Transaction laundering has quickly evolved into one of the payment industry’s most prominent and most difficult problems. Transaction laundering — also previously known as “undisclosed aggregation” or “factoring” — occurs when a merchant processes unknown transactions on behalf of another business.
This hidden business is often engaged in prohibited activities, and the “front” merchant may either be colluding or exploited by this violating business.
Governments around the world have joined the battle against money laundering – passing laws that put an end to anonymous banking services and under-the-table money transfers and payments that enable crime and finance terror. It’s been on the agenda of governments for years. So how did they miss one of the biggest aspects of the problem?
It is estimated that Transaction Laundering for online sales of products and services topped $159 billion in 2016 in the US alone. Of this, some $4.6 billion involved illegal goods, which were sold online by an estimated 100,400 unregistered merchants.
The scam in transaction laundering works like this: A criminal sets up an illegal site where shoppers can order the drugs or other illicit goods they seek. Many times, the shoppers do not even know they are committing an offence – the counterfeit goods may just appear to be a great sale!
When it comes time to pay, they submit their credit card credentials, like they would do in any legitimate purchase. However, the payment will not be processed by the drug site, but rather by a legitimate-looking site that pretends to sell perfectly legitimate products – say, books (bookseller sites were the number one business model used by transaction launderers in 2016), operated by the crook for the purpose of gaining access to card processing utilities.
The credit card is charged, and the seller collects his/her payment via the legit site. Thus, a customer who buys Angel Dust will be charged for a copy of War and Peace – and that’s how the payment will show up on the credit card statement issued by their bank.
Let’s be clear – we’re talking about $159 billion of sales volume over which Merchant Service Providers (MSPs) have no control. These are unregistered transactions from hundreds of thousands of merchants transacting through MSPs’ payment networks occurring without their consent or knowledge. And despite all this – MSPs continue to facilitate and process these transactions.