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Expert opinion

Transaction Laundering 101: what banks and MSPs should know

Wednesday 4 January 2017 | 09:01 AM CET

Ron Teicher, EverCompliant: Acquiring banks can dissolve their unwilling partnership in crime within the hidden networks of nefarious activity

New technologies offer benefits as well as detriments to the financial industry

From identity theft, online fraud or first party fraud, problems have been steadily increasing, ironically, because of the magnitude and sophistication of these technologies.

According to the PwC report ‘Global Economic Crime Survey 2016: US Results’ , more than one in three US organisations experienced economic crime in the last two years. The study also says that ‘new types of economic crimes — and the means to commit them — have complicated the threat landscape over the past several years, contributing to an upturn in economic crime’.

Lesser known but fast growing fraud: Transaction Laundering

One of the lesser known, but fast-growing forms of merchant-based fraud is Transaction Laundering (TL). TL is happening within the portfolios of Merchant Service Providers (MSPs). MasterCard defines Transaction Laundering as ‘'the action whereby a merchant processes payment card transactions on behalf of another merchant’'. Today's Transaction Laundering cyber criminals are not just transferring money from one merchant to another. They are often using a single, registered ecommerce website as a front for a whole world of unregistered, unreported, and often unlawful lines of business.

Transaction laundering often masks activities explicitly prohibited by international law and card associations such as drugs and weapons trade, illicit pornography, sales of counterfeit goods, illegal pharmaceuticals, terrorism financing and money laundering.

By funnelling payments through storefront websites, transaction launderers are able to link extended networks of hidden and often illegal ecommerce websites to payment networks without being detected. As a matter of fact, there are as many as 6% to 10% of additional unauthorised ecommerce sites that banks may be processing without their consent or awareness.

The cyber criminals responsible for these businesses are agile. One of the reasons TL is so easy and quick is due to the development and explosion of ecommerce websites. You don't have to be a programmer to set up a website or create a payment page. Ready-made templates and easy to follow instructions can result in dozens of professional-looking and fully functional websites that are up and running within hours or days. In just a few clicks, all you need to do is choose a store template, set up a checkout page and connect to a credit card profile.

Other factors have also contributed to the proliferation of TL – the substantial growth in the number of online merchants, the relative anonymity provided by being part of a huge community of e-merchants and the growth in payment options – from digital wallets and payment processors to gateways. All of these have augmented the ease in conducting TL activities.

While cyber criminals are raking in profits, acquiring banks are running into trouble. When a credit card brand association eventually discovers the transaction violations, it levies the acquiring banks with warnings, fines, and/or sanctions that cause both financial and reputational damage.

Complying with Brand Regulations is Mandatory

Inadequately complying to brand regulations or failure to take them seriously enough may be one of the biggest mistakes acquiring banks and MSPs make. That is why awareness and educations is so important, even before prevention.

Detecting transaction laundering will require banks to take a different look at their merchant services. That is rather difficult when most of the transaction violations are being conducted through hidden websites, off the radar of banks.

Acquiring banks have options

Acquiring banks can dissolve their unwilling partnership in crime within the hidden networks of nefarious activity. Given the relatively new phenomenon, they will need to look at ways of detecting these TL occurrences while outsmarting the criminals and their ostensibly innocent partners, before they take their next step. To win this fight, acquiring banks must be able to effectively monitor merchant activities by using cyber intelligence across their entire merchant portfolio.

As long as transaction laundering goes unchecked by banks, these unlawful activities will continue to prosper and grow, much to the detriment of the MSP financial ecosystem, as well as to society.

About Ron Teicher

Ron Teicher is the CEO and Founder of EverCompliant. Ron has served as a CEO of EverCompliant since its inception. Before founding EverCompliant, Ron led the compliance initiatives at Sanctum and Watchfire (acquired by IBM). Watchfire’s compliance product won SC Magazine’s first excellence award for Best Regulatory Compliance Solution.

About EverCompliant

EverCompliant is a provider of Cyber Risk Intelligence and Transaction Laundering Detection and Prevention. Our focus is to detect and prevent transaction and money launderers, hidden transaction tunnels and merchant fraud from entering the ecommerce ecosystem. Our innovative cyber intelligence proprietary technologies allow our clients to manage their merchant risk. By gathering extensive risk management information, our customers can reach a conclusive business decision regarding each of their merchants.

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