Understanding transaction monitoring for payment processors

What is transaction laundering?

Transaction laundering is a streamlined form of money laundering whereby criminals secretly process credit card payments. It takes place when transactions such as credit card charges are submitted by one merchant under another merchant’s account entirely unbeknown to them. Compliance officers responsible for transaction monitoring in payments processors must absolutely be aware of transaction laundering and create business rules aimed at detecting this activity.

The biggest transaction laundering suspects are those who sell counterfeit merchandise, illegal drugs, and sex services. It’s also commonly seen among unlicensed Internet casino operators, though any merchant can fall victim to it.

A growing threat to payment processors

Transaction laundering is a problem that’s growing fast, and it represents one of the most challenging threats faced by payment processors; criminals and terrorists essentially use legitimate websites to execute transactions for third parties unknown to the acquirer.

Although you may think that the premise behind transaction laundering sounds simple and should be easy to spot, the following factors make it very difficult to detect:

• Complexity of the payment chain: There can be several combinations of a payment cycle whereby a payment can travel through multiple gateways and payment processors. This makes it difficult to differentiate legitimate transactions from illegitimate ones.
• Difficulty in safeguarding sites: Merchants might not realise that their websites are being used for illegal transactions, e.g., through affiliate programs or “shadow sites”.
• Hidden websites: Transaction laundering can take place through hidden websites which banks cannot monitor because they’re unaware of them. In addition, traditional monitoring doesn’t catch these hidden sites.
• Use of corporate credit cards: The now widespread use of corporate cards for B2B payments over other options such as ACH/BACS means that large card payments running into the thousands and tens of thousands have become normal. This makes it difficult to single out transactions that would have been flagged a decade or so ago.

At the same time, several factors have made transaction laundering an easier and much more lucrative financial crime to carry out, such as:

• How easy it now is to make professional, seemingly legitimate websites, quickly.
• Substantial growth in e-merchants and payment processing services.
• The widespread use of alternative payment methods such as digital wallets.
• The potential to create a revenue stream through the abuse of affiliate programs.
• Banks outsourcing merchant acquisition to payment providers, who don’t have the same degree of risk management or monitoring capabilities. They’re also not subject to the same level of compliance requirements as banks.

How can payment processors safeguard against transaction laundering?

While developments in technology have lent a huge boost to the proponents of financial crime, they’ve also provided an equally huge if not larger boost for transaction monitoring in payment processors.

Modern AML transaction monitoring technology is powered by artificial intelligence (AI) and automation, enabling payment processors to detect a wide range of criminal activity much more accurately and quickly than is possible with legacy human-led processes.

One of the most effective ways for payment processors to implement safeguards against transaction laundering is therefore through the deployment of a modern AML transaction monitoring solution that can not only identify potential transaction laundering but also:

• Money Laundering
• Terrorist Financing
• Fraud
• Drug Trafficking
• Bribery
• Corruption
• Identity Theft

Even though payment processors are not subject to the same strict controls and compliance requirements as banks, it’s still crucial that payment processors implement transaction monitoring into their risk management workflows. There are two main reasons for this:

1. The regulatory landscape is quickly evolving, and more and more firms are finding themselves subject to increasingly stringent compliance requirements where they once weren’t.
2. Should even a single transaction processed by your firm turn out to be associated with illegal activity, you could be subject to large financial penalties.

Fortunately, modern, tech-backed transaction monitoring tools make AML transaction monitoring a simpler, painless process with 360-degree automated coverage. If you’re interested in how a tool like this could help protect your bottom line, request a free demo of our transaction monitoring solution today.