Even before it was discovered that the attack on the offices of Paris satire magazine Charlie Hebdo was partly financed by online payment fraud, the writing was on the wall. Organized crime
and international drug traffickers had learned early on that the online payments ecosystem was easily exploited for money laundering. It was only a matter of time until terror organizations figured this out, too.
And they did.
Yet two years later, with the FBI’s revelations that ISIS was financing their domestic terror agenda in the US via eBay and PayPal – the stakes have again risen.
Here’s What We Know
According to the FBI statement, as reported in the Wall Street Journal and other news outlets back in August, an American-born ISIS operative and US
citizen by the name of Mohamed Elshinawy was arrested last year in Maryland after he received nearly $10,000 via PayPal for fraudulent sales of computer printers over eBay.
Elshinawy circumvented conventional financial institutions to receive these ISIS funds, using classic transaction laundering tactics to do so. The suspect used eBay to “sell” various models of computer printers, and received payments for these sales from
overseas through PayPal.
The FBI reportedly believes that the scheme reaches far deeper than what’s been discovered thus far. One source claimed that Elshinawy was part of a global network, and was instructed to use the money for “operational purposes” – which law enforcement officials
take to mean a possible terror attack.
Finally, Law Enforcement is Taking Transaction Laundering Seriously
Law enforcement has long devoted significant resources to anti-money laundering activity. FinCEN and other regulators globally are constantly enacting stricter Anti-Money Laundering (AML) policies, rules and regulations. Yet enforcement mechanisms were until
recently primarily targeting traditional lines of business and financial services: banking, capital markets, insurance, cash deposits, wire transfers and securities trading.
Transaction laundering was the least regulated method of online money laundering. Now that the link to terror funding is undeniable, transaction laundering has finally shown up on law enforcement radar.
What is Transaction Laundering?
The principle is simple: an unknown business uses an approved merchant’s payment credentials to process card payments for unknown products and services. It’s a massive problem. We estimate that transaction laundering for online sales of products and services
$200 billion a year in the US alone. Of this, some $6 billion involves illegal goods, which were sold online by nearly 335,000 unregistered merchants.
How does it work? By way of example, a drug dealer could create a website to sell illicit drugs, while accepting payment via credit card from customers and laundering these transactions by disguising them as legitimate payments routed through a legitimate
merchant. Neither the innocent merchant, the MSP processing the payment, nor – likely – regulating authorities ever have any idea that these payments are actually for illicit goods and not legal merchandise.
This particular case demonstrates another way transaction laundering can be conducted. The entire commercial transaction was entirely fictitious. There was no shipment and no goods exchanged in hands. The terrorists were able to use the online marketplace
to set up a shadow shipment for the sole reason of moving money across borders.
Transaction laundering occurs every day and has become increasingly common with the growth of online commerce. Existing payment models and transaction processing solutions simply can’t keep up. There are so many online transactions, over so many diverse
payment systems – and the vast majority of MSPs (acquiring banks, payment facilitators, and online marketplaces) don’t have the right tools to vet each merchant and each payment.
Shutting Down Transaction Laundering
The good news is that online money laundering in general and transaction laundering specifically can be controlled with the right combination of awareness, regulations, and – especially – technology.
What law enforcement officials are starting to understand is that transaction laundering requires a fundamental change in how acquirers vet and monitor online merchants. Solutions that rely on manual monitoring simply can’t keep up - they need to be automated
to effectively scale. Along with their scalability, automated technologies are ideal for discovering repeatable patterns and reporting them in near-real time. This speeds up the decision-making process for merchant onboarding, while still ensuring that transaction
laundering for illicit activities – including those that fund terror – becomes a thing of the past.
By eliminating transaction laundering, acquirers grow trust and confidence in payment networks and facilitate the integrity of the digital economy. Today, advanced cyber intelligence technology can uncover hidden ecommerce networks and merchants – accurately,
transparently, and with time to market that can be measured just days. These technological solutions enable a new level of response to the serious threat of transaction laundering.