Transaction laundering poses major threats to the integrity of merchant portfolios. Illicit merchants pose as legitimate business to be approved for merchant accounts, then conduct risky activity such as online gambling or illegally selling pharmaceuticals or counterfeit goods.
Payment processors and acquiring banks risk having to pay hefty fines if they work with these merchants, whether or not they’re aware of the illicit activity that’s occurring. That makes it crucial to be able to recognize transaction laundering before approving a merchant account.
With that in mind, LegitScript created a comprehensive guide—Anatomy of a Transaction Launderer—that outlines important strategies for identifying and preventing transaction laundering.
What is Transaction Laundering?
Transaction laundering is a method used by high-risk merchants to gain access to merchant accounts. These merchants will obtain merchant accounts to process transactions for a seemingly legitimate business, but the business is not what it appears to be. For example, an illicit merchant’s online website may make it appear to be a clothing retailer, but its actual business involves illegal merchandise.
The payment provider authorizing the transaction is usually unaware of the illicit business being conducted, but can nonetheless be held accountable for facilitating illegal activity. Payment providers that unintentionally allow illegal activity to occur can be hit with steep fines from Visa and Mastercard and face anti-money laundering (AML) regulator scrutiny.
Common Forms of Transaction Laundering
There are four main forms of transaction laundering in underwritten merchants, or merchants with an approved merchant account:
- Underwritten Merchant as a Shell: The most common form of transaction laundering, this occurs when a shell company is created to acquire a merchant account, but is actually being controlled by an illicit merchant.
- Underwritten Merchant as a Co-Conspirator: This occurs when a legitimate merchant is approached by an illicit merchant and incentivized (often through commissions) to allow the illicit merchant to use their merchant account. This can happen before or after the merchant account is acquired.
- Underwritten Merchant Goes Rogue: This occurs when a merchant has both a legitimate line of business and a hidden, illicit one.
- Underwritten Merchant as a Victim: The least common form of transaction laundering, this occurs when an unaware merchant is the victim of an illicit merchant that is using their merchant account without permission.
How to Identify a Transaction Launderer
There are four key principles for identifying a transaction launderer:
- Step into the customer’s shoes. Transaction launderers aren’t concerned with providing a positive customer experience because the underwritten website isn’t their primary or legitimate business. Because of this, transaction laundering websites are often missing key features designed to make the online shopping experience easier. If a website is exceedingly difficult to navigate, it is possible that the site was never intended to attract and retain legitimate customers in the first place.
- Consider the business model. If the nature of a business is unclear or the pricing of its merchandise seems abnormally high or low compared to competitors, it may indicate that the merchant isn’t actually selling those products. Rather, these products may be covering up that the actual merchandise being sold is illicit.
- Stay abreast of trends. Clothing and consumer electronics have been used for transaction launderers for years, while service-based business like IT consulting and computer support websites have also begun to gain traction. But this won’t necessarily remain the case. Knowing what types of websites transaction launderers tend to use—and keeping up with shifting and evolving trends—is key to prevention.
- Explore the merchant’s associations. Not every merchant with a poorly configured website is transaction laundering. To separate those that are engaging in illicit activity from those that aren’t, it’s worth reviewing the merchant’s associations with other businesses and individuals that may be bad actors.
Transaction laundering poses big risks, including scrutiny from AML regulators and expensive card brand fees, to payment processors and acquiring banks that unintentionally facilitate illicit activity. There are ways to identify transaction laundering so this doesn’t occur.
LegitScript’s 17-page transaction laundering guide provides much more in-depth information about transaction laundering detection, including several real examples of transaction launderers that were identified by LegitScript.