Transaction laundering is increasingly becoming a threat within the payments industry. According to EverCompliant, a solutions provider, in 2016 $155 billion was created from online sales through transaction laundering in the U.S. alone. It was also found that banks were processing close to six to ten percent of “unauthorized” e-commerce sites. Out of that, three percent were discovered to be involved in unlawful activities.
G2, another solutions provider, found that a client’s portfolio contained an average of 1.5 percent of illegal or “unknown” websites.
What Is Transaction Laundering?
Transaction laundering is an illegal activity that occurs when business entities process their payments, without the merchant acquirer’s knowledge, to fund criminal operations. Criminals use the “facilities” of the merchant for their unlawful activity which clearly violates the agreement between the merchant and the acquirer.
The typical course of action taken is that criminals use legitimate websites as a “front” to carry out illegal activities such as pornography, illegal pharmeceuticals, sale of counterfeit products, trading of weapons and drugs, unlicensed gambling, financing terrorism, and money laundering.
This creates a precarious situation where Merchant Service Providers, (which includes banks, payment processors, and acquirers), involuntarily become accomplices to assisting in money laundering and other illegal activities. Not only can this potentially damage their reputation, but it also makes them a target for an exorbitant amount of chargebacks, regulatory penalizations, and legal actions.
Transaction laundering can also be described as “unauthorized aggregation”, or “undisclosed aggregation”. The reason for this has to do with the method by which illegal payments from several unknown sites are “aggregated to be processed” via one single merchant account.
Unfortunately, the final punishment falls upon the acquiring bank of the merchant taking part in transaction laundering, whether they were aware of such activity or not. All regulations demand that the merchant service provider verify the identity of all their customers as well as determine the Ultimate Beneficial Owner (UBO) of that particular business.
How Can Payment Providers And Acquiring Banks Protect Themselves?
As prevalent as transaction laundering has become, you don’t have to be a victim. There are strategies that can be implemented to stop transaction laundering criminals in their tracks. Take a look at a few below.
- Take extra steps during the underwriting process: It is always best to take preventative measures to identify potential criminals. Take a look at their website and investigate backlinks to the site. Look for websites that are utilizing the same server. Perform “click origination investigations” and behavioral monitoring throughout the merchant’s portfolio.
- Train: Everyone in every department needs to be thoroughly trained to be able to identify any malicious activity. Make sure your sales, chargeback, and processing departments are thoroughly educated and prepared.
- Get Data: Carry out site visits, analyze merchant balance sheets as well as their profit and loss. Go out and seek testimonials as well as conduct surveys. Merchant acquirers can also perform analytics to determine the type of merchants they have as well as figure out the “average credit card processing volumes” for every month.
Transaction laundering damages both merchant acquirers and society as a whole. It is critical that merchant acquirers become more proactive in reporting any suspicious activity as well as implementing sophisticated systems to monitor criminal activity. This will not only protect their brand reputation, but also avoid hefty fees.