Transaction Laundering: The Reasons Why Fraudsters Do It

Transaction Laundering: The Reasons Why Fraudsters Do It

For payment service providers, knowing why transaction laundering occurs is important to stopping it. We feel there are three reasons fraudsters turn to transaction laundering:

  • To sell illicit and/or illegal goods, such as drugs
  • To get better rates, both credit card acceptance and processing
  • To lure consumer credit card data

As we’re days from holiday online shopping madness, where incidences of fraud are most common, transaction laundering doesn’t know any season. It is a constant threat.

A front for illicit or illegal goods

We’ve seen this a lot. A merchant calls about getting a high risk merchant account for his online “school supplies” business (true story). Needs it ASAP. Upon examination of his website, it is very simplistic, not many pages and likely put together quickly. Pricing for his school supplies is very high, suspiciously so. Some supplies are three and four times higher for what a consumer could simply purchase at any retail store. Additionally, we’re curious as to why he approached Instabill, which specializes in high risk merchant accounts, for school supplies.

After conducting underwriting due diligence, the school supplies merchant stood by his questionably inflated prices, prompting us to decline his merchant account application. Within the month, the merchant’s website was offline. Of course we cannot prove anything, but we felt the school supplies merchant was selling other goods not mentioned in his merchant account application.

Scheming to get the lowest rates

Similarly to the aforementioned, transaction laundering doesn’t always involve the sale of illicit or illegal goods. Often, merchants will apply for a merchant account under the guise of goods such as school supplies, but might really be in the industry of tech support or online pharmaceuticals – but don’t want to pay tech support or pharmaceutical merchant rates.

Roughly two years ago, a merchant approached us about obtaining a high risk merchant account for a business in which he rented large waste bins and dumpsters. Again, we were suspicious as to why our dumpster merchant needed a high risk merchant account, like we were about our school supplies merchant. Everything else checked out, however, and we went forward – until we randomly telephoned his business to hear an administrator answer, ‘ACME technical support. May I help you?’

We had a similar instance occur just a few months later, when a merchant from the Asia region contacted us about a merchant account for his rug cleaning business, about which we were skeptical. By this time, our underwriting team was well-versed in the signs of transaction laundering. Before either merchant could process any sales their merchant accounts were closed down by our acquiring banking partners.

The fraudulent merchant wants consumer information

We’re not talking simply about a consumer’s e-mail information so that they can receive the merchant’s newsletter.

Instead, these are unsavory merchants who are attempting to pass themselves off as legitimate (like the ones we’ve mentioned), succeed in getting a merchant account, then “sell” goods/services online while keeping consumer information: credit card data, e-mail, telephone number, residence, etc… If payment service providers and acquiring banks are performing due diligence, such merchants should never be approved for merchant accounts, though it does happen.

Spotting signs of transaction laundering: 5 clues

Merchants who launder transactions often project certain characteristics:

  • The merchant is over-anxious and impatient with the vetting procedure to begin processing transactions.
  • Does a merchant’s prices seem to be overly expensive?
  • Examine the merchant’s website. Does it contain errors in graphics, missing photos, error-filled text and broken links? Does it appear to have been built hastily?
  • Do a search for reviews regarding the merchant. If they’re exceedingly negative, confront him/her. Conversely, if there are abundantly more positive ones, it’s possible they could be fake.
  • Ask the merchant about his/her processing history and chargeback rates. Is he forthcoming in offering such information?

Have you ever seen a case of transaction laundering? What were the clues that were most convincing? Leave us a comment below:

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