Transaction Laundering Facilitates Illegal Credit Card Transactions

On: July 20, 2017

Ecommerce sales are growing, with an average annualized growth rate of around 16%. New technology makes it easy to set up online storefronts and payment environments and the resulting growth in ecommerce transactions is accompanied by the rise in transaction laundering.  

Transaction laundering is a sophisticated merchant-based fraud scheme that takes advantage of payments networks by funneling illicit transactions through seemingly legitimate merchant accounts.

Transaction laundering is a new, advanced form of money laundering. Most merchant service providers (MSPs) are not aware of the extent of illicit activity going on right under their noses. This process allows fraudulent transactions to come from unknown payment pages and shopping carts that the MSPs often do not know about. As a result,  MSPs often end up facilitating credit card transactions for highly illegal goods and services, including hard drugs, counterfeit medicines and unlicensed firearms.

During this process, the transaction for highly illegal activity essentially gets “cleaned” after being processed through the storefront/ legitimate merchant account with an innocent looking MCC.

Why Is It Happening Now?

Transaction laundering allows criminals to sell illegal goods and services  without being detected by using online storefronts to process transactions. Some are simply products and services that MSPs would like to avoid involvement with for various reasons, but a lot of transactions involve highly illegal activities.

According to analysis of 300 million top level domains and subdomains of online websites it was discovered that over 500 thousand are involved in the sales of  illegal goods and services. These websites often operate by accepting major credit cards and other mainstream payment methods, putting Merchant Service Providers, payment facilitators, PSPs, and acquiring banks at risk of legal action and regulatory fines. Furthermore, bear in mind these are all online business, i.e. websites, meaning they are likely to be hosted by a hosting service provider – putting them at risk as well.

Following categories of highly illegal products, content and services are readily available online and often put MSPs and acquiring banks at risk:

Illegal substances

Illegal substances, including hard drugs such as heroin, cocaine, ecstasy and LSD, designer drugs, bath salts, and more are readily available online from nearly 85,000 suspected online merchants.

Illegal Pharmaceuticals

Counterfeit, illegal or prescription pharmaceuticals are another high risk area with approximately 80,500 online merchants selling illegal pharmaceuticals. The Illegal online pharmaceuticals industry brings in  $400 billion a year.

A survey of more than 11,000 websites selling prescription medications online to US consumers found that only 1 in 25 appear to comply with US laws and pharmacy practice standards. Furthermore, about one half of medicines sold online are fake or counterfeit.

Illegal opioid epidemic is also being fuelled by fraudulent ecommerce merchants who sell addictive, high-potency prescription medications  including synthetic opioids such as fentanyl, and prescription drugs such as oxycodone. Such medications are readily available online through multiple sellers who accept major credit cards, putting MSPs at risks of fines and legal action.


42,456 websites are suspected for soliciting prostitution online. The industry is notorious for its connections to human trafficking rings, slavery and abuse.

As recent takedown of adult section from Backpage.com demonstrates, minors are often being forced into prostitution and sold through websites throughout the web. Criminals who used Backpage, according to the  authorities, often used teasers like “Amber Alert” and “Lolita” to signal that children were for sale.

Child Abuse

Too many websites, maybe up to 40,000, are suspected of dealing with child abuse materials. Efforts are being made by governments and NGOs alike to put a stop to sexual exploitation of children.  Merchant Service Providers can easily be fooled to facilitate transactions originating from dealings in sexual abuse materials through the use of transaction laundering.


Online classified sites and escort pages have become a virtual marketplace where sex trafficking victims are bought and sold. There are over 100,000 escort ads posted in the United States every day. According to Thorn, a leading international NGO fighting sexual exploitation of children,  63% of child sex trafficking victims were advertised online. Transaction laundering is often used to “wash” the proceeds from this atrocious crime.

The trade in imagery, video and live-streaming of sexual abuse and violence is a highly lucrative business for the perpetrators. It is often assumed that such crimes hide in the dark web, however this is a misconception. We estimate that over 15,500 websites in the open web are dealing with such content and often process payments through legitimate payments systems.


Suspected bestiality content is being traded on estimated 4,000 websites hosted on the open web.

MSPs beware –  criminals are often  hiding behind innocent-looking storefronts

Since transaction laundering typically hides behind so-called low risk merchants it makes it hard to separate the illegal transactions from the legitimate ones. Transaction launderers often use following MCC codes, usually mistakenly marked as “low-risk” by MSPs:

  • Book stores
  • Miscellaneous food stores (i.e. convenience stores and specialty markets)
  • Household appliance stores
  • Men’s and boy’s clothing and accessory stores
  • Variety stores
  • Cosmetic stores
  • Gift, card, novelty, and souvenir shops
  • Hobby, toy, and game shops
  • Sporting goods stores

Fraudulent merchants use multiple layers in transaction laundering to obscure the true origins of  funds and to keep the real beneficiary hidden. To do this, they create elaborate networks of interconnected hidden online entities and use them to circumvent the usual KYC onboarding procedures,  including fraud and anti-money laundering checks employed by the MSPs.

To learn more about the dangers of transaction laundering and how it could affect your organization, sign up to our blog.

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