Transaction Laundering – What’s the Big Deal?

On: October 22, 2016

With the rapid growth in ecommerce, new sophisticated merchant-based fraud schemes are developing at a rate that makes them increasingly difficult to detect. To fight this relentless wave of fraud, Merchant Service Providers (MSPs) such as acquiring banks, PSPs, ISOs, payment facilitators, hosting providers and online marketplaces are introducing ever stricter merchant underwriting procedures and KYC regulations.

As the regulatory environment becomes more complex and difficult to navigate, the lack of adequate risk mitigation tools forces payments industry stakeholders to turn to a strategy of mass “de-risking”. This means that entire industries are shut out from access to payment networks. In an effort to mitigate risk of fraud, MSPs are avoiding involvement in high-risk industries altogether, turning away legitimate businesses and losing revenue.

Payment system proliferation, combined with the explosion in the number of merchants, has led to unimaginable data overload and inability on the part of MSPs to determine the true origin of transactions passing through their networks. Despite all efforts, fraudulent merchants continuously find new ways to circumvent risk mitigation measures by employing sophisticated fraud models. A key example is transaction laundering.

What is transaction laundering?

Transaction laundering is the new face of merchant-based fraud and is a growing problem for the payments industry. MasterCard defines transaction laundering as, “the action whereby a merchant processes payment card transactions on behalf of another merchant.”

By funneling payments through storefront websites, transaction launderers are able to link extended networks of unreported, hidden and often illegal ecommerce websites to MSPs’ payment networks whilst staying undetected.

Due to the lagging development of adequate risk and fraud management tools, lax onboarding procedures, difficulty of collecting accurate data about the customer and the global scope of operations, new payment channels, such as mobile payments, are especially vulnerable to transaction laundering and other types of merchant-based fraud.

This video by EverCompliant shows an example of how simple it is for transaction laundering to occur.

The technological advances in ecommerce have made it easy to establish undisclosed online businesses and hide them behind legitimate storefront websites, implicating payment processors in illegal, illicit or otherwise unwanted activities.

Those developments, combined with the lack of adequate detection tools create an environment whereby undisclosed entities can easily hijack the legitimate payment processes and infiltrate MSPs payment networks.

While many MSPs are unaware that transaction laundering is an epidemic that plagues the payment processing industry, EverCompliant has discovered that on average, the size of the unknown merchant portfolio is 6% to 10% of the known client base. In other words, for every 10,000 known merchants there are 600 to 1,000 unknown merchants transacting through the MSPs’ payment networks without their consent or knowledge.

Transaction Laundering as a form of Money Laundering

Transaction laundering is often used as an intricate form of money laundering. A merchant sells illegal goods through an online storefront that appears to sell legal wares. This way illegally obtained funds are disguised to appear to have been derived from legal activities, the very definition on money laundering.

Transaction laundering can also easily be used as a tool for layering funds. In this scenario the same beneficiary acts as both customer and merchant, without a real commercial transaction actually taking place.

As a result of transaction laundering, funds obtained by illegal means are “washed” the moment they are deposited into the storefront merchant account. Because such merchant activity is extremely challenging to detect, it makes compliance with current AML and anti-terrorism financing regulations even more difficult than many MSPs imagine.

The implications for Merchant Service Providers

Transaction laundering often masks activities explicitly prohibited by international law and card associations, such as drugs and weapons trade, illicit pornography, counterfeit goods sales, illegal pharmaceuticals, terrorism financing and money laundering. Facilitating such activities, even unknowingly, exposes MSPs to a great deal of liability and risks. These include fines and penalties from card associations, legal and regulatory action and severe reputational and brand damage.

Fines and Penalties
Although transaction laundering is notoriously difficult to detect, payment processors face legal action and hefty regulatory fines, unless they can credibly demonstrate that all the necessary steps were taken to detect and prevent such activity.

Inaccurate Risk Assessments
Transaction laundering renders risk mitigation measures ineffective, as it makes it virtually impossible to accurately assess the risks associated with a merchant portfolio. High risk merchants can easily misrepresent themselves as low-risk businesses in order to pay less fees, not only making risk assessments and strategies inaccurate, but also causing MSPs to lose extra revenue associated with high-risk merchant processing.

Facilitating Criminal Activities
In addition transaction laundering facilitates criminal activity ranging from human trafficking and sexual abuse to arms and drugs trading. Such crimes have adverse effect on the society as a whole.

How do you prevent transaction laundering?

Due to its very nature, transaction laundering is almost impossible to detect without a dedicated solution. The amount of data that needs to be constantly gathered and analyzed in order to uncover hidden merchants is so vast, that manual methods are no longer sufficient, requiring a specialized cyber intelligence 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.

From signup through to onboarding and ongoing monitoring, MerchantView is always there to detect illicit transactions and alert of any changes in the merchant portfolio.

Sign up for a free trial and find out how MerchantView can safeguard your payment systems against transaction laundering.

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    • Nick Carter
    • January 24, 2017
    • Reply

    This was a good read, as are your other blog posts. Thanks for the sharing of valuable information!

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