Valentine's Day is this week, which means money will be spent on loved ones. In today’s digital world, online stores will see a significant boost in sales activity around the holidays, with about 27.9% of consumers ordering their Valentine’s Day gifts online.
And this is precisely where electronic money laundering, known as transaction laundering, comes into play.
Transaction laundering, the new digital form of money laundering, occurs when an unknown business uses an approved merchant’s payment credentials to process card payments for unknown products and services. The sophisticated, merchant-based fraud scheme takes advantage of the e-commerce ecosystem by funneling illegal, illicit or unknown transactions through legitimate merchant accounts.
We will use a flower shop example to explain how transaction laundering works, as online flower shops will have a significant increase in sales this week. An online merchant sets up a flower shop and submits an application for an account with a merchant acquirer to process payments. After the application is approved, he starts to conduct business online. What the merchant acquirer doesn’t know is that the same flower shop merchant operates several online stores that deal with illegal products, such as illicit drugs. By processing illicit payments through the flower shop’s approved and registered account, the deceptive merchant conceals the real origin of his funds.
Shopping is an integral part of Valentine’s Day. According to the National Retail Federation, Americans are likely to spend between $18 billion and $19 billion on their valentines in 2018, with sales peaking between Feb. 7 and Feb. 11.
While the average American spends 109 U.S. dollars daily, total spending for the holiday is expected to top $18.2 billion. That's an average of $136.57 of spending per person on Valentines related purchases alone.
During the holiday, specialty stores such as florists see a spike in sales, with over $4 billion spent on jewelry, $2 billion on flowers and $1.7 billion on candy. Higher than usual sales volumes create the perfect environment for criminals to launder money through e-commerce payments via transaction laundering. The concept is simple; the more transactions are taking place, the easier it is to camouflage illicit transactions with the rest.
Transaction launderers can link a virtually countless amount of unregistered online stores to one single merchant account. By taking advantage of the peak sales periods with higher-than-usual transaction volumes such as Valentine’s Day, criminals can use legitimate payment and shipping platforms without raising fraud alerts. The seasonal increase in traffic to these websites makes it difficult to detect suspicious transactions. This combination of factors makes holiday shopping sprees the perfect time for fraudulent merchants to commit transaction laundering.
Transaction launderers are most likely to select “low-risk” online storefronts to process transactions for their illegal activities. Illegal e-commerce activity often hides behind merchants with MCC codes corresponding to “low risk” merchant categories such as flower, jewelry or gift shops.
With transaction laundering, cybercriminals are selling illicit or illegal products and services while using the legitimate payments system to process payments. As with any other form of money laundering, transaction laundering is illegal and failure to prevent such activity can result in fines, investigations, and brand damage for merchant acquirers. Merchant acquirers should always be vigilant, but especially so around our consumer-driven, online shopping holidays.