Transaction Laundering is the New, Advanced Form of Money Laundering

On: May 23, 2018

Electronic Money Laundering, known as Transaction Laundering, is the digital evolution of money laundering and has become one of the biggest challenges facing the Anti-Money Laundering (AML) regime today. Transaction Laundering occurs when an undisclosed business uses an approved merchant’s payment credentials to process payments for another undisclosed store selling unknown products and services.

This advanced, merchant-based fraud scheme takes advantage of legitimate payment ecosystems by funneling unknown e-commerce transactions through legitimate merchant accounts. Valid websites act as payment processing storefronts for criminal enterprises selling firearms, illicit drugs, child pornography and other illegal goods.

Merchant Service Providers (MSPs) can unknowingly facilitate money laundering or end up processing payments and expose themselves to financial and legal liability, penalties from the credit card companies and severe reputational damage.

Evolution through E-Commerce

The evolution of e-commerce and mobile payments have essentially enabled money laundering to reach unprecedented level. At the end of 2016, EverCompliant reported that $352 billion had been laundered globally through e-commerce and, of that total, nearly $11 billion involved the sale of illegal goods online.  The ease of onboarding an online merchant and setting up a payment environment for business contributes to an alarming increase of Transaction Laundering.

Criminals no longer need to go through the complicated process of setting up a real storefront business. Through the anonymity of Transaction Laundering, criminals can digitally perform the three steps of money laundering (placement, layering, integration) without leaving a trace. This allows the criminals to achieve their goals faster, easier and on a larger scale than the traditional money laundering methods.  

By creating vast networks of interconnected online entities, criminals can easily separate the true source of funds from the transaction, and thus are able to circumvent anti-money laundering checks and measures without setting off regulatory alarms. This makes the trailing of illegal proceeds extremely difficult for the law enforcement agencies and regulatory bodies.

Add to that the boundless, global aspect of e-commerce paired with minimal Know Your Customer (KYC) requirements for onboarding online merchants, and you get the perfect platform for performing unauthorized financial activities.

How Transaction Laundering Works

In the traditional, online merchant brand-and-content violation scenario, risky or illegal sales activity is typically hidden directly within the website that registered with the MSP.

Transaction Launderers essentially tap into the payment ecosystem by using a storefront merchant account to process transactions originating elsewhere. This way, the fraudulent merchants can funnel unauthorized transactions through legitimate payment networks while avoiding detection, not only by regulators but even by the payment processors themselves. Considering the number of players involved in the online payment process, there are countless combinations for deception.

It’s easy enough for fraudsters to be able to get started in just minutes, endangering the e-commerce platforms that they do business on, the hosting companies that their sites are listed with, and the credit card companies that process their payments. All these could be held liable by law enforcement for aiding and abetting – and if the details of how they were taken advantage of come out, their reputations could take a damaging hit.

Acknowledging the Scope of AML Risks

The advent of online money laundering puts MSP organizations in a precarious position. On one hand, traditional monitoring methods cannot keep up with the technology used by deceptive merchants.  On the other hand, the card brands and government agencies are implementing a zero-tolerance policy, holding the MSPs accountable.

In February, the U.S. Treasury’s Financial Crimes Enforcement Network (FinCEN) slapped a $7 million fine on Merchants Bank of California, a medium-sized bank, for Bank Secrecy Act violations potentially related to Transaction Laundering. The bank was fined an additional $1 million by the Office of the Comptroller of the Currency (OCC), another arm of the U.S. Department of the Treasury.

These two penalties became a highly-visible and important lesson in the dangers of Transaction Laundering to acquirers. The fines were charged because the bank failed “to establish and implement an adequate anti-money laundering program”, while allowing “billions of dollars to flow through the U.S. financial system without effective monitoring.

Although FinCEN, other regulators and card brands have recently enacted stricter policies, standard AML rules and regulations have not adequately aligned to the growth of the payments ecosystem. Current enforcement methods are tailored to other lines of business and financial services – such as banking, capital markets, and insurance – and other products, such as cash deposits, wire transfers and securities trading.  

E-commerce payments are quickly gaining popularity, and this growth creates ample opportunities for cyber criminals to abuse the legitimate payments ecosystem. The realities and risks of these online schemes continue to be the blind spot of the AML regime. Transaction Laundering has now been recognized as a massive problem throughout the payments ecosystem, and regulators are taking notice and taking action.  

Detecting and Preventing Transaction Laundering

The past few years have exposed vulnerabilities in the payments ecosystem, and as a result, a regulatory eye has begun to keep watch over illicit and illegal transaction activity and pay attention to who is ultimately responsible.

As Transaction Laundering issues escalate, MSPs will need to take next steps in developing and executing comprehensive AML plans to properly protect themselves from fees, fines and brand damage. This includes taking a proactive stance against cyber criminals by equipping AML departments with the necessary detection and prevention tools.   

Digital problems require digital solutions. By adding advanced, technological solutions to physical vetting procedures, Transaction Laundering risk, exposure and liability can be mitigated drastically and ultimately prevented.

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