Voice of the Industry

Federal and state regulators turn their attention to Transaction Laundering

Thursday 22 March 2018 08:12 CET | Author Melisande Mual | Voice of the industry

Regulators got their eye on transaction laundering. According to Ron Teicher, CEO of EverCompliant, in their fight against this type of fraud, awareness and policy making are key

Electronic Money Laundering, known as Transaction Laundering, has been around since the early days of ecommerce, but has mostly escaped the attention of government agencies and regulators. However, in recent months, it is starting to get the attention it deserves.

From counterfeit products to terror attacks

Transaction Laundering finances everything from counterfeit clothes and weapons to illicit sex services and illegal drugs. It has also been linked to terror plots, including the attack on the French satirical magazine Charlie Hebdo in 2015. In August 2017, the FBI revealed that ISIS was financing operatives in the US via fake sales on eBay, “selling” various models of computer printers, and receiving payments for the sales from other countries via PayPal.

As ecommerce grows, so does the threat of Transaction Laundering. According to our research, 38.1% of all money laundering is now conducted through the ecommerce ecosystem, with an increase of 8.4% year over year. We estimate that USD 500 billion dollars will be laundered via ecommerce in 2018.

Below FinCEN’s radar

If Transaction Laundering has been linked to multiple instances of terror and crime, why has it been overlooked by regulatory agencies for so long? Until recently, anti-money laundering (AML) regulatory bodies, like the US Treasury’s Financial Crimes Enforcement Network (FinCEN), were focused on traditional lines of business and financial services: banking, capital markets, insurance, cash deposits, wire transfers, and securities trading. When government regulators think of AML, they are usually thinking of criminals taking money obtained illegally and laundering it in the real world. These methods can include keeping deposits below the reportable limit or moving the money to an offshore account. This mindset has kept Transaction Laundering below the radar of many regulators.

That is beginning to change...

New legislative initiatives have been passed and additional laws will be passed in 2018, at both the US state and federal levels.

A shift in 2017 – The FTC initiates proceedings against an ISO

In August 2017, a noteworthy event took place at the federal level. The US Federal Trade Commission (FTC) initiated the proceedings against payment-service companies involved in a telemarketing scam run by a fraudulent company called Money Now Funding (MNF). The scam’s telemarketers at MNF convinced consumers they could earn income by referring small businesses seeking loans to MNF. However, consumers were first required to make an upfront payment of USD 299 to USD 499 to “go into business” with MNF, and only then they could receive lucrative commissions for each loan opportunity referred - these leads, plus the initial sign up fee, cost thousands of dollars, which were pocketed by the scammers.

The entire operation depended on the ability of MNF to launder the payments from their victims without raising fraud alerts. They accomplished this by laundering the payments through a company called “Electronic Payment Systems (EPS)” an online payment processor. The lawsuit alleges that from May to November 2012, one of the defendants submitted phoney merchant applications on behalf of 23 of these fictitious companies to EPS for their underwriting approval. EPS then approved all 23 applications, set up merchant accounts for each fictitious company, and immediately began processing for these accounts through their acquiring bank.

EPS ultimately processed nearly USD 6 mln for MNF with these false merchant accounts and, as a result, became the Independent Sales Organization (ISO) held accountable for Transaction Laundering by the FTC. This action made by the FTC represents a shift in how Transaction Laundering is perceived by regulators. It reflects an increased regulatory awareness to the threats of all types of money laundering and indicates the beginning of additional changes. Initiated in 2017, new legislation is currently working its way through Congress with a focus on Transaction Laundering. This law would make disguising acquirer transaction reports to conceal online payments a federal crime.

Applying existing federal law to stop Transaction Laundering

In addition to new federal laws, there are several existing laws that can currently be enforced against Transaction Laundering activity, as it is the advanced, digital form of money laundering. These laws include:

  • The Bank Secrecy Act of 1970, as amended by the Patriot Act: requires financial institutions to establish strict AML programs and continuously monitor customer activity for suspicious behavior.

  • The Annunzio-Wylie Anti-Money Laundering Act of 1992: requires banks to report suspicious activities to avoid liability.

  • The Antiterrorism and Effective Death Penalty Act of 1996: criminalizes activities connected to terrorism and the financing of terrorism.

Action at the state level

Georgia is the top merchant-acquiring state in the US and became the first to pass a law (OCGA 16-9-33) that specifically targets Transaction Laundering. In January 2017, New York announced that the state’s Department of Financial Services would begin requiring financial institutions to maintain transaction monitoring program for potential Bank Secrecy Act or AML violations. At present, a total of twelve states – Arizona, Florida, Georgia, Louisiana, Nebraska, North Carolina, Oregon, Texas, Utah, Virginia, Washington, and Wisconsin – have state-level legislation in place that explicitly relates to Transaction Laundering. Major merchant-acquiring hubs such as California, Illinois, and Ohio are expected to introduce similar types of regulations in 2018.

Awareness + policy making = the solution

Detecting Transaction Laundering is an activity complicated by a large number of payment options available through online and mobile channels (including mobile wallets, near-field communication chips, and payment apps) and the introduction of micro merchants through the payment facilitator model, which links acquirers to small businesses through a payment service provider intermediary.

Banks, PSPs, acquirers, and other financial service organisations must adopt sophisticated, automated tools that conduct ongoing data analysis in order to identify and stop fraudsters. The problem can be controlled; new technology, together with new state and federal regulations, becomes a necessary combined effort to stop billions of dollars in illicit money from being laundered online.

About Ron Teicher

Ron Teicher is the CEO and founder of EverCompliant. He led EverCompliant from inception to become a leader in the field of merchant based fraud and transaction laundering detection. Today, EverCompliant serves some of the world’s largest financial intuitions. Prior to founding EverCompliant, Ron led the compliance product initiatives at Watchfire (acquired by IBM). He is a member of the Israeli bar association, and is frequent speaker at payment and fin-tech events.

About EverCompliant

EverCompliant is the pioneer and industry leader in Electronic Money Laundering Detection and Prevention (also known as Transaction Laundering.) The companys flagship product, MerchantView, is the first and only dedicated solution on the market designed from its core to detect and prevent Transaction Laundering. MerchantView applies proprietary, cyber intelligence technology to identify unknown and hidden merchants funneling transactions through seemingly legitimate storefront websites. EverCompliants technology has been adopted by large-scale financial institutions and payment service providers in Asia, Europe, US and the Middle East. EverCompliant is headquartered in New York City with offices in San Francisco, Shanghai and Tel Aviv.

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Keywords: transaction laundering, fraud, money laundering, AML, EverCompliant, Ron Teicher, expert opinion, US
Countries: World