Allison Guidette, G2 Web Services: Payments innovation creates new challenges for risk professionals

Can you tell us a little more about G2 Web Services, its aim and experience on the market?

Payments innovation -- new business models, new ways to pay and new places to shop – translates into more ways to reach customers and generate revenue. It also presents a dizzyingly complex environment with lots of places for unknown parties to the transaction to hide, creating new challenges for risk professionals.

G2 clients, who are acquiring banks, commercial banks, processors, third parties and payment brands, want to capitalize on the opportunities presented by this innovation. They also want to avoid serious reputational, financial, legal and regulatory pitfalls, which can include boarding known fraudsters or unwittingly harboring merchants engaging in transaction laundering and other forms of illegal commerce.

G2 is a global provider of merchant and payment risk data and analytics. We are based in Seattle, Washington, in the US, where we were founded in 2004, and have an office in London and employees covering Latin America, EMEA and APAC serving over 300 payments companies worldwide. We help our clients manage merchant risk, improve compliance and enhance operational efficiency. G2’s solutions combine web crawling and analysis, data classification and modeling capabilities, the power of data science, tenured risk experts and the G2 Merchant Map - a database of merchants, fraudsters and their relationships. G2 helps our clients make smart decisions about which merchants to board and ensure that their existing business customers are not engaging in illegal or brand-damaging activity.

Probably G2’s strongest advantage, along with proprietary data, is our global network of clients. Fraudsters are rarely lone wolves but often are connected into technologically sophisticated fraud rings. Detecting them in our clients’ portfolios requires the ability to network fraud rings as they move between banks – which with our global reach, G2 is uniquely positioned to do.

What is transaction laundering and how does it affect banks and processors?

Transaction Laundering, also known as unauthorized aggregation, occurs when unknown, often illicit businesses process payments through merchants known to acquirers or their downstream partners. By any name, transaction laundering is a crime. It violates the merchant’s agreement with its acquirer, allows prohibited goods and services to enter the payment system and may flout anti-money laundering laws.

Because of the efforts of G2, our clients, and the global payment brands in the past decade, bad actors find it increasingly hard to sell prohibited items through monitored merchant accounts because they are detected by acquirers. But when acquirers terminate a merchant, the perpetrators behind the merchant live on to deceive another day and seek more covert methods of processing payments.

Enter transaction laundering, which is not new fraud, but is growing in prevalence. In one early case identified by G2, a vitamin site created a shadow site that sold illegal injections of HCG. The shadow site became the revenue driver for the whole operation. In many instances, the front site is thoroughly innocuous-looking: selling toys, wedding dresses or foodstuffs, but processing for much more dangerous products, including illegal and dangerous drugs such as pharmaceuticals sold without a prescription, heroin and synthetics like flakka.

In a recent example, an acquiring bank in Australia recently came to G2 because they received an assessment fine for a laundering merchant in their portfolio. This merchant was selling illegal steroids.

When G2 started to look into the violating nutritional products’ store, the problem was much larger than originally anticipated. This violator was merely one small component of a much larger enterprise. More violating sites were exposed, structured into separate groups using multiple merchant accounts.

In total, there were more than a dozen other violating sites connected in some facet to the original violator. These sites were based in multiple countries with some sites acting as front stores, while others openly displayed steroids and other illegal products in standard retail form. The consumer’s credit card bill would show the purchase of regular vitamins. The products would then ship under the guise of the front store.

By finding this one violating merchant, G2 was able to clean up the Australian bank’s portfolio, but also this had implications for clients in other parts of the world as well.

Which are the most common types of transaction laundering and how do they occur?

We think of launderers in seven categories based on business legitimacy (is it a real, functioning ecommerce site or a façade?) and principal character (honest, if mistaken, or malicious?) This chart explores the different types of laundering from most to least culpable:

What is the difference between transaction laundering and money laundering?

Money laundering, which serves to conceal the origin of illegal proceeds, consists of three steps: placement, layering and integration. Transaction laundering facilitates the first step, placement. It does so by using harmless-looking credit card merchant accounts.

Transaction laundering utilizes the payments system—credit cards, digital currencies or e-wallets—to whitewash fraudulent transactions. As mentioned, legitimate merchant accounts are used to process unknown transactions for another line of business, illegal or otherwise.

Transaction laundering is growing because placement is regarded by authorities as the most difficult step. Past methods utilized smuggling, briefcases of cash, asset purchases and other cumbersome methods. Transaction laundering sidesteps these and moves funds electronically by blending them with valid purchases or utilizing front businesses. Often, the criminal operation uses a dozen or more nodes spread across different banks so that when one is shut down, the other is immediately activated.

