Online sales of illicit goods are massive, and the criminals who are selling drugs, weapons, and other (often darker) wares, just like their comrades of the analog age, need to turn their illegal profits into legitimate funds that can be used freely in tightly regulated markets.
The easiest way to launder online is transaction laundering, the practice wherein an unknown merchant uses an approved merchant’s payment credentials to process card payments for unknown products and services. This is not a marginal phenomenon. In the U.S. alone, transaction laundering tops $200 billion a year, $6 billion of which involves illegal goods sold by some 335,000 unknown and hidden merchants.
It’s also worth noting that transaction laundering, though an inherently white collar crime, has already been directly linked to much darker crimes including human trafficking and terrorism. It’s become a criminal realm that legislators can no longer afford to ignore, and they’re not. At the state and federal levels, new and emerging legislative initiatives have already been passed or are on the fast track for passage.
At the federal level, there are no definitive, standardized laws surrounding transaction laundering. At first glance, it may seem that federal regulators are ignoring the issue altogether. However, this assumption is false.
In the U.S., federal and state level regulators work together to tackle transaction laundering, in what is essentially a trickle down system. FinCEN, the Financial Crimes Enforcement Network, has yet to release a specific direction on transaction laundering and there is currently no universal push to include transaction laundering in state level regulations.
Until FinCEN decides to explicitly regulate transaction laundering, we will not see an organized effort at the state level. States have the right to address transaction laundering within their own jurisdictions if they so wish, and major merchant acquiring hubs such as California, Illinois and Ohio are likely to introduce transaction laundering regulations in the near future.
When it comes to enforcement of the anti-money-launcering, or AML, regime, FinCEN and the primary federal regulators (FRB, FDIC, OCC, NCUA, CFPB) set general guidelines, but the nitty-gritty details are left up to the states.
Federal regulators still consider transaction laundering to be a subset of money laundering, but it is starting to change. The recent FTC case against Electronic Payment Systems demonstrates that the FTC is starting to move decisively against transaction laundering.
Since the 1970s, when the Bank Secrecy Act was first introduced, the US has expanded the scope of its AML regulations gradually. Over time, laws were passed in the US that established the criminality of money laundering and expanded the powers of local police forces and task forces to enforce the federal laws (i.e., the Money Laundering Control Act of 1986, the Anti-Drug Abuse Act of 1988). While federal bodies provide general direction, states have the authority to implement state level regulations within the scope of federal laws.
When it comes to AML regulations, it is up to the individual states to determine how the state laws are written, and what they include. These developments caused many state governments to include money laundering laws in their state-level penal codes. We see the same tendency with the regulation of transaction laundering.
At the time of writing, 13 out of the 50 U.S. states have legislation in place that specifically tackles transaction laundering. Interestingly, many of the states that currently have state transaction laundering laws are major merchant acquiring hubs. Georgia (the top merchant acquiring state in the U.S.) was the first to implement a transaction laundering law in 2010. It wasn't until 2015 that five more states followed suit (North Carolina, Oregon, Texas, Utah and Wisconsin). Finally, in 2016 another six states implemented transaction laundering laws (Washington, Virginia, Nebraska, Louisiana, Florida and Arizona), followed by Alabama, which recently passed a law classifying “Illegally Laundering Credit Card Transactions" as class B felony.
Of the states that have passed anti-transaction-laundering legislation, most have made the crimes some class of felony. However, with the notable exception of Oregon, fines and jail time for convicted digital money launderers remain woefully low. The average minimum jail sentence for transaction laundering is less than a year, with the average maximum sentence at 15 years. The average minimum fine is just over $13,000, with the average maximum fine just under $34,000. However, it should be noted that all of these numbers are disproportionately affected by Oregon’s steep monetary penalties (minimum fine $125,000, maximum $250,000) and Texas’ stiff jail time (maximum 99 years).