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What is Transaction Laundering?

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Transaction Laundering

As financial services integrate with ecommerce technologies, criminals find new ways to exploit online payment infrastructures and disguise their illegal funds. An emerging trend amongst online criminals, transaction laundering represents a digital evolution of traditional money laundering that has, until recently, been overlooked by regulators and financial service businesses alike.

With its global proceeds reaching around $500 billion in 2018, regulators around the world are taking a stronger stance against transaction laundering and punishing firms that fail to address the threat. As a financial services business, if you’re not familiar with the risks, it’s time to ensure your AML program is prepared…

What Is Transaction Laundering?

Transaction laundering utilizes the anonymity of online payment services to avoid the AML safeguards that normally detect money laundering. Essentially, it involves one merchant processing card payments for the illegal goods they sell by using another merchant’s legitimate payment services account and, in so doing, masking the funds’ criminal origin.

How Does it Work?

Also known as electronic money laundering or cyberlaundering, transaction laundering has become popular because of the ease with which criminals can set up legitimate-looking websites or gain access to legitimate websites and use those to access genuine merchant payment accounts. Illegal transactions are then directed through that legitimate account’s payment gateway and laundered unwittingly by the payment service provider (PSP). 

The transaction laundering process involves the following steps:

  • A criminal posing as a legitimate merchant sets up an illegal website from which customers can order illicit 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 for funding.
  • Laundered funds are deposited in the criminal’s bank account. 

While the criminal might sell drugs, weapons, or other illegal items through their own website, the merchant site that the criminal uses to process their transactions will sell non-illegal goods like clothes or books, which help to mask the illegal sales. The legitimate merchant website may be complicit in the criminal’s scheme to launder money (and may even have been set up by the criminal) or may have been hacked so that the criminal can use it surreptitiously.

Why Should Firms Be Worried About Transaction Laundering?

Regulators can impose significant fines on banks and PSPs found to be involved in transaction laundering. FINCEN is currently developing a range of measures to prevent such criminal activity, while the EU has already introduced measures to deal with it in 4AMLD and 5AMLD. In 2018, FINCEN fined Merchants Bank of California $7 million for AML violations linked to transaction laundering. 

The difficulty for firms lies in spotting transaction laundering schemes: criminals have developed sophisticated ways of avoiding AML controls and regulatory scrutiny, including forging documents and managing the ratio of their illegal transactions. In addition to financial penalties, banks and PSPs that facilitate transaction laundering also suffer significant reputational damage.

How Should Firms Deal with Transaction Laundering?

To overcome the risks posed by transaction laundering, firms should reinforce their AML checks and monitoring processes and adapt to the sophistication of criminals. When investigating suspect transactions, firms should consider a number of factors:

  • Website functionality: Closely examine the suspected merchant website to gauge its functionality. Fraudulent websites often do not match competitor sites or seem unappealing to potential customers. 
  • Site merchandise: Compare the suspected site’s merchandise with its sales projections and figures. In criminal contexts, those figures are often unaligned or unrealistic.
  • Unexplained trends: Sites that are involved in transaction laundering often exhibit unexplained spikes in sales or ongoing sales volumes that do not match the products they sell.
  • Customer due diligence: Strengthening CDD measures offers a greater chance of spotting illegal activities like transaction laundering. Firms should use all available resources to gather information on the merchants involved in the relationship and on the beneficial ownership of their business.
  • Regulatory environment: Become familiar with the authorities and the regulations that govern payment services businesses in your jurisdiction, e.g., the United States’ FINCEN, or the European Union’s money laundering directives.

How To Avoid Transaction Laundering

Utilize a comprehensive ruleset that monitors your organizational data based on suspicious activity patterns – stopping high-risk transactions as they occur, or monitoring retrospectively via batch upload.

Learn More Now

Originally published 17 December 2019, updated 25 August 2022

Disclaimer: This is for general information only. The information presented does not constitute legal advice. ComplyAdvantage accepts no responsibility for any information contained herein and disclaims and excludes any liability in respect of the contents or for action taken based on this information.

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