Transaction Laundering: Top News Stories 2017

On: August 06, 2017

Merchant Service Providers (MSPs) are required by law to ensure that the merchants they service and the payments they process are both known and legitimate. However, the rapid expansion in both volume of ecommerce transactions combined with the wide variety of payment methods available, have created a situation where Merchant Service Providers often fail to identify Transaction Laundering, a sophisticated merchant-based fraud scheme whereby an unknown entity transacts through a legitimate merchant account.

Through Transaction Laundering criminals infiltrate legitimate payment ecosystems without being detected by the MSPs. This is a growing phenomenon and is likely an outcome of the combination of factors: the explosion in ecommerce payments, the growing ease of setting up an online storefront and the need to make merchant onboarding as frictionless as possible. In essence, Transaction Laundering, is the money laundering in the digital realm.  

As of yet, many MSPs, as well as financial regulators have not grasped just how big the Transaction Laundering problem really is. From drug cartels, terrorist organizations, pharmaceutical fraudsters and porn kingpins using legitimate websites to mask their illegal activities, the undercurrent of Transaction Laundering is starting to come to light.This article offers a brief overview of some of the high profile Transaction Laundering cases that have hit the media in recent years.

Jesse Willms, the Dark Lord of the Internet

The Atlantic article tells us a story of Jesse Willims, one of the most notorious hustlers in the history of e-commerce who made a fortune on the Web through  affiliate-pushed “negative option” scams—in which customers sign up for “free” trials and then find themselves trapped in expensive continuity plans.

Between 2007 and 2011, according to the Atlantic, Willms defrauded consumers of some $467 million by enticing them to sign up for “risk free” product trials and then billing their cards recurring fees.

Willims scam, as the FTC’s investigation suggested, was less a product-delivery business, and rather a highly sophisticated mechanism for gathering credit-card numbers. Because of the high number of refunded charges his sales were generating, Willms was in danger of losing his ability to conduct credit-card transactions. As a solution, he turned to Transaction Laundering and recruited five people (one was a dog groomer) to “run” shell companies for him to process transactions in order mislead credit processors.

The sophisticated network of shell companies allowed him to commit Transaction Laundering at a massive scale, processing hundreds of millions of transactions.

For a detailed account of the most egregious scammers in the history of the Internet, click here.

When Terrorism Finances Terror:  Paris Attacks    

The deadly Charlie Hebdo and Hyper Cacher terror attacks in Paris in 2015, were perpetrated by three individuals who had amassed an arsenal of weapons worth €25,000. These included rifles, rocket launchers, grenades, and tear gas canisters.

How did these terrorists pay for their weapons? The answer is: with Transaction Laundering.The attackers purchased €8,000 of counterfeit items, mostly consisting of Nike shoes that were sold in France online. The terrorists were involved in selling drugs online before they sold counterfeit goods.

In an FATF report on “Emerging Terrorist Financing Risk” they state that “electronic, on-line and new payment methods pose an emerging terrorism financing vulnerability”.  For more details, read the full report here.

After 9/11 a lot of stress has been put into investigating how the attack was funded and designing regulations to counter terrorism funding activities. New legislation, known as the Patriot Act, fundamentally changed the global AML landscape.

It drove regulations on a global scale and resulted in tens of billions of dollars in fines and settlements, as well as many other enforcement acts, putting the global financial institutions under intense scrutiny. Would the same path be followed with the payment industry? Would regulators recognize this vulnerability in the global AML regime?

Transaction Laundering Infecting Online Pharmacies

Transaction laundering schemes often involve multiple layers and utilize complex shell company setups and hidden networks of online entities.

One such case involves an online pharmacy, MOMS, operating out of New York. The pharmacy allegedly provided support and pharmaceuticals to AIDS patients. However, unfortunately for the patients, the medication they received was either fake or had expired.

The criminals used MOMS since it was a legitimate company and an ideal inconspicuous business through which to process payments for the illegal commerce that occurred through the shell companies.The MOMS customers were unaware that the setup was being used to launder money and illegally distributing black-market HIV medication.

In a recent ruling,The perpetrators in the pharma-fraud MOMS pharmacy saga were found guilty of several charges, including first and second degree counts of money laundering. WhileMOMS pharmacy ruling is a welcome step in Transaction Laundering prevention efforts, the distinction between Transaction Laundering and money laundering needs to be made explicit. Regulations need to be updated to give to regulators the power to persecute Transaction Laundering for what it really is,  if we are to stifle this flow of unauthorised transactions into legitimate payments ecosystem.

Small British Town Steelworks Factory Replaced by Online Porn and Poker

A sleepy British town in the North East of England was the subject of a major Transaction Laundering exercise that went on undetected for ten years and engulfed much of the small town. Many residents of Consett, once famously known for its local steelworks, became instead an unwitting players in Transaction Laundering schemes.  

Local residents, looking for work, were co-opted into becoming directors of shell companies.These shell companies acted as credit card processing fronts for undisclosed companies unable to meet the criteria to take credit card payments. The Consett “directors” jobs consisted mainly of forwarding the incoming mail to the main co-ordinating organization. Ultimately, the money obtained using this Transaction Laundering method was used to funnel transactions originating in illicit activities such as gambling and porn.

Drug Cartels Use Credit Cards to Launder Money Online

Organized crime groups are getting creative with credit cards to move illicit proceeds across international borders without setting off regulatory alarms attuned to cash deposits, money wires or automated transfers.

To move value across borders criminals turn to Transaction Laundering, which can also be called “merchant-based money laundering.” In this sophisticated merchant-based scheme, money obtained from the sale of illegal drugs  were processed through credit cards associated with legitimate businesses, ranging from jewelry and pawn shops to day care centers.

Cross border  money transfers pose a serious difficulty for criminals due to high level of scrutiny and control by the authorities.  However, transferring the money through online retail and multiple payments for everyday goods is a clever way to avoid the hassle.

The scheme involved using drug money to acquire prepaid credit cards and use them to “purchase” on websites owned by the cartels in Mexico which were than paid by their acquirers. Criminals also used business credit cards to pay for “shadow shipments” from Mexico, that existed only as a legal fiction and have never made their way into the United States.

For more information, read the full article here.

Transaction Laundering- the growing threat for Merchant Service Providers

As you can see from the above examples, Transaction Laundering comes in different shapes and sizes, and is used to facilitate a wide range of illegal, illicit or otherwise unwanted activities, including “negative-option” scams, illegal drugs, and terrorism. For more information about how Transaction Laundering affects Merchant Service Providers and what can be done to counter that threat, sign up to our blog.


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