What is Credit Card Money Laundering and its Schemes?

Table of Contents:

  • Credit Card Money Laundering Schemes/Red Flags 
  • Money Laundering Credit Cards – Transaction Laundering
  • Credit Card Laundering – A Growing Problem
  • Money Laundering Through Credit Cards – Regulations and Fines

Credit Card Money Laundering Schemes 

Credit Card Money Laundering Schemes: Criminals and terrorist groups are finding new and complex methods to conceal the illegal profits they earn via an online environment. Today, an extensive range of payment systems has become available such as PayPal, Google Pay, Amazon Pay, Apple Pay, etc. This, along with the exponentially increasing amounts of e-commerce activities happening online, causes difficulties when it comes to detecting fraudulent financial transactions by payment service providers and banks. By June 2020, federal regulators levied a total of 16 fines, which totaled to a sum of US$ 706 million, all of which was in relation to money laundering. Therefore, detection and prevention of transaction laundering or money laundering credit cards is a pressing concern for the payments industry.

Credit card money laundering or transaction laundering is also known as ‘factoring’ and unauthorized aggregation. This takes place when one business (often a website) processes payments for another website. This allows the sellers of illicit products (goods and services) to hide their transactions and wash their illegal money by illicitly entering their sales receipts into the official or legal payment system. With the increasing growth of e-commerce and the anonymity afforded by the online web, the use of transaction laundering/credit card money laundering is surging globally. Keeping this in mind, regulators and credit card networks have launched a campaign to deflect these efforts, specifically by holding acquirers and payment processors accountable for their merchants’ actions.

The most illegal online money laundering credit cards are executed through transaction laundering or credit card money laundering. One case is where sellers of illicit goods and drugs create shell websites that may be far from the category of goods they are really distributing. For example, a fashion e-commerce website can help process payments made from illegal drug networks. In order to target the system supporting drug businesses, the US Food & Drug Administration (FDA) set out a series of investigations that were focused on credit card processors involved in the credit card money laundering or transaction laundering arrangements. This operation was a great example to show the payment industry why transaction laundering monitoring is so important. It also witnessed how law enforcement agencies perceive the role of credit card processors in the network of illegal businesses.

Money laundering credit cards: Money launderers can also use credit cards to integrate illegal money into the financial system. They do this by maintaining an offshore account in another jurisdiction through which payments are made. The criminals limit the financial trail that may lead back to their own country, where they reside. Authorities have now become more aware of this use of offshore credit cards as a credit card money laundering technique. Because of this, certain offshore jurisdictions have now enabled regulators to obtain records from banks of transactions made by their clients who have credit cards.

Credit Card Money Laundering Schemes/Red Flags

Vendors/Merchants Acquired by a Licensee for Credit Card Transactions:

  • The principles of the merchant appear to be unfamiliar with, or lack a clear understanding of, the merchant’s business.
  • The proposed transaction volume, refunds, are inconsistent compared to the information obtained from on-site visits or merchant peer groups.
  • Unusual or excessive cash advances or credit refunds.
  • There are indicators showing that a merchant’s credit card is being used by any third party.

Money Laundering Credit Cards – Transaction Laundering

What is Transaction Laundering?

Criminals use money laundering as a means to hide their illicit source of dirty money. Initially, this was achieved via extracting funds from an illegal enterprise through a legitimate business, such as a restaurant or a store. Among other government bodies and regulators that work to eradicate financial crime is FATF, which is an intergovernmental body formed to combat money laundering. The FATF grey countries list is the list of countries and jurisdictions that are identified as having strategic deficiencies in their regimes in order to counter money laundering and terrorist financing.

Transaction laundering or credit card money laundering is an extension of money laundering. It is a streamlined form of money laundering used to secretly process credit card payments for money laundering through credit cards. How is the transaction laundered? When one merchant/vendor submits credit card charges under another merchant’s account. Also, while the pass-through business can still be a brick store, it is now more commonly known as a website.