It may seem innovative or clever, but it is often used to hide very serious crimes, such as drug trafficking, illegal pharmaceuticals or terrorist activity.

Transaction laundering is a modern day answer to a pervasive criminal problem. As with its money laundering parent, transaction laundering is difficult to track down and even more challenging to eradicate.

Will the arrival of EMV to the US escalate this risk?

Yes, EMV increases card-not-present payments fraud of many types, including transaction laundering. That rise doesn’t have anything to do with the chip technology per se, but, rather the fact that fraudsters will never stop seeking access to payments. Access to money is just too important to their criminal enterprises. As such, when industry strategies and technologies such as EMV make card-present fraud more difficult, they will move to other means, including online and MOTO fraud schemes.

The liability shift in other countries precipitated increases in card-not-present fraud. This happened in Europe and Australia, among other countries. Canada provides the best reference for the US. After Canada underwent the liability shift, CNP fraud went from USD 140 million to USD 360 million in 5 years, or a rise of 27% per year.

We anticipated the ripple effects of the EMV liability shift in the US and began working with our clients last year to manage the growing ecommerce risk.

Which are the main approaches in identifying transaction laundering?

Let’s start by affirming that transaction laundering (TL) is hard to root out for many reasons and there is no one silver bullet to root it out of a portfolio.

Why? There are lots of reasons, including front merchants who usually look incredibly prosaic. They are often trying for accelerated boarding, hoping an acquirer’s guard is down. Moreover, violating transactions can enter in multiple places along the payments chain. Life would be easier if all transactions flowed through the payment system in a consistent way. But it’s not so easy -- a shopping cart may go directly to a bank, or a gateway may funnel through a processor some times and a bank at other times. There are hundreds of companies and thousands of permutations. The key challenge is separating laundered transactions from legitimate transactions.

The best protection against TL is thorough underwriting – stopping a bad front merchant before it gets in the door. Once onboard, FIs need to adopt an array of tactics to strengthen their defense against laundering. This includes monitoring client service logs, transaction data and chargebacks data for clues. G2 offers clients additional protection with Transaction Laundering Detection, which adds several layers to the TL bulwark, including advanced monitoring and analysis of a client’s portfolio for suspicious front sites, crawling the world wide web looking for potential laundering sites and the world’s most sophisticated test transaction system and team. We report suspect “pairs” to clients for additional investigation and, often, termination.

To defeat transaction laundering, one key is finding connections. As I noted, fraudsters are often sophisticated and networked, so mapping those connections – going back years into history and in real time, across hundreds of FIs in the G2 Merchant Map – is key to G2’s Transaction Laundering Detection. Clients also need to use their own data networks to look for links between found launderers and other possible members of a fraud ring in their own portfolio.

Is technology a solution to this type of fraud, or should banks and processors adopt a new strategy to fight it?

Technology is necessary, but not sufficient.

On the one hand, technology is a huge part of the fight against fraud. Technology and data science are two keys to turning this mass of data into insight and clues to fraud and risk. Laundering detection tools and science should combine website, traffic and transaction analysis, execute network mapping and complete critical verifications of laundering – all that requires technological power, and it has to keep evolving as fraudsters evolve. As we’ve discussed, we also leverage – with a combination of data science and technology -- the power of G2’s historical merchant risk data and reach across acquirers to spot fraud patterns and rings.

On the other hand, skilled human analysis is equally important. It takes humans to interpret some findings and to sense things that technology cannot. That is why we believe a mixture of both is imperative to defeating TL. G2 has a large team of the most experienced analysts in the business.

About Allison Guidette

Chief Executive Officer Allison Guidette is responsible for setting the strategic direction and driving customer-centric innovation and growth at G2 Web Services. She brings more than 15 years of general management experience in information and technology for professional services industries. Most recently, she served as managing director at Thomson Reuters, running a USD 1B growing portfolio of businesses providing software, big data solutions and practice tools. In prior roles, she ran Thomson Reuters’ litigation business and its business of law group, where she co-invented the industry’s premier financial benchmarking solution. Previously, Allison served as SVP of Product Management & Marketing at Merrill Corporation. Earlier in her career, she ran client services for CEB and held positions with law firms in Hong Kong and Brussels. Allison is a frequent speaker on industry trends, data analytics and change management. She earned both her B.A. and M.A. degrees from the University of Virginia.

About G2 Web Services

G2 Web Services is a global information company that uses technology and analyst expertise to help banks, processors and their partners ensure safer, profitable commerce. G2’s clients represent over half of merchant outlets globally and use G2’s solutions to perform better due diligence, identify violators and keep them out of the payments system. G2’s data, tools and expertise help the payments industry to grow portfolios while taking on acceptable risk. 

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