Transaction Laundering is the New, Advanced form of Money Laundering

On: January 23, 2017

Transaction laundering is the new sophisticated form of money laundering and terrorism financing  and is one of the biggest challenges facing the AML regime today.

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

This creates a situation where Merchant Service Providers (MSPs) unknowingly facilitate money laundering or end up processing payments stemming from, or intended for, financing illegal activities, thus exposing themselves to financial and legal liability, penalties from the credit card companies and severe reputational damage.


Transaction Laundering: the basics

Transaction launderers essentially tap into the payment ecosystem by using a storefront merchant account to process transactions originating elsewhere. This way, the fraudulent merchants are able to funnel unauthorized transactions through legitimate payment networks while avoiding detection, not only by regulators but even by the payment processors themselves.

Due to its ability to conceal the true origin of the transaction, transaction laundering is often used to process payments resulting from criminal activities. Transaction laundering opens the door into legitimate payment systems for money launderers of all sorts: criminals, tax evaders, merchants involved in shady business practices and financing acts of terror.

Left unchecked, transaction laundering can have truly dire consequences. It has come to light that Cherif Kouachi, one of the two terrorists who attacked the Charlie Hebdo office in Paris on January 7, 2015, had financed the attack with proceeds from counterfeit goods that he sold online.

This example shows how easily dangerous and violent criminals can set up websites through which they sell illegal goods or services (i.e. counterfeit clothes, weapons, drugs) and then process payments from these sites by routing them to legitimate, registered online stores selling innocent-looking goods. Moreover, these proceeds can later be used to finance even more atrocious crimes, such as terrorism or supporting human trafficking rings.

To add another layer of complexity to this already sophisticated scheme, in some cases, transaction takes place without any actual exchange of goods whatsoever. In this case, the criminal is not selling anything (either legal or illegal), but is rather faking the ecommerce sale in order to launder money obtained elsewhere; in other words, transaction laundering as the means for cross-border money transfers and layering activities.

Money Laundering 2.0

The evolution of ecommerce and mobile payments have essentially enabled money laundering on a never-seen before scale.  The ease of establishing an ecommerce merchant and setting up a payment environment for such a business, contributes to rapid proliferation of transaction laundering. Add to that the the borderless, global aspect of ecommerce, and the minimal KYC requirements for establishing online merchants, and you get the perfect platform for performing unauthorised  financial activities.

Compared to traditional money laundering schemes, transaction laundering is making the concealment of true origins of funds especially easy and scalable. Criminals no longer have to go through a complicated process of setting up a real storefront business. With transaction laundering criminals can tackle the three steps of money laundering (placement, layering, integration) digitally. This allows the criminals to  achieve their goals faster,  easier and on a larger scale than the traditional money laundering methods allow.

Making illegally-gained proceeds appear legal through the use of a storefront is money laundering by definition. Transaction laundering works based on  the same principle.  By processing illegal transactions through a storefront merchant account, criminals kill two birds with one stone–they remove the money from its source, while at the same time place the previously laundered money back into circulation, making such monies appear to be normal business earnings.

Creating multiple layers of complexity, as a way to obscure the real origin of funds and to hide the identity of the real beneficiary of a certain transfer is the main goal of transaction laundering. 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.

Transaction laundering and organized crime

Traditional money laundering is a labor-intensive and time consuming process and organized crime is constantly on the lookout for new methods and channels for money laundering.

As the case of El-Chapo cartel demonstrates, criminal syndicates are attuned to payments trends and quickly adopt their strategies to exploit blind spots in the AML regime.

The so-called “black market peso exchange”, the scheme used by the cartel to launder millions of dollars,  required a number of complicated steps and a vast network of co-conspirators necessary to successfully launder the drug proceeds.

That is why drug cartels started to increasingly turn to transaction laundering as the less complicated and a cost effective method of international money laundering. Cartels turned their attention to B2B payments and started using company credit cards to move illicit proceeds across international borders.

In the case of Mexican drug cartels, transaction laundering often occurs when a US based cash-intensive business makes a high value purchase of goods from a Mexican merchant. However, no actual goods are actually changing hands here -the sole purpose of the transaction is to transfer funds cross-border and launder the drug money.

Ecommerce Payments- the Blind Spot in the AML regime

Although FinCEN and other regulators constantly enact ever stricter policies, AML rules and regulations did not adequately adapt to the growing magnitude of ecommerce and the associated growth of the payments ecosystem. Current regulations and enforcement mechanisms are attuned to other lines of business and financial services, such as banking, capital markets, and insurance;  and products , such as cash deposits, wire transfers and securities trading.  

Ecommerce payments using credit cards, among other means, are rapidly growing, and this growth creates an ample opportunity for criminal enterprises to abuse the legitimate payments ecosystem. As things currently stand, payments in general, and card-not-present credit card payments specifically, continue to be the blind spot of the AML regime.

Who is held accountable for Transaction Laundering?

The “Final Rule” of FinCEN requires Merchant Service Providers to verify identities of legal entity customers, or the Ultimate Beneficiary Owner (UBO), yet,  most traditional KYC programs still focus almost entirely on physical, rather than digital aspects of an entity, are not capable to address this issue properly when it comes to ecommerce payments. It’s imperative for MSPs and online marketplaces to be aware of the massive blind spot in their anti-money laundering and fraud mitigation methods, as it leaves them exposed to enormous regulatory and business risks.

The rapidly growing volume of online payment processing means that MSPs cannot secure their systems without a dedicated software solution.  MerchantView was created for just this purpose: it is specially designed to detect and prevent transaction and money laundering activities, from entering your merchant ecommerce payment system.

For a free trial, click here.


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    • Biplab Ghosh
    • February 12, 2017
    • Reply

    Thanks for this article. It is very essential for all bankers to know about the transaction M/L. This help them for gathering knowledge how to protect their instruction. Good luck.
    Biplab Ghosh.
    DGM (Rtd) & DCAMCO.

      • Ron Teicher
      • February 14, 2017
      • Reply

      Hi Biplab, thank you for your feedback. It is our mission to eradicate transaction laundering from legitimate payments ecosystem, and raising awareness to this problem among MSPs such as acquiring banks, payment processors and regulators is an essential first step.

    • Nishant Mishra
    • February 15, 2017
    • Reply

    Its been a great knowledge source given the worlds payment ecosystem going online with all sorts of transactions now adays.

    • Nishant Mishra
    • February 15, 2017
    • Reply

    Its been a great knowledge source given the worlds payment ecosystem going online with all sorts of transactions now adays.
    Nishant Mishra
    Compliance Head
    Zenith Leisure Holidays Ltd(India)

    • Kathleen Easton
    • February 18, 2017
    • Reply

    Excellent article. The use of gift cards in transaction-based money laundering has been explosive and the layering techniques are increasingly elaborate. Yet another complication is the lack of regulation for NMSBs such as gift card wholesalers. Since they make pennies on the dollar for each gift card purchase willful blindness is yet another danger..

    • Saurabh
    • February 28, 2017
    • Reply

    Excellent observation, and presentation?

    • Dr. James Welch
    • April 10, 2017
    • Reply

    Superb observations which reflect the ingenuity of the criminal counter measures. We must always remain one step ahead, ever vigilant and ware of such responsive tactics.

    • Katerina Oikonomou
    • June 19, 2017
    • Reply

    Thanks for putting it out there!

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