The largest amount of credit card laundering is committed by those who sell counterfeit merchandise, drugs, sex services, and online casino operators, and who operate without a license. Even when the goods or services are sold legally, representing the nature of a credit card payment falsely violates the processing merchant’s agreement with its acquiring bank. Benefiting from a scheme such as this, in order to sell products illegally, means violating a number of state, federal, and AML laws, depending on the nature of the transaction.

There are three principal forms of transaction laundering/credit card money laundering:

  1. Shell companies use legal businesses as a front for criminal activities. For example, a supplements seller who launders illicit funds by selling drugs, which is achieved by inflating the receipts. Another example is someone who sells counterfeit medicines under the vitamin and supplement ‘Merchant Category Code’. Shell companies may usually operate online or out of a physical storefront.
  2. The pass-through companies make it easy for illegal businesses to process their credit card receipts, specifically by allowing them access to the legal company’s payments processing account. This is often done by inserting a link for payment on the illegal company’s website. Following this, they manually enter illegal sales into their payment system in order to make them harder to detect.
  3. Funnel accounts are similar to pass-through companies. Indeed, they are legal businesses that accept credit card charges from multiple companies. These companies do not have their own merchant payment account, as they engage in either illicit transactions or are too small. Following this, the funnel company then enters through these payments as legal transactions into the card payment processing system.

Credit Card Laundering – A Growing Problem

While it may be difficult to quantify credit card laundering, payments industry experts universally agree that it is both extensive and growing. Quoting the Electronic Transactions Association (ETA), a trade association for the payments industry, Thomson Reuters stated that 50% to 70% of online sales for illicit drugs, counterfeit goods, and unlawful adult content involve some form of transaction laundering. Illegal online gambling is even more dependent on transactional money laundering: more than 90% of their sites make use of it to move their credit card receipts into the legal payment system.

With the growth of e-commerce websites, the number of illegal websites selling unlawful goods and services has multiplied. Over the last few years, the underwriting standards were less strict, making it relatively easy for an online seller of illegal merchandise to open a merchant account. However, with the increase in the volume of laundered payments rapidly escalating, regulators and the payments industry have no other choice but to become more diligent.

Money Laundering Through Credit Cards – Regulations and Fines

The rapid development in money laundering through credit cards and transactional laundering has led the Financial Crimes Enforcement Network (FinCEN), along with other bank regulators, to become stricter with banks that make use of third-party payment processors. It now requires FIs to identify and verify the identities of all nominees with a 25% or greater ownership stake in any company for which they open an account, to help establish beneficial ownership. FinCEN and other regulators are also required to identify the principal decision-maker for the site, which in many cases turns out to be the beneficial owner. This rule was officially adopted in May 2016, and banks and processors complied by May 2018.

One of the several legal requirements is the FinCEN’s beneficial ownership rule: namely, for banks to know their customers. Others may include the 1914 Federal Trade Commission Act, plus the 1970 Bank Secrecy Act.

In October 2016, FinCEN issued an advisory to FIs on cyber-enabled crime. It states: “The proliferation of cyber-events and cyber-enabled crime represents a significant threat to consumers and the U.S. financial system.” Monitoring and reporting done by FIs can play an important role in the investigation of an e-business.

To know more about the Role of a Money Laundering Reporting Officer (MLRO), read here.

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Money laundering via high-end art and antiquities is not new yet it is difficult to detect. Art-related money laundering amounts to about US$3 billion per year, according to this blog, quoting the Uni...

Beware! Money Mules in Demand amid COVID-19. Here’s an Effective Cure

If reports are to be believed, cybercrooks are taking advantage of the COVID-19 situation. They are targeting people who were laid off or working from home due to the pandemic to work for them as mone...

How do we weather a tornado of change?

“Great works are performed not by strength but by perseverance” – Samuel Johnson All of us are in challenging times. However, we cannot afford to be lethargic to life, work, and busi...

Roundtable Rewind: Embracing Next-gen Tech & Collaboration Key to Sustainability

As a regtech player with a vision to enable sustainable compliance programs in financial institutions, Tookitaki organized a first-of-its-kind industry roundtable in Charlotte, NC, USA to discuss oppo...

