Voice of the Industry

As UK bans "legal highs", expect dealers to turn to transaction laundering

Thursday 23 June 2016 10:30 CET | Editor: Melisande Mual | Voice of the industry

Dan Frechtling, G2 Web ServicesAcquiring banks will increasingly be responsible for finding lawbreakers and terminating accounts—and they will need the right tools.

As psychoactive substances become unlawful contraband in the UK, sales will likely migrate online. If sellers follow the path of conventional drugs, they will hide psychoactive substances from law enforcement through e-commerce and Transaction Laundering. Acquiring banks will increasingly be responsible for finding lawbreakers and terminating accounts—and they will need the right tools.

On May 26th, the UK’s Psychoactive Substances Act came into law. It criminalized the production, distribution, sale and supply of “legal highs,” as such synthetic drugs are called. Those convicted of violating the law by producing or supplying may be sentenced up to seven years in prison. So-called retail “headshops” are expected to be targeted by police and are already abandoning these sales.
Even before this ban came into effect, G2 Web Services has found legal highs increasingly sold online out of convenience. These include nitrous oxide (laughing gas), salvia divinorum (sage), mephedrone (meow meow), and synthetic cannabinoids (spice) (see Figure 1).

Figure 1

Research with Drug Users Illustrates the Rise of the Internet Channel

The Global Drug Survey, which queried 101,313 self-identified drug users from over 50 countries, refer to synthetic drugs as Novel Psychoactive Substances (NPS). The newly published 2016 report data shows a declining rate of street sales and a sharp increase in the online market: in fact, 58% of UK drug users surveyed reported having purchased these substances online within the past year.

The ban of psychoactive substances was timely, as the UK is seeing a dramatic increase in the use of synthetic drugs. More than 10% of Britons have purportedly used these psychoactive substances, the largest rate of any population worldwide. Following four years of declining rates, the use of these synthetic drugs spiked in 2015.

Figure 2

Drug industry experts say online purchases are more efficient and more consumer-oriented than offline. Consumer data from the GDS 2016 supports this trend (see Figure 2). James Martin, who wrote Drugs on the Dark Net, describes how online drug dealers offer consumers promotions like buy-one-get-one-free, repeat-buyer savings, and money-back guarantees. He compares these markets to shoe vendors because they operate in such a buyer-friendly fashion. Tom Wainwright, author of Narconomics: How to Run a Drug Cartel, writes: “I dealt with a trader of crystal-meth pipes who was as attentive as any Amazon representative. (Actually, I take it back. He was far more helpful).”

The Rise of Transaction Laundering

There is a significant barrier to online sales of drugs. They are illegal and the major card schemes like MasterCard, Visa, and American Express forbid their member banks from facilitating such purchases. So the market moves to less visible corners of the internet, namely the dark web and Transaction Laundering. The dark web is less a place than a method—hiding IP addresses of websites’ host servers through anonymity software like Tor, or alternatives like I2P and Freenet. Methods of payment are commonly cryptocurrencies and stolen cards.
Transaction Laundering (TL), on the other hand, doesn’t require the buyer to install anonymity software. The sellers take care of concealing the purchases by routing them through legitimate-looking sites and fooling the sponsoring banks and processors.

Transaction Laundering, also known as credit card laundering, aggregation, and factoring, occurs when a hidden website uses the merchant account of an approved front site to conceal the true nature of the sales. G2 has seen both an increase in Transaction Laundering and an increasing proportion of illegal drug sales in TL cases in 2016 (see Figure 3). The outlawing of legal highs is liable to further stimulate this growth.

Figure 3

The “front” operations that hide the illegal sales come in many forms. They are as prosaic as the organic food store, a web design shop, or a photo printing firm—all UK based—shown in Figure 4. The first pair includes an organic food and seed store that hid a website selling salvia. The second pair is a web building shop that processed transactions for a variety of legal highs, from uppers to downers. The last pair in Figure 4 is a firm specializing in large photo prints that laundered sales of cannabinoids and other synthetic drugs.

