This article was contributed by Maya Shabi, a Payments and Risk Specialist with EverC.
For many, the term money laundering conjures up images of popular TV shows like The Sopranos and Ozark. You may point to brick-and-mortar businesses like car washes, restaurants, and taxi services as common choices for front companies. But what does money laundering look like in our digital era when business is increasingly done online?
As of 2023, ecommerce sites now control more than 60 percent of the American retail market – meaning online sales account for most transactions. The post-pandemic boom in ecommerce and the switch to digital purchasing habits has created the chance for any business to set up an online shop, whether it be legitimate or illegal.
As a result, the “car washes” of money laundering have moved online to conduct crimes, otherwise known as transaction laundering when done electronically. It has never been easier to create a fictitious business. What once required the acquisition of a storefront and inventory of physical products now only requires a website. Unfortunately, this has left the door wide open for criminals to register merchant accounts and create front businesses for illicit activity.
Here’s what marketplaces need to know about transaction laundering and how to prevent criminals from using their services to perpetuate this crime.
How does transaction laundering work?
Transaction laundering occurs when an approved merchant processes payment card transactions on behalf of another entity, unknown to the merchant acquirer or payment provider. This can include:
- Front companies: Functional companies intended to disguise and obscure illicit financial activity
- Pass-through companies: Legitimate companies that sell real goods or services but are either forced to or agree to process transactions through their merchant accounts
- Funnel accounts: Legitimate businesses that unknowingly enter illicit transactions into the credit card network payment system
Common types of online front companies include clothing websites, VPN providers, cloud hosting, consulting, and web hosting. Here is an example of how it works:
A criminal registers their merchant account as a website for selling flowers. The account is approved by an acquiring bank and issued a Merchant ID. The operator of that flower shop website, however, would also like to sell illegal narcotics online. Given the illegal nature of this activity, banks would obviously reject a merchant seeking to sell illegal drugs and would not approve those transactions through their institutions. The operator of the flower shop site routes transactions from selling illegal narcotics through his legitimate, registered merchant ID to hide the source of proceeds. These transactions will flow through a Payment Service Provider (PSP), and then on to the acquiring bank. From the acquiring bank’s perspective, every transaction appears as though it is a sale for the flower shop.
Digital front companies are a major blind spot for the traditional banking sector, as transaction laundering falls outside the scope of more established monitoring protocols. Moreover, the speed and sophistication of transaction laundering rings is an expensive and time-consuming problem for payments companies. The risk and underwriting departments of payments ecosystem participants are not able to pivot quickly enough to provide air coverage.
Combined with the addition of new payments avenues, such as marketplaces, payment facilitators, and super apps to the financial system, transaction laundering becomes increasingly difficult to disrupt.
Four common transaction laundering types
Transaction launderers have discovered creative ways to procure illicit funds and reintroduce them into the financial system. Here are a few of the most common types that marketplaces should look for:
Mail or Telephone Order (MOTO): Operators of the website will seek to process payments for the desired product or service offline. This can occur by phone, link, or other method not directly connected to the front site. Transaction launderers can gain access to sensitive credit card information and process transactions through their desired venue to hide the destination of funds.
Payment page redirect: Once a customer attempts to purchase a product or service, they are redirected away from the front website to an alternate URL to complete payment. This can also include intermediate sites in between the front website to the payment processing page. This method allows the transaction launderer to conceal the source of funds originating from the front site such that a bank or third-party payment provider (TPPP) believes that it is processing a payment for a different business. VPNs can also be used by transaction launderers to facilitate this method.
Affiliated businesses: A front will process transactions through a website which also deals within the same or a similar industry space. The affiliate knowingly or unknowingly uses their credentials as a merchant to process online payments for the transaction launderer, earning them a percentage of the sale. Transaction launderers can process payments by misleading customers or the affiliated website to conceal the true source of funds. This also makes affiliated websites complicit in money laundering activity.
Multiple processor laundering: Front site operators will use various credit card checkout options listed under different merchant names. Transaction launderers complicate the process of identifying the true destination of funds by creating multiple avenues for which to receive payment. The bad actor maintains accounts at more than one financial institution to allay suspicion of illicit activity.
Staying one step ahead of transaction laundering
With an increased potential for illegal activity, more marketplaces are expanding their transaction laundering detection capabilities in line with technology used by major card brands. This includes a thorough assessment of merchants on their platforms, including sign-up, underwriting, onboarding, and continuous monitoring. In some cases, marketplaces are using automated solutions and machine learning to assess and remove fraudulent merchants at a faster pace than ever.
Transaction laundering is an advanced merchant-based fraud scheme taking advantage of online payment ecosystems, putting the global financial network at risk at an increased scale. And as more of the retail environment moves online, marketplaces should prioritize efforts to identify and eliminate transaction laundering to protect their reputations and their customers from criminal activity.
