As fraud and risk mitigation procedures continue to evolve, criminal entities adopt new innovative ways to bypass those measures. One of such methods is transaction laundering.
Transaction laundering is defined as the action whereby a merchant processes payment card transactions on behalf of another merchant, thus disguising the true nature of the transaction and hiding the real identities of the parties involved.
As a result, Merchant Service Providers (MSPs) such as acquiring banks, PSPs, ISOs, payment facilitators, hosting providers, and online marketplaces end up unintentionally processing transactions from unknown sources in large volumes.Activities Facilitated by Transaction Laundering
The “shadow economy” has grown to unprecedented volumes. Criminal networks’ ability to infiltrate legitimate payment systems through transaction laundering and the ease with which such activities can be disguised online has contributed to its meteoric rise.
The numbers are hair-raising. The $10 trillion global black market is the second largest and fastest growing economy in the world. By 2020 two thirds of the world’s population is expected to be employed in the underground economy.
As it essentially conceals the origin of funds, transaction laundering is often associated with financial crime and is frequently used to launder proceeds stemming from activities that are explicitly prohibited by international law.
However, transaction laundering is a flexible tool, and can be used to facilitate a wide range of activities from relatively benign policy violations to the most atrocious crimes.
The following examples demonstrate the wide variation of unwanted activities that can be facilitated by transaction laundering:1. Policy Violations
Transaction laundering enables merchants to supply content that, although not illegal or prohibited, violates MSP’s own policies. This type of transaction laundering often involves industries located in the “grey legal area”, such as online gambling and pornography.
Although such businesses are legal and regulated in many countries, MSPs might still want to avoid involvement with such industries due to reputation and brand image concerns.2. Risk and Fee Manipulation
Transaction laundering enables high risk merchants from industries such as alcohol, tobacco, ForEx and virtual currencies to pose as low risk entities in order to avoid high processing fees. Once again the MSP suffers, as a significant portion of its income is reduced due to inaccurate risk assessments.3. Commerce in “Soft” Illegal Goods
Transaction laundering enables ecommerce in goods and services such as counterfeit products and copyright infringing merchandise. The impact here is more severe on MSPs as they are often held liable. However, involvement with such activities does not carry with it severe penalties or reputational damage associated with other kinds of crime.4. Ecommerce in Illegal Goods and Services
Because MSPs and online marketplaces are not aware who the real merchants are and what is the true nature of their business, they end up facilitating illegal activities, such as sales of counterfeit products, illegal prescription drugs and prostitution, incurring brand damage and financial penalties as a result.
Society as a whole suffers the negative impact of such activities as well. A recent research by the Fisher College Criminal Justice Division found various types of opioids easy to obtain illegally through multiple online platforms, including online marketplaces, while NABP reports that as of June 30, 2016, it has identified 10,823 Illegal online drug sellers, hiding behind sleek storefront websites and posing as legitimate pharmacies.
Such online drug dealers present serious public health risk, making illegal opioids easily available and contributing to a spike in prescription drug abuse.5. Transaction Laundering and Violent Crime
Atrocious crimes such as human trafficking, terrorist financing, weapons trade, child pornography and hard drugs are flourishing online. The main reason why such activities prosper is that crime pays. By unwittingly facilitating transactions resulting from such activities, MSPs become unintentional accomplices, enabling criminals to profit from crimes that entail immense societal costs in terms of human suffering and premature loss of life.
It is a common misconception within the payments industry that crimes like these are hiding only in the Dark Web, with transactions processed in anonymous virtual currencies, such as bitcoin. In reality, criminals also hide behind online storefronts and process transactions out in the open, funneling the proceeds from violent crimes through major payment networks that we all use. In such instances transaction laundering can be seen as an advanced form of money laundering, as funds obtained by illegal means are “washed” the moment they are deposited into the storefront merchant account.
Deficiencies in detection and prevention methods, and simplicity of setting up an online ecommerce business make it easy for criminals to hide their true activities, while laundering illegally obtained funds through online storefronts– killing two birds with one stone.Alarm bells should be ringing for Merchant Service Providers
Merchant Service Providers are liable for transaction laundering occurring “under their roof”, even if they are unaware that such activities taking place within their merchant portfolios. Regulators require MSPs to credibly demonstrate that all the necessary steps were taken in order to prevent transaction laundering and financial crime.