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the secrets of online money laundering

The New Face of Merchant-Based Fraud

Each year less than 1% of dirty money is seized by authorities, according to the United Nations Office on Drugs and Crime. The total amount of this fraudulent fortune is huge: it is estimated to reach up to $1 to $2 trillion US dollars annually, which is equal to 2% to 5% of global GDP.

Criminals use numerous techniques to launder money in the offline world: offshore accounts, anonymous shell accounts, and money mules, to name but a few. But, the evolution of payment systems and innovations in e-commerce are broadening the possibilities in money laundering. Fast and global online businesses are equally desirable to legal merchants, shoppers, and criminals.

Today, the unregulated financial services, propelled by the advancements in technology, are gaining popularity among criminals who have begun to use electronic money, mobile money, online casinos and underground online networks of money dealers to shift dirty money with as little trace as possible. All this is giving rise to a new way of money laundry named transaction laundering

Ron Teicher, founder & CEO of EverCompliant, a leading provider of cyber risk intelligence and transaction laundering detection and prevention, explains what transaction laundering is. 

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"Transaction laundering is the new face of merchant-based fraud and 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 e-commerce websites to merchant service providers' payment networks whilst staying undetected."

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Money-Laundering Of the Digital Age

According to Mr. Teicher, transaction laundering often masks illegal activities such as drugs and weapons trade, illicit pornography, counterfeit goods sales, illegal pharmaceuticals, terrorism financing and money laundering. "For as long as transaction laundering goes unchecked, these unlawful activities will continue to prosper and grow, much to the detriment of our wider society."

The technological advances in e-commerce 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.

"Put simply", ads Mr. Teicher, "transaction laundering is the money-laundering of the digital age: criminals processing illegal transactions and making them appear as legal ones. This type of activity – concealing the origins of funds by having the same beneficiary act as both the customer and the merchant and engaging in layering activities without a real commercial transaction – is the exact definition of AML/CTF violation and poses a massive threat to the payment industry."

Most Commonly Used Techniques

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",  continues Mr. Teicher.

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"The means to connect the unknown website to the storefront, i.e. the legitimate website, can vary between automatic and various technological methods, such as credential swapping or the usage of iframes. It can also be done through a manual process. Typically, the network will manage thousands of bad merchants connected to a few dozen storefronts, registered with a number of processors, and will load balance between them. The combination of the volumes, the manual swapping, and the load balancing makes it very complicated to detect."

What do clients have to have in mind so that they don't fall victims of online money laundering?

Given the relatively new phenomenon, Merchant Service Providers (MSPs), such as acquiring banks, PSPs, ISOs, payment facilitators, hosting providers, and online marketplaces are required to ensure that merchants and their activities are both known and legitimate. Despite ongoing efforts to manage merchant risk, undisclosed online entities can easily infiltrate payment systems through transaction laundering. 

This exposes MSPs to risks that range from fines and penalties to legal action and severe reputational and brand damage. To avoid the risk and liability associated with facilitating transaction laundering, payment processors need to consider adopting advanced cyber intelligence technology that uncovers hidden ecommerce networks, merchants and their associated activity. 

Criminals are always looking for new ways to take advantage of payment system for their own gain. The agility and adaptability of criminal networks requires an ongoing monitoring of the entire merchant ecosystem, not only of the website the MSP knows about. That is why, to avoid the liability associated with facilitating illegal activities, Merchant Service Providers need to employ a dedicated transaction laundering detection and prevention solution. 

Ron Teicher