Amex invests in detecting digitally savvy fake merchants

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The rapid growth of e-commerce brings with it a rapid growth in fraud, fueled by the scammers who scrutinize new digital channels for flaws to exploit.

To detect and combat transaction laundering — the practice of hiding illegal activity behind a business that appears legitimate — American Express' Palo Alto-based investment group on Monday announced an undisclosed minority equity stake in EverCompliant, a New York-based company.

In transaction laundering, illegal transactions are disguised as payments for legal goods routed through a legitimate merchant. The acquirer that processes the payments isn't aware of the illegal activity underneath.

"The digital trend is making it easier for more businesses to accept card payments, and there are more opportunities for illicit players to set up illicit accounts and process transactions that aren't compliant," said Harshul Sanghi, a managing partner at American Express Ventures.

Amex's investment wing favored EverCompliant because of its ability to ferret out bad or suspicious activity in the merchant aggregator market.

"They do monitoring of third parties across the web," Sanghi said. "And it has its roots in the intelligence community."

EverCompliant contends acquirers and processors are burdened with data overloads from the rapid introduction of micro-merchants and an overall demand for instant merchant enrollment. Thus, each new merchant may not get the proper amount of scrutiny.

EverCompliant's services analyzes each merchant's web presence, confirms identity and true line of business and monitors transactions to spot unreported affiliates. The tech is aimed at ISOs, payment service providers, payment facilitators, marketplaces, acquirers and other stakeholders.

Money laundering is thriving through e-commerce, and the schemes are evolving by the day, said Ron Teicher, CEO of EverCompliant.

"Everything is so accessible, setting up a storefront, a money transfer entity. It's going to be hard on organizations to prevent it," he said. "Nobody will even know. That's the scary thing."

While EverCompliant works with the major card networks, having a more intimate relationship with a network will help EverCompliant address the more problematic areas in the market, Teicher said.

EverCompliant's own research contends banks may be processing transactions from between 6% and 10% of unauthorized e-commerce sites without awareness of permission. Teicher has also argued that transaction laundering is used downstream to fund drug trafficking and terrorism, including the attack on the French satire magazine Charlie Hebdo.

"Transaction laundering is absolutely a growing problem, fueled by the rapid rise of digital commerce in general, and complicated by the increasing prevalence of marketplace-types of business models that complicate the traditional Know Your Customer process, obligating acquirers and processors to not only know their customer, but also know their customer’s customer," said Julie Conroy, a research director at Aite.

There's a crowded market to combat transaction laundering. G2, one of the market's largest companies, was acquired by Verisk in 2017. Web Shield and EverCompliant are also gaining traction, according to Conroy.

"The technology is not just useful for risk management," Conroy said. "The intelligence that these organizations are gathering with their web crawling and analytics has interesting marketing implications as well."

Amex Ventures invests in startups that accelerate Amex's consumer and B-to-B services. Fraud prevention, security and regtech are key areas of this focus, with other investments including Menlo Security, Signifyd, Trulioo and Enigma. Amex acquired one of its early investments, InAuth.

"A few years back, regtech was about companies that had good tech with a good use case," Sanghi said. "Now it's coming into its own as an industry."

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Venture funding Payment processing Fraud detection Retailers American Express