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August 24, 2023

In Hitchcock’s classic film “To Catch a Thief,” the reformed cat burglar played by Cary Grant does everything from climbing on roofs to attending a masked ball in order to catch a newly minted thief in the act. It is his ongoing watchfulness that wins in the end—and it is much the same when trying to catch transaction laundering. Ongoing monitoring of transactions is not only required by law, it’s essential to detect this rapidly growing problem.

The threat of online seller fraud to acquirers, banks, and payment providers is at an all-time high, with fraudulent sales reaching $155 billion last year. These businesses must have transaction monitoring controls in place to help manage their financial crime risks, achieve compliance, and control risk while scaling for growth.

The main purpose of transaction monitoring is to identify suspicious activity that might signal a financial crime is being committed. These include transaction laundering, money laundering, terrorist financing, sanctions breaches, and other illegal activity.

Transaction laundering vs. Money laundering

Both money laundering and transaction laundering are methods that support criminal activity ranging from fraud and scams to illegal drug sales and funding of terrorist activity. The main difference is that transaction laundering takes place online, specifically through ecommerce.

Money laundering occurs when a criminal entity attempts to hide the true origin of money obtained through illegal activity, by trying to make it appear to have come from a legal, legitimate source.

Transaction laundering occurs when a criminal entity attempts to complete illicit payment transactions through an approved merchant to make the transactions appear legitimate. These two merchants hide their association to cover up criminal activity, and on the surface they don’t appear to be connected. The merchant acquirer or payment provider is usually unaware that they are enabling the transaction.

How transaction laundering works

A criminal entity creates a merchant account for an online store that sells motorcycle parts. This entity also sells illegal narcotics using the motorcycle parts store as a front. Transactions from selling illegal narcotics are routed through the legitimate, registered merchant ID in order to hide the true source of proceeds. These transactions will flow through a payment provider and then on to the acquiring banks.

The ability of these financial institutions to detect and filter out merchants perpetrating transaction laundering is a complex and growing challenge, which becomes even more difficult as these businesses take on a larger volume of merchants or expand into new markets.

To add to the problem, perpetrators of transaction laundering can quickly create websites, use multiple payment providers, and then repeat the process. What used to take weeks now takes hours. The complexity and speed employed in transaction laundering can make it nearly impossible for payment providers to pivot quickly enough to catch it, and attempting to do so can drain an organization’s time, money, and resources.

Regulators require transaction monitoring

Regulators require that financial institutions (FIs) identify suspicious activity or face penalties, fines, or other consequences. Transaction monitoring is widely accepted as an effective method for identifying such activity. For instance, the Financial Action Task Force (FATF) says in Recommendation 20 that FIs must have the “ability to flag unusual movement of funds or transactions for further analysis.”

Recommendation 20 also says that FIs should have “appropriate case management systems so that such funds or transactions are scrutinized in a timely manner and a determination made as to whether the funds or transactions are suspicious.” This means that FIs must not only detect suspicious transactions, but have the ability to quickly analyze them.

Some types of activity require special attention during the transaction monitoring process. These include: large transactions, complex transactions, unusual transactions, and rapid cycling.

Essential components of an effective transaction monitoring program

To be effective, transaction monitoring programs should consist of the following:

  • Methodologies must be established for profiling merchant identities for unusual patterns of customer activity through statistical techniques.
  • Development and implementation of a transaction monitoring system that will alert suspicious activity, with awareness of its capabilities and its constraints. Ideally, a separate system will be implemented to manage alerts after they occur.
  • Effectiveness of the transaction monitoring system is essential. However, it should not be set to general fewer alerts to bump up performance statistics. Instead, it must be set to identify as much suspicious activity as possible, without yielding too many false positives.
  • Reporting and review processes should be established and documented to clearly allocate responsibilities for reviewing, investigating, and reporting suspicious activity alerts. Keeping an audit trail is crucial when regulators have questions after the fact.
  • Oversight of the performance of the transaction monitoring program should be conducted by senior management.

EverC solution looks beyond the single transaction or customer

Transaction laundering activity is characterized by speed and sophistication. Catching malicious actors requires payment providers and acquirers to leverage AI-driven tools and technology that equip them to identify these threats – quickly and continuously. EverC solutions and services zero in on transaction laundering, with rapid detection of high-risk merchants at onboarding and continuous monitoring to detect new threats as they emerge.