What is Transaction Laundering?How Does Transaction Laundering Work?
What is Transaction Laundering? Definitions & Overview
Billions of dollars in illegal transactions flow through the payment system each year, hidden behind seemingly legitimate merchants.
Transaction laundering has grown into one of the payment industry’s biggest open secrets. It enables criminals to sell billions in illicit goods and services using credit cards while staying invisible to processors and banks.
For merchants and payment providers, understanding how this scheme works is essential to avoiding unwitting participation (and the severe consequences that follow).
Transaction Laundering
Transaction laundering is a serious matter for eCommerce. With the right strategies in place, though, merchants can protect their businesses, prevent loss, and preserve their relationships with financial institutions. But what do you need to know to protect your business?
- Transaction Laundering
Transaction laundering is a process by which fraudsters disguise themselves as legitimate eCommerce merchants and begin working with an acquirer to process payments. But, the fraudster is actually using their account to launder revenue from criminal activity.
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As the term implies, transaction laundering is a form of money laundering. The end goal of money laundering is to take funds acquired through illegal means and make it so that they cannot be traced back to that activity. eCommerce transactions can be a means to carry this out.
Transaction laundering obscures the source of the payment transaction. It makes it so that criminals can accept credit card payments for prohibited goods and services without detection.
The front merchant involved may be knowingly complicit and actively colluding with the criminal operation in exchange for a percentage of sales. Or, they could be an unwitting victim, whose merchant account credentials have been compromised or manipulated without their knowledge.
Risk estimates show that criminals launder $352 billion globally through eCommerce channels each year. That’s greater than the nominal GDP of the majority of countries on Earth.
How Does Transaction Laundering Work?
Transaction laundering is a serious problem that is only growing worse. And, it carries far-reaching ramifications for the entire payments ecosystem. But, how does it work, exactly?
Here’s a typical example. Say you have an operation conducting illegal activity. This can be selling counterfeit goods, unlicensed pharmaceuticals, illicit drugs, unauthorized adult content, or services from unlicensed gambling sites.
You can’t get your merchant account to accept digital payments because it would fail underwriting requirements. So instead, you hide the operation behind a front merchant that has been approved by a payment processor. When customers make purchases from the illicit site, those transactions are processed through the legitimate merchant account, making them appear like sales from an approved business.
Your payment processor only sees the front merchant's credentials. So, they remain unaware that the actual transaction originated from a prohibited source.
Transaction laundering goes by several names in the industry, including “undisclosed aggregation” and “factoring.”
Why is Transaction Laundering Such a Big Concern?
Transaction laundering exploits the fundamental trust structure of the payment ecosystem.
Payment processors and acquiring banks conduct due diligence during merchant onboarding to ensure businesses are legit, and can be trusted to stay compliant. Transaction launderers abuse this trust by funneling unauthorized transactions through approved channels.
The scope of the problem is staggering. Estimates suggest transaction laundering could exceed $352 billion annually. There are hundreds of thousands of unregistered merchants working through payment networks without the knowledge or consent of the service providers facilitating those transactions.
Transaction laundering creates severe risks for the whole ecosystem, like regulatory penalties, card network fines, reputational damage, and potential criminal liability. And, the proceeds from transaction laundering frequently fund other criminal activities, including drug trafficking, human trafficking, terrorism financing, and organized crime.
It’s not just a payment compliance issue. Transaction laundering is a matter of public safety and national security.
