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Transaction Laundering: What to Expect in 2018

2017 was the year that Transaction Laundering planted itself firmly in the consciousness of the minds of regulators, lawmakers, law enforcement and the general public. We believe that 2018 will be the year that we turn this awareness into action. Here’s why:

 E-commerce and Mobile Transactions Will Continue to Surge

According to emarketer, worldwide retail e-commerce sales are expected to reach $2.29 trillion by the end of 2017. E-commerce will continue this surge, as there is a seemingly infinite amount of room to grow.  Online retail only accounted for approximately 12% of total retail sales at of end of 2016.

Mobile commerce is quick on the uptake. More than 2 billion mobile device users will make some type of mobile commerce transaction by the end of 2017, up from 1.6 billion in 2016. Currently, mobile devices are used in 19% of U.S. online retail purchases - a number that's expected to jump to 27% in 2018.

Transaction Laundering Will Become Too Big to Ignore

As the online commerce ecosystem grows more sophisticated and far-reaching, so does Transaction Laundering - the sophisticated, merchant-based fraud scheme whereby an unknown merchant funnels transactions through a legitimate merchant account to hide illicit activity. As the popularity of e-commerce grows and merchants boast an omni-channel presence, it becomes easier for criminals to hide behind the complexities of the digital world.

We estimate that the size of the unknown merchant portfolio for Merchant Service Providers (MSPs) constitutes on average 6% -10% of the known client base. That means that for every 10,000 merchants, a potential range of 600 to 1000 hidden entities are transacting through the payment networks of MSPs without their knowledge or consent.

This year, we saw popular online marketplaces become targets for transaction launderers looking to abuse the online payment system to facilitate illegal activity. In August, the FBI revealed that ISIS was financing their domestic terror agenda in the U.S. using eBay and PayPal. Mohamed Elshinawy, an American-born ISIS operative and U.S. citizen, was arrested in Maryland after he received nearly $10,000 via PayPal for fraudulent sales of computer printers through eBay auctions.

In November, money laundering scams via Airbnb became public when news sources revealed that online Russian forums were linking transaction launderers to complicit hosts.  The scheme is simple and potentially more widespread than we think: fraudsters use stolen credits cards to launder the dirty money through Airbnb bookings that never actually happen, benefiting both parties through large value transactions. The dangers of these crimes are very real and affecting the businesses and marketplaces we use every day. Transaction Laundering has become too big to ignore, and we expect that in the upcoming year detection and prevention will become a priority for regulators, acquirers and MSPs, as more cases like these surface.

Acquirers Will Acknowledge the Scope of AML Risks

As Transaction Laundering issues escalate, acquirers will need to take next steps in developing and executing comprehensive AML plans to shield themselves from potential fines and brand damage.

The past few years have exposed vulnerabilities in the payments ecosystem, and as a result, a regulatory eye has started to keep watch over illicit and illegal transaction activity while paying attention to who is ultimately responsible. Acquirers should understand the risks associated with merchant processing and the many ways hidden transactions can affect their business.  In 2018, we foresee acquirers taking a proactive stance against cyber criminals by equipping their AML departments with the necessary detection and prevention tools.   

Regulators Will Prioritize Transaction Laundering

In 2017, regulators began to show their teeth in reaction to Transaction Laundering issues. At the end of July, a lawsuit filed in the United States District Court in Arizona upped the game in the regulatory struggle against Transaction Laundering. By holding an ISO accountable for a scam perpetrated by one of its merchants, the FTC ended the years-old practice of regulatory bodies looking the other way while funds for massive amounts of illicit goods and services were laundered electronically.

In 2018, we expect FinCEN and other regulatory bodies to enact stricter Anti-Money Laundering (AML) regulations and policies as they relate to online commerce. The organizations will continue to upgrade their enforcement instruments, which, until recently, targeted only traditional business and financial services: capital markets, banking, insurance, wire transfers, cash deposits and securities. Additionally, they will adopt policies and technology suited for the digital era.

Individual U.S. States Will Take Legislative Steps

In 2018, we predict that more U.S. state regulators will turn their attention to Transaction Laundering, especially in those states that are major acquiring hubs. As of 2017, 12 states had enacted legislation specifically tackling Transaction Laundering, the majority making the cyber crimes some class of felony.

With a few notable exceptions,  the majority of fines and jail time for convicted digital money launderers remains unreasonably low. During 2018, we expect more states to adopt anti-Transaction Laundering legislation and to impose tougher penalties for criminals.

New Regulation Technology Will Take Center Stage

In 2017, regulators realized that digital problems require digital solutions in the form of RegTech (“regulatory technology”). RegTech is, simply put, innovative technology that helps regulatory bodies do their job in the digital age. More elegantly, Deloitte defines it as technological solutions that deliver “nimble, configurable, easy to integrate, reliable, secure and cost-effective” tools for regulators. Advanced RegTech needs to be effectively automated and scalable, to enable the regulators to discover repeatable patterns and report them in near real-time.

In 2018, vendors who understand the advantage of emerging technologies will work to create RegTech solutions that use the benefits of AI and machine learning to police and prevent the issues surrounding money laundering.   

The Bottom Line

In 2018, the expected widespread availability of advanced RegTech solutions will enable regulators to mandate that acquirers look beyond their known merchant websites, in order to detect and monitor elaborate and potentially hidden online ecosystems.

The new RegTech approach and tools will help make Transaction Laundering a shared responsibility among law enforcement agencies, e-commerce players, MSPs, fintech providers and individual users. With modern digital tools, 2018 could become the year that digital money laundering is not only addressed, but also contained.  



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