Transaction laundering lets worst kinds of crime prosper online. The fact that this crime starts with the digital realm does not mean that it stays there.
The effects of transaction laundering are felt across the entire economic spectrum, and all members of the financial ecosystem have the responsibility to do everything in their power to stop it.
People realize acquiring banks and credit card companies lose revenues when financial crimes like online money laundering occur. Yet the true extent of online financial crime’s impact is lost on most.
Few realize, for example, that even as Western nations scramble to fight the threat of terrorism, transaction laundering has been proven to fund terror attacks. And few consider that even as the U.S. faces a devastating opioid addiction crisis, arguably the worst public health crisis of its history, transaction laundering continues to facilitate illicit drug trade.
The principle of transaction laundering is as simple as traditional money laundering: It happens when an unknown business uses an approved merchant’s payment credentials to process payments for unknown products and services.
By way of example, an arms dealer can easily create a website to sell unregistered weapons, and accept payment via credit card from customers. These completely illegal transactions can be laundered by disguising them as legitimate payments routed through a legitimate merchant. Neither the acquirer processing the payment, nor relevant regulatory bodies ever know that these payments are actually for illicit goods.
How prevalent is transaction laundering? We’ve found that transaction laundering for online sales of products and services tops $200 billion a year in the U.S. alone. Of this, $6 billion involves illegal goods, which were sold online by nearly 335,000 unregistered merchants. It’s huge, and it’s growing.
The links between financial crime and terrorism are not new, of course. But with the advent of near-universal internet access, terror organizations increasingly enjoyed the benefits of lax online financial regulation.
A prominent example of recent terror activity directly financed by transaction laundering is the attack on the offices of the Paris satire magazine Charlie Hebdo. Perpetrators of the attack funded their activities through the sale of counterfeit items online. Moreover, the FBI recently revealed that ISIS was financing its domestic terror agenda in the U.S. via eBay and PayPal.
According to the World Health Organization, the worldwide market for counterfeit, contaminated, substandard and fake prescription medicines is valued at some $431 billion.
Even as the opioid crisis is recognized by the U.S. government as a public health emergency, transaction laundering continues to facilitate the online sales of opioids, directly impacting the lives of those worst affected by addiction, destroying families and creating an impetus for drug-related crime.
And transaction laundering doesn’t just cater to illicit drugs. Last year, a New York pharmacy was implicated in a scheme to provide expired or fake HIV medication on a massive scale. The criminals behind the plans used a legitimate company to process payments for the illegal commerce that occurred through shell companies. Thanks to their online sophistication, many of the people directly involved in the scheme were completely unaware of what was transpiring.
Sellers of counterfeit goods leverage transaction laundering to continue peddling illicit wares. Aside from the violation of international trademark and patent legislation, serious crimes in and of themselves, purchasing a counterfeit item like a fake brand-name handbag perpetuates exploitative business practices and poor working conditions in the illegal facilities that produce them.
Moreover, according to reports by Next Inpact News and Euipo, "counterfeiting is now a preferred mode of financing of terrorist groups, which organize the production and distribution of fake products to power their operations."
Counterfeit goods sales flourish online, where merchants can stay anonymous, reach across borders and constantly launch new websites to evade legal and regulatory action. Recent estimates for the total value of fakes sold worldwide each year go as high as $1.8 trillion.
Someone has to pay for every type of financial crime. With transaction laundering, just like a Ponzi scheme or other monetary fraud, the victims are, quite literally, all of us. Lost revenues are never really lost, they’re ultimately covered by higher consumer prices for goods and services. In this sense, we are all already victims of transaction laundering.
The inability to detect transaction laundering — an often huge volume of transactions of unknown origin — represents a serious business risk. Unknowingly and unintentionally, acquirers, PSPs and ISOs are exposed to the liability of facilitating criminal activity. This places them at risk of fines, chargebacks, legal action and brand or reputational damage.