Transaction laundering – it’s easier than you think.

On: November 08, 2016

According to the U.S Census Bureau, the number of ecommerce transactions grew 3.7% between Q4 2015 and Q1 2016: an increase worth approximately $9.8 billion. With the rapid growth in ecommerce activity comes an increased risk of merchant-based fraud such as transaction laundering.

What is transaction laundering

Transaction laundering is an emerging merchant-based fraud scheme that affects Merchant Service Providers (MSPs) such as acquiring banks, PSPs, ISOs, payment facilitators, hosting providers, and online marketplaces.

Transaction laundering is defined by MasterCard as “the action whereby a merchant processes payment card transactions on behalf of another merchant.” Funneling undisclosed transactions through a registered merchant account provides a gateway for unknown and hidden entities into the legitimate payments ecosystem, creating serious regulatory and compliance issues for the entire payments industry.

Transaction laundering often masks proceeds stemming from illegal activities such as drugs and weapons trade, illicit pornography, counterfeit goods sales and money laundering. Since transactions are processed through a registered merchant account, MSPs end up unknowingly facilitating this illicit, illegal and brand damaging activity.

Transaction launderers manage to plug entire networks of unknown and often illegal ecommerce websites into global payment systems without being detected by MSPs’ risk and fraud mitigation procedures. You can learn more about transaction laundering from our previous blog post on the subject.

Prevalence of transaction laundering

The extent of the problem is staggering. EverCompliant discovered that on average, the size of the unknown merchant portfolio is 6% to 10% of the known client base. That means that for every 10,000 merchants registered with an MSP, some 600 to 1000 hidden entities are transacting through MSPs payment networks without their consent or knowledge.

Lack of knowledge about the true origin of transactions funneled through their payments systems exposes MSPs to the risks of legal action, regulatory fines, financial penalties from the card brands, and severe reputation and brand damage.

Transaction laundering is notoriously difficult to detect without a dedicated solution and most MSPs are not aware that they should be addressing this serious issue. Lack of awareness about the prevalence of transaction laundering within the industry calls for rethinking of risk and fraud management models as they are defined today.

Do you know who who is hiding within your merchant portfolio?

Transaction laundering is much easier to execute than many MSPs may imagine. In the following example, a drug dealer uses a flower shop as his gateway into the legitimate payment system.

The drug dealer’s transactions are funneled through the merchant account associated with the online flower shop. The flower shop has passed all the necessary due-diligence and KYC procedures required by the MSPs and is seen as a legitimate, low-risk merchant account for all intents and purposes. Because association with illegal activities of the drug-dealer is completely hidden from view, MSPs keep approving and processing transactions passing through this particular merchant account, completely unaware that illegal activities are entering their merchant portfolios. MSPs end up facilitating illegal activities, unknowingly exposing themselves to a great deal of liability and risk.

Why is it so easy?

Thanks to recent technological advances it is now extremely easy to set up an ecommerce website. Just by finding the best prestashop hosting provider, you are well on your way to building an ecommerce website of your own. The ease with which an innocent-looking online store can be set up has led to proliferation of fraudulent ecommerce merchants to unprecedented levels.

In conjunction with rapid growth in ecommerce, availability of new payments systems and methods is causing an unimaginable data overload, making it extremely difficult for MSPs to determine where the money is coming from and where it is going.

As the environment in which MSPs have to operate is evolving to become an extremely complex and multilayered ecosystem, fraud detection and risk mitigation tools that were previously sufficient are rendered ineffective. Most fraud-detection tools currently available are manual and rely solely on content monitoring on known websites, neglecting the issue of hidden ecommerce merchants entirely.

The combination of rapid developments in ecommerce, payment system proliferation and lack of adequate detection tools has led to an environment where transaction laundering is ubiquitous and runs rampant within most payment systems.

What are the penalties for transaction laundering?

MSPs that facilitate transaction laundering, even without their consent or knowledge, expose themselves to the risk of regulatory fines, legal action, penalties from the card brands, as well as severe reputational and brand damage. However, MSPs can avoid these serious consequences if they can prove that all the necessary steps were taken in order to detect and prevent such activity.

Preventing transaction laundering

Transaction laundering is prevalent within merchant services industry and at the same time is notoriously difficult to detect without a dedicated tool. That is precisely why we developed MerchantView, the only solution designed from the ground up to specifically address this issue.

MerchantView, uses proprietary cyber intelligence technology to continuously monitor all aspects of merchant networks to identify, detect and prevent undisclosed activity from entering the payment ecosystem. It takes an active role in preventing and detecting transaction laundering offences within a merchant portfolio.

Sign up for a free trial of MerchantView today.

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    • Aubrey Baugh
    • April 08, 2017
    • Reply

    This info is invaluable. How can I find out more?

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