Figure 4

Operators are shrewd about risk mitigation and load balancing to stay in business. G2 discovered a group of ecommerce sites laundering synthetic cannabinoids, aka “spice,” through a group of food ingredients online retailers, or a different form of “spice.” Upon further inspection, the ingredient store was found to be part of a network of four functionally and visually equivalent stores with multiple merchant accounts. The merchants operating these sites were a drug syndicate, cunningly utilizing both active and dormant sites to continue operations if one or more merchant accounts were terminated (see Figure 5).

Figure 5

How to Detect Transaction Laundering

First, acquirers must mobilize their organizations (see Figure 6).

The risk and/or compliance departments must exhibit leadership. Setting expectations is the first step. The start by briefing executive leaders and owners on the challenges of uncovering TL. They update counterparts and management on new Transaction Laundering plots and patterns.
The effort begins with due diligence in underwriting. Underwriters should create process guidelines for their teams through all phases of the process from the top down. Analysts need to be properly trained and in communication with colleagues in risk and compliance.

The effort is sustained with sales and customer support. Working with these departments helps ensure any red flags are raised on a consistent basis. Sales representatives must pay keen attention to what happens during the application process and make note of any inconsistencies. Customer support agents are the eyes and ears of the company. They should listen for merchants who make inappropriate requests and attempt to get them to bypass standard protocol

The program is held together with interdepartmental communication between underwriting, risk, customer support, and sales. Regular meetings describing risk events and outcomes keep essential team members updated across functional boundaries. Even risk events that didn’t turn out to be violations are worth sharing.

Figure 6

Second, acquirers must select the right Transaction Laundering vendor.

A strong vender will provide a wide angle lens, utilizing the knowledge of fraud from peer companies to catch cross-acquirer and cross-region perpetrators before they strike your portfolio. The best providers have high market share, operate globally, and provide a systematic method of sharing data.

Historical data is crucial, offering the ability to recognize past violators so banks and processors can catch them before they re-initiate fraudulent activity. Verification proves definitively that Transaction Laundering is occurring. Expert analysts trained in uncovering real versus perceived fraud are needed for acquirers to be sure they have uncovered TL.

Finally, advisory makes risk and compliance professionals more adept. This includes learning organizational best practices and understanding how to best collaborate with their counterparts in other departments. Additional tools including G2’s on-demand Insight Hub can also be an invaluable resource for team training and practical tips.


The UK’s Psychoactive Substances Act aims to prevent consumer injury and death due to misuse of formerly legal highs.

But choking off supply does little to pinch demand. Despite four decades of the War on Drugs that has filled prisons with more drug users, the US still leads the world in drug consumption, according to studies from the World Health Organization and other institutions.

Acquiring banks, processors, ISOs, payment facilitators already recognize that card-not-present (CNP) environments have become a preferred method of concealing violating products. The same will be true for sales of psychoactive substances. Even those that serve low-risk merchants are not immune. They will require without ongoing monitoring for Transaction Laundering

GDS 2016 statistics have been used in this article with permission from the Global Drug Survey organization. 

About the author

Dan Frechtling is the SVP of Marketing & Chief Product Officer at G2 Web Service. In this role he oversees marketing, product management and innovation for diligence and monitoring solutions serving the US, Europe, Middle East/Africa and Asia. Previously, Dan was Vice President of Global Website Products for hibu, where he grew an auxiliary add-on product into a $100 million Web Presence business serving merchants in the US, Europe, and Latin America. Dan earned his MBA with distinction from Harvard Business School, his BS in Journalism/Economics with High Honors from Northwestern University, and studied at Nankai University in Tianjin, China.

 About the company

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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Keywords: G2 Web Services, Dan Frechtling, case study, e-commerce, transaction laundering, UK
Countries: World