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The Battle Against Money Laundering

Published Date
Author Checkout.com

As e-commerce continues to grow in popularity, so has the threat of e-commerce fraud and money laundering cybercrimes. Payment service providers can be the first line of defense against money laundering by playing an important role in prevention, like identifying risk through sophisticated fraud technology, having comprehensive and rigorous KYC infrastructures, and having ongoing consultations with merchants to ensure that your business, and customers, are educated and protected.

Cybercriminals are already a step ahead and have found numerous loopholes in the relatively nascent e-commerce and fintech ecosystems. Data breaches, identity fraud, and stolen card and bank account information are all common entry points for criminals to take advantage of consumers and businesses alike – and depending on the business vertical and platform, some businesses are more vulnerable than others. Growth in e-commerce, increased money flow, and increased usage of mobile payments, which contribute largely to e-commerce sales, have all made the digital payments landscape vulnerable to criminal activity.

According to recent research, the merchant categories that are most affected by e-commerce fraud were airlines and travel accounting for almost half, or 46%, of all fraudulent transactions  This was followed by money transfer businesses at 16% and computers and electronics making up 13%.

Money Laundering

Money laundering is one of the most common types of financial fraud. Illicit drugs, online gambling, counterfeit goods and adult content account for nearly 50-70% of transaction laundering, according to a report by Thomson Reuters on the growing threat of money laundering. In a 2018 report, fake merchants made up $352 billion in laundered money annually in the U.S. alone.

The most common type of online money laundering is transaction laundering and occur in 3 main forms:

  • Front companies, which use legitimate businesses as a cover for criminal activities.
  • Pass-through companies, which allow illegal businesses to process credit cards through their legitimate business by allowing access to their payments processing account.
  • Funnel accounts, which are legal businesses that accept credit card charges from multiple companies that do not have their own merchant payment account due to illegitimate business dealings.

In order to “clean” funds, launderers will go through an ‘integration stage’ where they will pass the money through a variety of channels at which point the illegally obtained funds will appear “clean.”

One common integration method is selling e-vouchers on marketplaces or auction sites where the clean funds are now in the wallet, bank transfer, or is cashed. Another method is to convert the money into cryptocurrency where it disappears off the radar; once cryptocurrency is sold, the funds from the sale become extremely difficult to trace back to the original source.

What should your payment service provider do to combat money laundering?

  • Perform merchant due diligence on an ongoing basis throughout the lifetime of the client.
  • Offer tokenization
  • Cap deposits and withdrawals per transaction
  • Delay payout of funds to certain destinations. For example, cash withdrawals or payouts to other accounts.
  • Offer merchants sophisticated fraud tools
  • Provide ongoing education

Individuals working in the financial sector, professional services and high-value retainers, assume a criminal liability for failing to report suspicious transactions, so it’s in their best interest to have checks in place and are enforced regularly. 

What are some things businesses can do to combat fraud and money laundering?

  • Ongoing KYC of merchants’ account holders
  • Restricting transactions
  • Restricting the number of deposits and withdrawals
  • Adopt machine learning technology to identify risk patterns
  • Implement demographic, address, and spend monitoring
  • Work with a PSP that has innovative fraud technology and a strong prevention framework.

As companies continue to build new products and features designed for user-friendliness and frictionless experiences, they must also stay a step ahead and consider all fraud implications with their releases. And early-stage companies, who may be eager for business at the onset, have to be particularly careful and set a precedence early on in order to ensure success in the long run.

Want to learn more about how Checkout.com can help protect your business? Get in touch with our payments and fraud experts today for more information.