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    Transaction Laundering in the Payments Landscape

    These days, criminals have turned to internet-based transaction laundering to disguise profits from unscrupulous and illegal enterprises. Transaction laundering has also been referred to as factoring, undisclosed aggregation, and electronic money laundering, and it occurs when an undisclosed online business uses another company’s payment credentials to process unknown transactions on behalf of the undisclosed business. Quite often, the latter is choosing to have their money go through a front organization for payment processing because this effectively anonymizes their transaction.

    In this blog post, we’ll discuss how transaction laundering works and what the industry is doing to combat it.

    How Transaction Laundering Works

    Transaction launderers' websites often appear legitimate, and may even advertise "normal" goods and services as a cover for counterfeit or illegal goods and services. Launderers insert themselves into the payment ecosystem through various methods, including the use of front companies which disguise criminal activity through the use of a legitimate business; pass-through companies which provide illegal businesses access to a legitimate company's payment processing account; and funnel accounts which, like pass-through companies, allow one or more companies that are unable to obtain a merchant payment account (because they engage in illicit activity) to "funnel" transactions through a legal business. This allows those who are selling illicit goods and services a way to hide the money they obtained illegally and make it seem as if it came from a legitimate source.

    According to Finextra, “Transaction Laundering, is the most common, but least enforced, method of money laundering. Our research has shown that Transaction Laundering for the online sales of products and services reaches over an estimated $200 billion a year in the U.S. alone. Of this, $6 billion involves illicit goods.”

    Detecting Suspicious Payment Activity

    Anti-money laundering (AML) regulations: Your financial institution is required to set up systems that detect and report money laundering or efforts to conceal money obtained through criminal activity. One of the best ways to combat money laundering is to make sure your employees are knowledgeable about and in compliance with the Bank Secrecy Act, which addresses suspicious activities and identity verification of your institution's account holders when they conduct transactions.

    Related Reading: Detecting Suspicious Activity in Loan Payments

    To guard against suspicious activity, your institution should have processes in place to detect the signs of transaction laundering as early as possible. AML regulations and due diligence procedures are an excellent start. Here are some things to look for when you're trying to uncover unwanted activity:

    • Sum or volume of transactions that does not match the business typology
    • Due diligence findings that indicate a customer's involvement with unscrupulous business(es)
    • Unusual merchant codes used on the customer's sales slips

    Strengthening and focusing on customer due diligence (CDD) and enhanced due diligence (EDD) practices both at on-boarding and throughout the relationship can protect your institution and your customers from being used by criminals to facilitate transaction laundering.

    For more in-depth information on the current state of the payments industry, payment regulation and compliance, and related technology, click below to download our free ebook: Meeting Consumer Self-Serve Payment Demand.

    Related Categories

    Fraud & Cyber Security Payments

    Elizabeth Cardenas

    As a payments compliance supervisor, Elizabeth Cardenas is responsible for identifying fraud and money laundering concerns in electronic cash management (ECM) to support SWBC's Payments clients. Elizabeth is CAMS certified, has a bachelor's degree in modern languages and linguistics from the University of Texas at San Antonio and is fluent in Japanese and proficient in several other languages.

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