What is Transaction Laundering? Effective AML Steps to Combat this Growing Threat of Payment Fraud

• March 21, 2023
• Rachna Pandya

Why understanding Transaction Laundering is important? As we live in a world of ever-changing technology – our lives have become increasingly connected, from the latest smartphone to the newest social media platform. In turn, we’re also becoming increasingly reliant on technology, which can be both good and bad. For example, technological advancement has improved access to information and allowed us to connect. However, cybercriminals are always one step ahead, using the latest tools to steal money and data.

This blog explains how online money laundering works and highlights a series of actionable AML steps to protect payment businesses from this rising threat of Transaction Laundering, also known as factoring and illicit aggregation.

What is Transaction Laundering

In simple terms, money laundered online is called Transaction Laundering. The mechanism involves shell website operations that disguise fraudulent activities from the regulators.

The miscreant sells illegal/prohibited/counterfeit products or services via a camouflaged or shell website in the background, while the front legitimate-looking site has clean advertising. The banks and credit card networks are tricked into thinking they are processing payments for a legitimate site when they are not.

Cyberlaundering is a growing form of financial crime that has gained popularity because it’s so easy to set up web pages with the appearance of legitimacy. Criminals use these sites to launder their online criminal activity. This process is then routed through the seller’s payment gateway and laundered unwittingly by the payment service provider (PSP).

How does it work

An unscrupulous merchant or business owner runs an online store that sells stolen, counterfeit or banned goods. The criminal routes card payments from that site through another legitimate merchant’s PSP account. The PSP processes the payment and contacts the acquiring bank to clear the funding. Finally, the laundered funds are deposited in the person’s bank account.

The legitimate merchant website may be involved in the criminal’s scheme to launder money or may have been hacked so that the criminal can use it secretly.

Most illicit pharma, gambling, adult content, banned weapons, and counterfeit goods exploit Transaction Laundering, i.e., factoring or illicit aggregating payment methods to process their payments.

Should merchant service providers (MSPs) be worried

With online commerce growth, the internet has attracted many websites selling illegal goods and services. Unfortunately, this has been abetted by lax underwriting standards, making it easier for a website to start.

To combat Transaction Laundering, MSPs must know and verify their customer’s identities and the company’s Ultimate Beneficial Owner (UBO) before accepting a transaction. Traditional KYC is not enough; the industry must also focus on verifying the digital information that comes into the organization.

Regulators can impose significant fines on banks and payment institutions for failing to follow anti-money laundering rules, even if the institutions were not found to be involved in any transactions for which they were fined. In addition, FinCEN is developing a range of new measures to prevent cybercrime, while the EU has already taken action with it in the 4th and 5th AMLDs.

Payment processors and MSPs are exposed to high risks that call for developing more effective methods for spotting and thwarting illegal transactions and managing the volume of illegal activity. In addition, financial penalties and serious reputational damage are suffered by banks that facilitate transaction laundering, whether knowingly or not.

How to deal with this growing threat of Transaction Laundering

The volume of laundered payments is increasing, and the regulators and the credit card networks are becoming ever more diligent as they are concerned that these moves may lead to greater and more uncontrollable fraud. Therefore, they’re trying to get acquirers and payment processors to take responsibility for their merchants.

Anti-money laundering (AML) compliance has become a pressing concern for the payments industry. As a result, AML compliance regulations have been passed, requiring the payment industry to comply with AML-KYC and due diligence practices.

While combating Transaction Laundering is complex, financial institutions should focus on beneficial ownership information in their customer due diligence (CDD) efforts. A strong customer due diligence strategy increases the chances of detecting suspicious activity and Transaction Laundering. A firm should also use all available resources to gather information about the beneficial owners of its suppliers’ businesses.

It’s advisable that a payment provider must screen customers and transactions efficiently while working with online or mobile platforms. Technology companies can provide more detailed data to satisfy AML regulatory requirements. A comprehensive ruleset that monitors their financial and operational data based on suspicious activity patterns is recommended for payment businesses.

How to detect possible ecommerce threats

Threat detection involves analyzing a potential new customer’s website to determine whether they have a legitimate website, their website traffic, and which products are selling.

While merchant onboarding, the risk team must always look for ways to ensure that the website is functional and attractive. A fraudulent website often doesn’t match competitor sites or seems unappealing to potential customers.

If you’re unsure whether the suspect site is selling products at a profit, check the site’s sales projection and figures to see if they match the site’s products. Sites that launder transactions often show inexplicable sales or ongoing volume increases that don’t match their products.

The closing

Traditional fraud mitigation methods are ineffective against e-commerce transactions, making them vulnerable to hacking. Therefore, the payment industry must implement proactive AML measures and work together to ensure that legitimate merchants can operate hassle-freely.

There are many ways to handle transactional information, but only some are perfect for practical applications. In addition, there are usually tradeoffs associated with each of these choices. Therefore, acquirers should develop processes to identify and mitigate the risk of such high volume/small value transactions to prevent them from becoming an unrecognized money laundering opportunity.

Effective AML compliance, alongside AI technologies and human interventions, can help acquirers to pinpoint the highest risk factors present in the transaction and work towards a complete solution for their Transaction Laundering problems.