The Battle Against Money Laundering

Payments

0 min read

Money laundering is a dirty business. For e-commerce businesses, your payment service provider should be the first line of defense against money laundering and other fraudulent activities by playing a key role in prevention.

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.

Keep up-to-date with all things payments

Written on Mar 19, 2019 by

author image

Vanessa Norhausen

Customer Success Manager

Keep up-to-date with all things payments

Related articles

3-D Secure 2.0 Explained

So, you want to understand the implications of PSD2 and 3-D Secure 2.0 on your payments? Here’s a recap of the regulation and how Checkout.com can get you SCA-ready with our 3DS2 hosted solution and Unified Payments API.

ecommerce

0 min read

Gaming the System Through Payments

As experts in digital payments, we’re delving into ways game publishers can protect their consumers, boost revenue, improve authorization rates, and convert more players into payers by making these key optimizations to their payment strategy.

Checkout.com Introduces the Reconciliation API

With the Reconciliation API, merchants can now reconcile their payment and fee data against their Checkout.com statements, bank account statements, the Checkout.com Hub and their own internal records with one API.