Electronic Money Laundering: Digital Solutions for a Digital Problem

On: December 11, 2017

Technological innovations are rapidly changing the global banking landscape. While fintech startups are mainly focused on improving consumer interaction with the financial system, financial institutions are investing heavily in developing “behind-the-scenes” solutions for meeting the increasingly demanding regulatory compliance obligations.

In the past few years, the financial ecosystem has seen a significant amount of new regulations, restrictions and record-breaking penalties. In this environment, the goal of reducing regulatory compliance costs becomes very attractive for financial institutions, with the direct impact on the bottom line.  

Enter new SaaS-based Regulation Technology: solutions that automate risk management, facilitate reporting, prevent fraud and enable financial institutions to keep pace with the changes in regulations. Current applications are utilising the latest breakthroughs, including Big Data analytics, cloud computing, AI and machine-learning technologies.

Transaction Laundering

The history of money laundering is as old as the history of money itself. In the digital era, money laundering has taken on a new guise – Transaction Laundering. By way of definition, Transaction Laundering is when an unknown business uses an approved merchant’s payment credentials to process card payments for unknown products and services.

At EverCompliant, we estimate that Transaction Laundering exceeds $200 billion a year in the U.S. alone, and $6 billion of this total involves illegal goods sold by some 335,000 unregistered merchants.

In recent years, as online commerce has become ubiquitous, it has become essential for FinCEN and other regulatory bodies to stay updated. Their efforts to prevent Transaction Laundering often run into barriers. The scale,  complexity and  opacity of the digital world render the traditional KYC and AML tools and programs powerless when it comes to Transaction Laundering detection and prevention.

The Challenge of Transaction Laundering

With Transaction Laundering, an unknown entity is funneling transactions through your merchant portfolio. How can you uncover the real identity of the fraudulent merchant, when catching the culprit can seem impossible? The transactions could originate from nearly any online source; and with this large scale and difficulty to identify hidden connections between various online entities, manual reviews are not a viable option.

Scale of the Internet

Source: Internetivestats


Finding the fraudulent e-commerce merchant in your portfolio is like finding a needle in a haystack. There are over 1.2 billion indexed websites on the world wide web today. Google Inside Search estimates that there are greater than 130 trillion web pages. At the end of the second quarter of 2016, VeriSign, a global leader in domain names and internet security, estimated 331.9 million domain names registrations across all top-level domains.

With this volume, it becomes extremely difficult to identify Transaction Laundering activity. A growing number of merchants have complex online profiles that include multiple websites, domain names, digital channels and, most importantly, no real physical profile. This presents a serious challenge for the financial industry, especially for traditional KYC regimes and AML programs that require constant monitoring and updates to keep track. These days, it is a very simple process for a criminal to setup a payment page on an unknown website to facilitate transactions through a merchant account connected to an entirely different domain name, leaving no way for the merchant acquirer to identify such transactions with manual tools.

Scale of E-commerce

There are approximately 40 million e-commerce websites on the internet according to our own research; however this number does not accurately represent the number of merchants online.

The rise of micro-merchants that don’t operate their own websites, but rather work with global online marketplaces, complicates the problem even further. Nearly half of all of the items sold from Amazon (NASDAQ:AMZN) don’t come from Amazon itself: over 47% of units are actually sold by third-party sellers. According to TechCrunch, Amazon has more than 2 million third-party sellers around the world.  According to Go-Globe and Ecommerce News, Alibaba has 8.5 million and Shopify has 377,500 merchants on their respective platforms as of 2017.

The amount of transactions going through such aggregated marketplaces is staggering. For example, Alibaba processed nearly 1.5 billion transactions during its Singles Day shopping event, reporting the sales of $25.3 billion, with a peak of 325,000 transactions per second.  

Monitoring transactions, merchants and online activities at such large scale and high speed presents a serious compliance challenge for merchant acquirers. As a result, Transaction Laundering is difficult to detect, monitor and prevent.

In order to identify Transaction Laundering you need to ask important questions to determine what the merchant is actually selling:

  • How do you identify illegal content, goods and services sold online?  and;
  • Once identified, how can you uncover the hidden links between merchants in your portfolio to the illegal activity elsewhere on the web?

Technology: The Key Ingredient to Solving The Transaction Laundering Problem

Digital problems require digital solutions. Since solutions that rely on manual monitoring simply can’t keep up – they need to be highly-automated and scalable, to enable the discovery of repeatable patterns and  real-time reports.  New technology capabilities are indispensable for detection and prevention of Transaction Laundering. Law enforcement agencies, the e-commerce players, MSPs, fintech providers and individual users all share the responsibility in making efforts to eradicate this advanced merchant- based fraud.

In order to stop and further prevent Transaction Laundering,  you need to manage Big Data and apply machine-learning capabilities to discover illegal content and hidden connections between seemingly unrelated online entities. You also need to create an actionable view to understanding merchant risk. At EverCompliant, we provide concrete evidence of Transaction Laundering, undisclosed illegal activity, and other high risk factors within your portfolio and with a single SaaS platform.

Digital money laundering can be defeated, but only with the right tools.


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