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Online Payments-the Blind Spot in the AML Regime

As the volume and market share of online payments explodes, are AML efforts keeping pace?

The volume of online payments is skyrocketing. Worldwide, retail ecommerce sales reached $1.915 trillion in 2016 – nearly a 24% growth rate over 2015. This number is expected to continue to grow in 2017. eMarketer estimates that online retail now accounts for nearly 10% of total retail spending worldwide, and that it will top $4 trillion by 2020, which will then represent almost 15% of total retail spending.

Ecommerce payment providers are growing at phenomenal rates, too. PayPal’s total payment volume reached $354 billion in 2016, up 26% from 2015 – and other payment methods such as e-wallets, online banking, e-payment, and invoicing solutions are seeing massive growth.

Yet as online payments thrive, so does merchant based fraud and payment-oriented crime. And even as FinCEN and other regulators constantly enact stricter Anti-Money Laundering (AML) policies, rules and regulations - enforcement mechanisms still primarily target traditional lines of business and financial services: banking, capital markets, insurance, cash deposits, wire transfers and securities trading.

Thus, as things currently stand ecommerce continues to be the blind spot of the AML regime. And one of the key symptoms of this illness is the huge growth in transaction laundering.

Transaction Laundering: Money Laundering’s New Frontier

By way of definition, transaction laundering occurs when an unknown business uses an approved merchant’s payment credentials to process card payments for unknown products and services.

For example, an arms dealer could create a storefront website to process credit card payments and launder these transactions by disguising them as legitimate payments by routing them through a legitimate merchant account. The MSP processing the payment, nor regulating authorities, ever have any idea that these payments are actually stemming from the sale of illicit goods or illegal merchandise. 

Transaction laundering is essentially an easy and scalable money laundering method. Ecommerce has freed  criminals from the complexities of setting up actual storefront businesses. They can digitally accomplish, on a huge scale, the three steps of traditional money laundering: placement, layering, and integration. This allows them to meet other goals easily understood by AML professionals – removing money from its source then placing it back into circulation under the guise of normal business earnings.

It’s also important to keep in mind that transaction laundering does not have to involve illicit goods. It's used massively to facilitate unreported income and transactions – an activity that represents the infringement of credit card association policies, breach of KYC requirements, a flaunting of AML regimes, and violates numerous federal regulations.

Transaction Laundering– Under AML Radar?

Why exactly do AML efforts fall short when it comes to transaction laundering? This appears to be less a technical question than one of awareness and policy.

It is true that there are many factors that make transaction laundering detection challenging. Merchant Service Providers lack the tools to identify the true origins of transactions passing through registered merchant accounts. Even if investigations are initiated, they tend to rely on traditional forensic tools - which often result in lengthy, manual investigations that are unable to deal with the scale of the issue.

Additionally, MSPs and AML stakeholders wrongly focus their scrutiny on high-risk, high-volume merchants – while transaction laundering is happening in multiple smaller-scale, seemingly low-risk players.

It is clear that AML regulators need to urgently change their focus to encompass online payments fraud. Transaction laundering is a massive problem – we've recently estimated that transaction laundering in online sales tops $200 billion a year in the US alone, of which at least $6 billion involves some type of illicit goods or services, sold by nearly 335,000 unregistered merchants. 

AML entities need to internalize that this $200 billion represents completely unregulated commerce – and is facilitated largely by legitimate and often unwitting merchants.

Whatever the reason for AML shortcomings in the face of transaction laundering, the problem is solvable. Today, advanced cyber intelligence-based anti-transaction laundering technology can uncover hidden ecommerce networks, merchants, and activity – and stop transaction launderers in their tracks.

The Bottom Line

Given the incredible volume of online payments and the associated rise in transaction laundering, AML regulators need to recognize that transaction laundering is here to stay. By adapting policies and regulations to fit this new reality, and adopting the right tools for the job, the extent and damage of transaction laundering can be markedly reduced and the threat to financial regimes mitigated.




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