Money laundering through credit cards: What you need to know about transaction laundering

4 mins

Criminals and terrorist groups are finding new and complex methods to conceal the illegal profits they earn via an online environment. Today, an extensive range of payment systems has become available such as PayPal, Google Pay, Amazon Pay, Apple Pay, etc. This, along with the progressively increasing amounts of e-commerce activities happening online, causes difficulties when it comes to detecting fraudulent financial transactions and money laundering through credit cards, payment service providers and banks.

As a prominent payment method, credit cards have been used as a vehicle to conduct money laundering. Therefore, detection and prevention of transaction laundering or credit card money laundering is a pressing concern for financial services. They need to develop rigorous anti money laundering (AML) policies to act on credit card money laundering red flags and mitigate credit card money laundering risk.

What is Transaction Laundering?

Transaction laundering or electronic money laundering is an extension of money laundering. It is a streamlined form of money laundering used to secretly process credit card or other digital payment forms. Transaction laundering happens when one approved merchant/vendor uses payment credentials to process payments for another undisclosed store often selling illegal products and services.

Structured credit card money laundering schemes help illegal merchandise sellers hide their transactions by entering sales receipts into the payment system and washing the dirty money. While these illegal sellers can be a bricks and mortar store, they are primarily set up as web stores in modern days.

The largest amount of credit card money laundering is committed by those who sell counterfeit merchandise, drugs, sex services, and online casino operators, and who operate without a license. Even when the goods or services are sold legally, representing the nature of a credit card payment falsely violates the processing merchant’s agreement with its acquiring bank. By benefiting from a scheme such as this, the criminals are violating a number of state, federal, and AML laws, depending on the nature of the transaction.

Forms of credit card money laundering

Transaction laundering/credit card money laundering can take three different forms:

  • Shell companies use legal businesses as a front for criminal activities. For example, a supplements seller who launders illicit funds by selling drugs, which is achieved by inflating the receipts. Another example is someone who sells counterfeit medicines under the vitamin and supplement ‘Merchant Category Code’. Shell companies may usually operate online or out of a physical storefront.
  • The pass-through companies make it easy for illegal businesses to process their credit card receipts, specifically by allowing them access to the legal company’s payments processing account. This is often done by inserting a link for payment on the illegal company’s website. Following this, they manually enter illegal sales into their payment system in order to make them harder to detect.
  • Funnel accounts are similar to pass-through companies. Indeed, they are legal businesses that accept credit card charges from multiple companies. These companies do not have their own merchant payment account, as they engage in either illicit transactions or are too small. Following this, the funnel company then enters through these payments as legal transactions into the card payment processing system.

Credit card money laundering schemes

Credit card money laundering or transaction laundering is also known as ‘factoring’ and unauthorised aggregation. This takes place when one business (often a website) processes payments for another website. This allows the sellers of illicit products (goods and services) to hide their transactions and wash their illegal money by illicitly entering their sales receipts into the official or legal payment system. For example, a fashion e-commerce website can help process payments made from illegal drug networks.

In order to target the system supporting drug businesses, the US Food & Drug Administration (FDA) set out a series of investigations that were focused on credit card processors involved in the credit card money laundering or transaction laundering arrangements. This operation was a notable example to show the payment industry why transaction laundering monitoring is so important. It also witnessed how law enforcement agencies perceive the role of credit card processors in the network of illegal businesses.

Integrating illegal money into the economy with credit cards

Money launderers can also use credit cards to integrate illegal money into the financial system. They do this by maintaining an offshore account in another jurisdiction through which payments are made. The criminals limit the financial trail that may lead back to their own country, where they reside. Authorities have now become more aware of this use of offshore credit cards as a credit card money laundering technique. Because of this, certain offshore jurisdictions have now enabled regulators to obtain records from banks of transactions made by their clients who have credit cards.

With the increasing growth of e-commerce and the anonymity offered by the web, money laundering risk with credit cards is surging globally. Keeping this in mind, regulators and credit card networks have launched a campaign to deflect these efforts, specifically by holding acquirers and payment processors accountable for their merchants’ actions.

Credit card money laundering red flags

The following red flags should be considered when a merchant service provider's licensee acquires vendors/merchants for credit card transactions:

  • The principles of the merchant appear to be unfamiliar with, or lack a clear understanding of, the merchant’s business.
  • The proposed transaction volume and/or refunds are inconsistent compared to the information obtained from on-site visits or merchant peer groups.
  • Unusual or excessive cash advances or credit refunds.
  • There are indicators showing that a merchant’s credit card is being used by any third party.

The role of current technology in detecting money laundering techniques

The countries that are suffering the most due to money laundering have complex financial systems, ineffective AML/CFT compliance programmes or operations which leads them to become vulnerable to various criminal activities. Current AML programmes powered by legacy rule-based systems are proving to be costly to manage and ineffective as criminals constantly improve on their laundering strategies.

Modern RegTech solutions powered by artificial intelligence, machine learning and big data analytics can effectively detect layering techniques such as the use of money mules and offshore shell companies.

To know how Tookitaki helps financial institutions of all types and sizes strengthen their AML compliance programmes, request a demo with us.

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