Imagine you have established a merchant account provider business which was growing on a good pace. Everything was going smooth but then you came to know that some fraud company used your service for illegal activities. All the reputation and goodwill you built is at the risk. But kudos it’s just an imagination! The thought itself is very disturbing but many merchant account providers actually face it and these frauds are growing every year.
Let us know about transaction laundering in detail.
WHAT IS TRANSACTION LAUNDERING?
The online money laundering is known as transaction laundering. Now, what is money laundering? Money laundering is an illegal activity where big profit is made by a criminal activity like drug trafficking, pornography, terrorist funding, trading unauthorized items, etc. And illegal money is passed through a complex process of banking transfers and transactions. So, transaction laundering is a digital form of money laundering we can also call it electronic money laundering. With ever growing technology, criminals and frauds are also getting advanced. They are finding new ways to perform illegal activities.
To process unknown transaction for different line of business from the legitimate merchant account is known as transaction laundering.
In simple words, in transaction laundering criminal set up a website which looks completely authentic and it is really hard to guess if it is illegal. From this website shoppers can order illicit goods. Like any other normal shopping payment will be made through debit card/ credit card but the biggest twist is here they payment will not be processed by the illegal item website but by the previously established genuine looking website that pretends to sell legitimate products, for instance, a cosmetic selling website is actually trading drugs illegally. The important thing to note is that it is not limited to illegal goods only. The actual line of business selling something different is considered illegal.
The basic major purpose behind all these dual setting is to gain access to credit card processing utilities. Merchant Account Providers unintentionally get trapped in the dirty game of launderers and end up processing payments and get themselves exposed to the legal liability, penalties and major goodwill damage in the market.
It is also being found that these fake merchants have two basic ways to get credit card processing facilities:
- They break illegally into the legitimate merchant’s data stream and then use their merchant account to trade illicit goods and services
- Or they go through the complete process and create fake online storefronts and get a merchant account.
WHAT ARE THE FORMS OF TRANSACTION LAUNDERING?
All transaction launderings are not done in the same way. Launderers use different ways some of the most common forms are here as below:
- Front companies: In this form of transaction laundering, launderer use the legal and authorized businesses to cover their fraud activities. This is can be understood in a more detailed way through an example. Suppose a nutraceutical merchant launders drug money by raising receipts of vitamins and supplements.
- Pass through companies: Pass-through companies are the companies which helps launderers to process illegal credit card transaction by giving them access to their legitimate merchant account. This being done very smartly to make it harder to detect. The payment link is set on the unauthentic company’s website and to make it look genuine, illicit sales are entered manually in the payment system.
- Funnel account: Last very common form of transaction laundering is funnel account. In this a funnel account is created by a legitimate business which accepts credit card charges from all type of businesses whether the business is small or big or even engaged in some illegal activities. Basically they convert the illegal money into legal by entering these payments into the card processing system.
WHAT ARE THE LAWS REGARDING TRANSACTION LAUNDERING?
Transaction laundering is an illegal activity but the proper structure of laws and regulation was not yet clear. But in last few years some drastic actions have been taken by the governments of different countries around the globe. A high growth rate of transaction laundering led the Financial Crimes enforcement Network (FinCEN) and other law bodies like Office of the Comptroller of the Currency (OCC) to take serious actions to make these fraud activities hard. In fact banks are also becoming more aware with the situation; they are pressuring independent service organization (ISOs) and payment facilitators to make very clear distinctions between the nominee and the beneficial owners’ of a site. Another important step which is taken for establishing beneficial ownership is that FinCEN has now made it compulsory for financial institutions to verify the identities of all nominees with 25% or more ownership hold in a company for which the account is being opening. Other than this, the main decision maker of the site has also to be identified. They majorly hold payment industry responsible for the fraud acts committed by the criminal merchant.
FinCEN, Federal Financial Institutions Examination Council (FFIEC), Consumer Finance Protection Bureau, The Department of Justice, these are some of the regulatory bodies which expect payment industries to be careful and follow proper guidelines to protect themselves from the law. Transaction laundering severely affects merchant account providers, failure in following electronic payment guidelines will result in heavy penalties and fines, the merchant account provider may also be restricted from participating in the payments industry and even bans from the business.
GROWING CASES OF TRANSACTION LAUNDERING
According to trade association for the payments industry, Electronic Transactions Association (ETA), this issue of transaction laundering should not be taken lightly. Around 50% to 70% of online sales involved some form of transaction laundering for sales of illicit drugs, counterfeit goods and unlawful adult content. ETA also revealed that more than 90% of the illegal gambling websites practice transaction laundering to move their credit card receipts in payment system.
From $10 billion to $300 billion is the estimated range for the counterfeit drug market a year!! Where Web fronts and online pass-through companies launder just half of the these transactions which can then estimated to make around dirty $50 billion to $75 billion a year and that too just from illicit pharmaceuticals, which is just one the industry from this huge fraud ocean. By now you must have got the rough idea that at which level transaction laundering is being done under our nose. Trillions of dollars are generated from it.
Reasons which make it difficult to detect transaction laundering are:
- Payment Chains are complex. Several different options are available to make payment and payment has to go through multiple gateways or payment processor which makes it difficult to identify the transaction.
- Instantly growing use of credit cards in business to business payments. They offer a lot of cash back offers which make it a more preferred option than Automated Clearing House. Every hour many big transactions are being done though a single transaction.
- It is difficult to safeguard the websites. Many innocent merchants are not even aware of the fact that their websites are being used for illegal activities.
- Large number of unreported websites does not come into the notice of bank or merchant account provider which is being used secretly for illegal transactions.
- These fraudsters are very smart and have complete knowledge of how to attack cardholders and how to not get trapped in investigation techniques.
Practically and logically we cannot completely get rid of transaction laundering but Merchant Account Providers can take certain precautions to lower the risk of transaction laundering. Following are the precautions which can be taken:
- New techniques for detection are developing, such as chip cards and tokenization. Merchant Account providers should keep themselves updated and try to install new security measures.
- According to a survey it was also revealed that about 6% to 10% merchants’ identities remain hidden from the merchant account provider. Merchant Account Providers should not be so careless and lenient with it. As a provider it is your right and duty to have complete knowledge about your client. During underwriting process identify merchants who are indulging in.
- Merchant account provider should examine the merchant’s website properly. Compare the content of website and the total revenue it is earning because sometimes it may happen that website is selling low price products but the total revenue earned it large. You should also keep an eye on the sales transaction. Compare average sale and the merchant code that it uses.
- Make yourself aware with the crime and the regulatory agencies which are working to prevent transaction laundering. Also you must focus on Bank Secrecy Act and its regulation, AML that is Anti-Money Laundering rules which helps in detecting suspicious activity.
- Always keep monitoring the credit card transaction activities of your existing clients. The type of merchants you have and the average credit card processing volumes per month. Notice any unusual activity like some certain merchant card processing volume is higher than any other similar type of merchant.
With smartness and alertness we can fight back transaction laundering. We have to start taking actions against these launderers and regulatory bodies too have to take some new measures in this matter.