Transaction Laundering Threats: Emerging Risks in 2024

How much do we really know about the new methods criminal merchants use to legitimise their illicit wealth right under our noses?

Transaction laundering is a term that everyone in payments should know. It refers to a covert operation where illicit transactions are processed through a legitimate merchant account, thereby concealing their true nature from acquiring banks. This practice is a serious violation of merchant agreements and poses significant risks to the payment ecosystem.

While money laundering concerns itself with obscuring the source of funds, transaction laundering is about obscuring the source of a payments transaction. Bad actors deliberately misrepresent themselves as legitimate merchants in order to process credit card payments without detection.

At its core, transaction laundering involves exploiting a legitimate merchant's account for activities unrelated to the original business. For instance, shady merchants may use the account of a law-abiding seller to ‘wash’ transactions linked to illegal goods or services. These illicit offerings can encompass a wide range of activities, including counterfeit goods, illegal substances, unregulated pharmaceuticals, adult content violations, unregulated gambling, and even funding for terrorism. The nature of these products and services highlights the complexity and danger of transaction laundering.

Traditional techniques

One notable example is counterfeit goods, which account for a staggering 2.5% of global trade, translating to approximately $461 billion. This figure underscores the vast scale of the issue, as counterfeit products can pose serious health and safety risks, particularly when they are pharmaceuticals or consumer goods. (add reference to Mission Compliance)

Unfortunately, transaction laundering has become increasingly prevalent, particularly in today’s digital landscape. The rise in online payments, exacerbated by the pandemic, has led to an environment where creating professional-looking websites is as easy as streaming a video. This accessibility allows fraudulent actors to slip through the cracks, making it challenging for acquiring banks and payment service providers (PSPs) to maintain due diligence.

On average, 1.5% to 2% of a processor's portfolio may include illegal and unknown websites. Additionally, about 25% of terminated merchants involved in transaction laundering re-enter the payment system with minimal changes to their operations. (add reference to MC)

The nature of transaction laundering can be classified into several types:

• Compliant aggregation: legitimate aggregation of payments through a single platform, typically without issues.
• Incompliant aggregation: payments processed from unknown websites that may not violate laws but are not reported to the acquirer.
• Illegal aggregation: involves fraudulent merchants consolidating transactions from different websites without consent, often involving illegal goods.

Now that we understand the historical definition and uses of transaction laundering, we can move on to what the future could hold.

Proof of advanced techniques

In Miami, August 2020, two individuals were charged for using synthetic identities to defraud banks and steal over $3 million from Covid-19 relief programmes. They created fake identities and shell companies to open bank accounts and process fraudulent transactions. This case demonstrates how AI-driven techniques can facilitate large-scale financial crimes.

The implications are far-reaching. The ability to generate synthetic identities could easily extend to transaction laundering, where fake personas might be used to make individual or small-group purchases of goods or services. These transactions could then be routed through multiple accounts and shell companies, making it difficult to trace the illicit funds.

‍Recent FTC cases have revealed how shell entities are increasingly employed in transaction laundering schemes. Fraudsters use these shell companies to secure merchant accounts, processing unauthorized or illegal payments while hiding their true nature. By funnelling transactions through legitimate channels, they evade detection, demonstrating the advanced methods criminals use to exploit financial systems.

Furthermore, deepfake technology, as seen in Hong Kong in early 2024, could be employed to manipulate stakeholders into approving large financial transfers or transactions. In this case, a finance worker was duped into transferring $25 million after interacting with deepfake recreations of company staff. The use of AI-generated identities and digital forgeries highlights how advanced technologies are increasingly being exploited to obscure financial crimes and evade traditional detection methods.

Hypothetical case: The "Virtual Merchants" Scheme

In a hypothetical scenario, imagine a criminal organisation using advanced technology to create fake online storefronts for seemingly legitimate e-commerce businesses. They set up multiple "virtual merchants" that sell high-value goods, such as electronics or luxury items, but never actually fulfil any orders.

These virtual merchants process numerous transactions daily, with the illicit funds being funnelled through these fake businesses. The transactions are crafted to appear as legitimate sales, with funds being moved from one account to another in a complex pattern. By using sophisticated AI algorithms, the criminals can adjust their tactics in real-time, making it difficult for financial institutions to detect anomalies.

Furthermore, deepfake technology could be used to create convincing fake reviews and testimonials, adding an extra layer of legitimacy to these virtual merchants. This makes it challenging for compliance systems to identify the fraudulent nature of these businesses, thereby enabling the criminals to launder significant sums of money without ever delivering the products.

Challenges in detecting transaction laundering

Detecting transaction laundering presents several challenges:

• Complexity of Transactions: The complexity of transactions involving shell companies, fake invoices, and synthetic identities makes it difficult for financial institutions to identify and trace illicit activities.
• Evasion Techniques: Criminals constantly evolve their techniques to evade detection. The use of advanced technologies, such as AI and deepfakes, adds a layer of sophistication that can outpace traditional detection methods.
• Regulatory Oversight: Ensuring compliance with anti-money laundering regulations requires constant vigilance and adaptation. Financial institutions must stay updated on emerging techniques and technologies to effectively combat transaction laundering.

Addressing the threat

To counteract transaction laundering, financial institutions and regulators must:

• Enhance Due Diligence: Strengthen due diligence procedures to detect and prevent transaction laundering. This includes thorough background checks, monitoring for suspicious activities, and leveraging advanced technologies for fraud detection.
• Utilise Data Analytics: Employ data analytics and machine learning to identify patterns and anomalies in financial transactions. This can help in detecting unusual activities and potential laundering schemes.
• Promote Collaboration: Foster collaboration between financial institutions, regulators, and law enforcement agencies. Sharing information and best practices can improve the effectiveness of anti-money laundering efforts.

Protecting against transaction laundering

Transaction laundering is a sophisticated and evolving method used by criminals to disguise illicit funds. Understanding the traditional and emerging techniques, as well as the challenges in detection, is crucial for financial institutions and regulators to effectively combat this threat. By enhancing due diligence, leveraging data analytics, and promoting collaboration, we can better address the risks associated with transaction laundering and protect the integrity of financial systems.