Ferreting Out Transaction Laundering

The emergence of transaction laundering is forcing risk managers to pay attention. The dialogue includes names such as “unauthorized aggregation” or perhaps “factoring,” but the actual process is the same, where payments are passed through merchants that are either known, or unknown to their acquirers.

As noted by G2 Web Services, a risk solutions provider, the end result of transaction laundering is that prohibited goods, and even prohibited services, make their way into various payment systems, which in turn spell greater regulatory scrutiny and also render anti-money-laundering laws ineffective.

The risk profile is heightened for acquirers as fraud incidences increase, extending across monetary damages and into reputational damage.

In a case study offered by G2 which focused on the drug trade, the company shed light on the experience of a food ingredients company specializing in spices and other foodstuff, which was onboarded by an acquirer. The firm’s offerings ran the gamut of seasonings and produce. “At first glance it seemed to be just another new online business, and the acquiring bank had no reason to question its legitimacy,” said G2 in its findings.

And then again: Looks can be, and sometimes are, deceiving. The seemingly innocuous food merchant was in fact laundering for a site that had been selling a drug known as spice, which is a dangerous mix of chemicals and dried plant matter, which together have the ability to foster hallucinations and even paranoia and present serious physical dangers. In fact, the five chemicals active in spice have been designated in the United States as Schedule I Controlled Substances, which means that it is illegal to sell, or buy, or even simply possess those chemicals in many countries internationally.

G2 said that its exploration of the spice store yielded some vexing discoveries, namely that the store itself was tied to four “functionally and visually equivalent” ingredient stores that maintained several merchant accounts, according to the white paper, and among those, only one site was active. And then here were another five sites through which the spice was advertised and sold. Obviously, the more sites at the ready, the better the chance that the drugs could still be sold — even if one or more sites were frozen or taken down by authorities.

Initially, the merchant account was shut down, said G2, and acquiring banks were spared the impact of penalties. But the spice trade found its way back online, with a new merchant account, with the eventual growth in card acceptance moving from one to — in a matter of months — four card brands. The spice sellers had also changed the language on the sites referring to the drugs to try to skirt regulatory action and also fool acquirers and banks.

In reference to payments activity, the fraudsters worked around settlement processes seen internationally, with buyers entering payment information through, for example, a site’s shipping section and being prompted to ask for invoices so that orders did not go through traditional channels. But eventually, through consistent monitoring by G2, the company was able to monitor how the sites were taking on new acquirers. From there, they were able to inform those acquirers, who in turn terminated the accounts.

But eCommerce has presented a plethora of avenues for duplicity simply by dint of the multiple avenues of transactions: e-wallets, mobile, wearables and even virtual currency, as G2 noted. All of these conduits tie into valid merchant accounts. G2 stated that transaction laundering has grown to the point where it can be bought and sold much like any other service. And, said the firm, on average, 1.5 percent of its clients’ portfolios have at least some inclusion of “offending” websites.

The solution, said the firm, is eternal vigilance, using a mix of human intelligence, watchfulness and technology.

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