transaction laundering

As commerce and payments shifts towards mobile and online, there is a method of fraud that is gaining popularity among cybercriminals: transaction laundering. This form of money laundering made headlines in May 2015 when a former professional basketball player was arrested for running a massive online fraud scheme using credit cards belonging to people across the country.

What is Transaction Laundering?

Transaction laundering, also known as undisclosed aggregation or factoring, is a form of money laundering that takes place when payments for illicit purposes – such as counterfeit goods, street drugs, unlicensed gambling – are processed by legitimate merchants on behalf of another party.

Three of the most common sources of transaction laundering are front companies, pass-through companies, and funnel accounts. Front companies are businesses that pass the initial due diligence tests but are used to launder crime proceeds or to sell illegal products under the guise of a legitimate business. Pass-through companies have legitimate payment accounts and allow unlawful third parties to make use of the accounts to process payments related to criminal activity. Funnel accounts are run by legitimate businesses that accept credit card charges from companies without merchant processing accounts and enter these charges as legitimate transactions within the payment processing system.

Who is Affected by Transaction Laundering, and How?

The threat of transaction laundering is both very real and it continues to grow. There are a number of reasons why banks and processors should be aware of the risk of being implicated in this type of crime.

Transaction laundering is illegal
The U.S. Financial Crimes Enforcement Network (FinCEN) treats transaction laundering as any other type of money laundering, meaning that businesses found guilty can expect the same intense scrutiny and low level of tolerance from the agency. Not only is transaction laundering against the law, but it also violates the agreement between the merchant and the payment processor.

Leads to severe consequences
In July 2015, MasterCard announced that it would provide incentives to monitor and prevent transaction laundering through a new program that was launched. This action was just one of several that have taken place in recent years by credit card companies to crack down on illegal activity and to maintain the integrity and reliability of their networks. As a result, some processors have been hit with considerable financial penalties and have even been banned due to a lack of implemented measures to keep bad actors out of the payments system.

Hard to detect
Due to a large variety of ways that payments can occur and be processed, it is extremely difficult to accurately and consistently identify transaction laundering. While in the majority of cases, the merchant is complicit in the activity, on occasion, the merchant may actually be the victim. Also, front companies, pass-through accounts, and funnel accounts are tend to go under the radar, since these companies have already passed the initial screening as a legitimate business. With hundreds of companies involved in the payment process, there are thousands of different possible combinations, making the task of finding laundered transactions like searching for the proverbial needle in the haystack.

Perpetrators are persistent
No matter how effective detection systems may become, transaction launderers will not give up trying to exploit the payments process. These criminals can make use of many different type of businesses, and the most successful crooks are adept at blending in their illegal transactions among the legitimate ones. G2 Web Services, a risk intelligence solution provider for merchants, has found that over the past 11 years of monitoring merchant content, an average of 1.5 percent of a typical client’s portfolio consists of suspicious websites.

What Can Be Done

The key to addressing this threat is strong collaboration among industry members, regulators, and law enforcement. There must be a highly focused approach that is analytical, practical, and technical that has the full and visible support of company executives. By applying the right technology, using effective internal monitoring, and implementing best practices, the risks from transaction laundering can be mitigated.

What is your business doing to protect itself from transaction laundering?