantage of government assistance programs like the Supplemental Nutrition Assistance Program (SNAP). Fraudsters may establish fake businesses or use legitimate businesses as a front to set up merchant accounts with payment processors. Once the account is set up, they run fake EBT transactions to siphon off funds, pretending to sell eligible products when, in reality, no goods are exchanged.

These fraudulent transactions allow criminals to extract money from EBT cards, pocketing government aid that is meant to support low-income individuals and families. The fraud schemes often involve manipulating point-of-sale (POS) systems or creating false transaction reports to make it appear as if legitimate purchases were made.

2. Fake Merchant Accounts: A Tool for Fraud

Fake merchant accounts are the key mechanism that fraudsters use to exploit the EBT system. Here’s how it typically works:

• A fraudster creates a fake business—either entirely fictional or using a shell company that appears legitimate.
• They apply for a merchant account with a payment processor, claiming to sell products eligible for EBT purchases (such as groceries).
• Once approved, they use the merchant account to run fraudulent EBT transactions, essentially turning government aid into cash that is deposited into the fraudulent business’s account.

These fake accounts can fly under the radar for a while, particularly if they have low transaction volume. However, as they become bolder and process larger sums, they are more likely to attract attention from regulators and law enforcement.

3. The Impact of EBT Fraud

EBT fraud has far-reaching consequences that go beyond financial losses:

• Loss of Funds for Those in Need: Fraud siphons away funds that are meant to assist families who genuinely rely on government assistance. This decreases the effectiveness of social safety nets.
• Higher Costs for Payment Processors: Payment processors face significant financial risks and penalties if they inadvertently support fraudulent merchants. This can lead to tighter regulations and increased scrutiny for legitimate businesses.
• Reputation Damage: The payment processing industry suffers reputational harm when fraud goes unchecked, making it harder for legitimate merchants to gain trust and secure processing agreements.

For these reasons, it’s essential that payment processors, ISOs, and sales agents stay vigilant when onboarding new merchants—especially those applying to accept EBT.

4. Preventing EBT Fraud and Fake Merchant Accounts

While EBT fraud may be hard to eliminate, there are several steps that can help reduce the risk of falling victim to fraudulent schemes:

• Stringent Merchant Vetting: Payment processors must implement robust vetting procedures when onboarding new merchants. This means verifying the legitimacy of the business, checking relevant licenses, and conducting in-depth background checks.
• Monitoring Transaction Patterns: Processors should regularly monitor transactions for any unusual patterns that could indicate fraud—such as frequent large EBT transactions or suspiciously high refund rates.
• Education and Training: Providing training to sales agents and employees about how to spot potential fraud can help identify red flags early. Educating merchants on the consequences of engaging in fraudulent behavior also serves as a deterrent.
• Collaboration with Authorities: Payment processors should work closely with government agencies to report suspicious activity and share information to prevent large-scale fraud.

5. The Role of Sales Agents in Preventing Fraud

Sales agents who work in the merchant services industry play a crucial role in preventing EBT fraud by ensuring that the merchants they onboard are legitimate businesses. Agents should take extra care when dealing with high-risk categories, such as grocery stores or convenience stores that accept EBT, to ensure that the applicant is a legitimate business with a proven track record.

Sales agents should never feel pressured to close a deal if something feels off. Instead, they should raise concerns with their payment processor and prioritize the long-term integrity of the industry over short-term sales.

Conclusion: Combatting EBT Fraud Together

EBT fraud and the creation of fake merchant accounts hurt the very people who rely on government assistance programs to make ends meet. It also damages the reputation of the payment processing industry and puts unnecessary strain on financial institutions. By staying vigilant, implementing stricter vetting procedures, and educating sales agents on what to look out for, we can work together to prevent EBT fraud and maintain the integrity of the system.

If you’re an agent or merchant services professional interested in learning more about how to prevent fraud and protect your clients, feel free to reach out. Let’s keep our industry transparent and trustworthy!