Specific to merchant processing, transaction laundering allows criminals to create legitimate transactions as a means of laundering illicit funds.
MasterCard defines transaction laundering as “the action whereby a merchant processes payment card transactions on behalf of another merchant.” It also refers to this approach as factoring, transaction aggregation or unauthorized aggregation. It can be used as part of a money-laundering scheme, to cover the trail of suspicious transactions.
How does transaction laundering work?
While the specifics of each scheme varies, a typical transaction laundering scheme would involve the use of two websites. The first site sells illicit goods, such as drugs, weapons or fake identity documents. It could also enable the sale of counterfeit goods that the buyer believes to be legitimate.
Instead of processing the payment via the original seller’s merchant account, a second online merchant with a seemingly legitimate business processes the sale. In fact, the second online business acts primarily as a means of gaining access to a merchant account and credit card processing services. The business exists in cyberspace but nowhere else. Nonetheless, it appears legitimate to a financial institution, and therefore, satisfies Know Your Customer (KYC) standards.
Once the business charges the buyer’s credit card, the seller from the first online business and controller of both sites can collect the payment. The charge on the buyer’s credit card appears legitimate as it relates to a normal product or service, such as the purchase of a book or payment for online gambling. In reality, the transaction involves the sale of an illegal product or service.
In a variation of transaction laundering, the second product sold to trigger the processing of the credit card charge might also be counterfeit or, in the case of a book sale, contain blank pages or text that is incomprehensible. Sometimes, criminals don’t own the second merchant. Instead, they conspire with a legitimate business to process credit card payments. In return, the merchant transmits the funds to the criminal, while retaining a small portion as a fee.
Preventing transaction laundering
While detecting and preventing transaction laundering presents a significant challenge, financial institutions should focus on beneficial ownership information as part of their customer due diligence (CDD) efforts. That effort includes analyzing an online merchant’s website to verify the ownership and line of business.
Consequently, there’s a need to conduct efficient and effective customer and transaction screening. Leading technology companies can provide the detail needed to satisfy regulatory requirements in this regard by using secondary identifiers to minimize false positives.