Cybercriminals, terrorists, and drug dealers have a fairly new method of laundering funds online through what’s known as transaction laundering. Like the money laundering fronts of yesteryear, today’s criminals use ecommerce enterprises to process payments. To do this, fraudsters will set up a legitimate ecommerce site through which they can route illegal transactions or launder money.
Transaction laundering makes it increasingly difficult for merchant service providers to detect fraud, which in turn creates significant compliance risks. It’s easy to set up an ecommerce site — especially one that serves as a front for illicit transactions. Mingling legitimate transactions with fraudulent ones is easier than ever before as well, since detection becomes much more challenging.
Banks that facilitate online payments may not be able to detect these new threats, which can result in reputational risk, non-compliant activity, and legal action.
New Technology Breeds New Tactics
Criminal operations and fraudulent businesses are getting increasingly sophisticated as payment technology evolves. The move to ecommerce gives many of them additional cover, given the sheer volume of transactions happening online every day.
The proliferation of ecommerce payment platforms has created an opening for fraudulent actors. Setting up a merchant account is simple.
"It’s really easy to set up shop as a merchant, which creates a set of problems for consumers. Consumers who visit a merchant that is hosted on a reputable platform think it’s probably safe to purchase from it," says Ron Teicher, Founder of EverC.
"The merchant could be somebody trying to collect personal information and sell it. They could also use their account to sell illegal, counterfeit, or harmful products. In other cases, they could be a business that’s operated by some shady people or shady organizations without the consumer being able to know."
In the past, businesses would need to fill out paperwork and register their business before they could get a merchant account. This is no longer the case for many online merchant platforms. Criminals can set up a professional-looking site quickly and cheaply; be it for counterfeit items, illicit substances, or to launder money — all while giving the appearance of being a legitimate business.
According to Teicher, the rise of online payment facilitators that appeal to smaller merchants has led to less oversight and transparency. Banks were not willing to work directly with micro-merchants as the cost of on boarding these merchants directly did not make business sense to them. This has changed dramatically following the 2008 financial crisis and the eruption of payments facilitator companies that have turned micro merchants into a significant part of the payments landscape.
"It's much harder to understand where the transactions start and end. That creates a much more complex payment system," Teicher says. This has created a cottage industry for fraudsters known as "transaction laundering."
How Transaction Laundering Can Harm Your Business
Transaction laundering isn't just illegal, it also creates significant risk for merchant services operators. If these businesses cannot detect fraud, they can't stop it from happening. If you run a marketplace with vendors who sell illicit goods, or who create false orders in order to launder money through your merchant portal, you're taking on significant liability risk and compliance issues. All without knowing about your exposure, in many cases.
"We're not very equipped as an industry to actually understand the risks involved in online commerce. We're pretty far away from putting all the necessary controls in place. That creates a haven for criminals to do whatever they want—be it money laundering or fraud," Teicher says.
Transaction laundering presents a significant challenge for financial services providers, even if they don’t work directly with fraudulent businesses. The risk of being associated with fraud, cybercrime, and even terrorism looms large for institutions that pair up with online merchant services providers who don’t do enough to prevent crime.
"This creates conditions for bad actors and criminals to go undetected within complex systems. There are so many requests coming in that it's hard to identify fraudulent merchants amongst the legitimate ones," Teicher says.
Staying a Step Ahead of Fraud
Merchant services providers have to do everything they can to weed out fraud within their client network. Using only your own in-house tools and techniques can be expensive – and less than effective.
This is why it's critical to work with a company that understands the space. A solution with advanced technology helps detect fraudulent merchants in the system, preventing money laundering and illicit activities before they even reach your doorstep. This can help you reduce and avoid fines while maintaining your regulatory compliance.
"In order for society to enjoy these new technologies, we also have to use technology to sift through merchants trying to get into payment systems and root out fraud," Teicher says. "Big data analysis, machine learning, and AI can help companies keep pace with the speed of online payment technology, all while reducing the need for human review."