Tookitaki Appoints Industry Veteran Joe Friscia as Advisor

Tookitaki Holding Pte. Ltd. appointed industry veteran Joe Friscia, former President of NICE Actimize and BAE Systems as Advisor to the Company’s Advisory Board. Joe brings over 25 years’ extensi...

Should Modern Machines Be Ethical?

There are mounting concerns across the globe about the reliability and safety of artificial intelligence (AI) based systems and its enabling technologies such as machine learning (ML). On the air are ...

Tookitaki Raises Another US$11.7 million in Series A; Closes Round at US$19.2 million

– by Abhishek Chatterjee, Founder & CEO The Tookitaki team and I are excited to announce that we have raised an additional US$11.7 million in Series A funding, taking the total investment in...

30 Years of FATF: Notable Facts About Global AML Watchdog

The Financial Action Task Force (FATF), the intergovernmental body formed in 1989 to combating money laundering, is celebrating its 30th anniversary this year. Since its inception, the global agency p...

Tookitaki Joins Aite Financial Crime Forum as Sponsor

Technological advances have fundamentally changed the operational landscape of financial institutions. However, there are also new risks emerging in forms of sophisticated financial frauds and complex...

Will Machine Learning Replace Compliance Professionals?

The impact of modern technologies such as artificial intelligence (AI) and machine learning on job security has been a widely discussed topic today. Of course, AI has advanced very quickly in the last...

6 Most Prevalent Cyber-Laundering Methods in APAC

Despite being a medium to exchange information in real-time and with scale, the Internet is being misused in several ways. Among the slew of financial crimes facilitated by the Internet, money launder...

What Made Us Earn the WEF Technology Pioneer Title

Tookitaki has bagged another global acknowledgement for its outstanding works in the regulatory compliance field. Our company was selected among hundreds of candidates as one of the World Economic Fo...

We Stay as a Team, We Win as a Team and We Flourish as a Team

“Teamwork is the ability to work together toward a common vision. The ability to direct individual accomplishments toward organizational objectives. It is the fuel that allows common people to a...

ABA Regulatory Compliance Conference: 10 Sessions You Can’t Miss

The 2019 edition of the American Bankers Association (ABA) Regulatory Compliance Conference is a few more days away. Organized by the Washington, D.C.-based trade association, the conference is touted...

Tookitaki AMLS Wins SBR Technology Excellence Award 2019

Tookitaki’s Anti-Money Laundering Suite (AMLS), an end-to-end machine learning-powered transaction monitoring and names screening solution, has bagged the inaugural Singapore Business Review Tec...

Watchdogs Grow Optimistic about AI Prospects at Banks

Proper regulation of banking operations is important as any failure in the banking system would affect the wider economy. Therefore, banking is one of the most regulated industries across the globe. F...

Pitfall of Black Box AI at Banks: Explaining Your Models to Regulators

The use cases of artificial intelligence (AI) and machine learning in front-office, middle-office and back-office activities at banks are growing slowly but steadily. The major areas of AI play includ...

AI for Regulatory Compliance at Banks: 4 Assessments Before You Okay the Solution Proposal

Banking is one of the industries where artificial intelligence and machine learning find their applications at a rapid pace. Regulatory compliance within banking is an area which has become a costly a...

We Believe in Innovation, the Key to Survival and Growth

“Innovation distinguishes between a leader and a follower.” -Steve Jobs What comes on the top of your screen when you google the meaning of the word innovation is – the introduction of somet...

Compliance Functions in Need of a Technological Overhaul. Can Machine Learning be the Game-Changer?

McKinsey in its latest compliance benchmarking survey found that compliance function at financial institutions has reached “an inflection point” and current compliance standards are in an “incho...

Tookitaki Raises US$7.5 mn Series A from Global VCs to Transform Regulatory Compliance

Tookitaki, a regulatory technology company that aims to enable financial institutions to develop sustainable compliance programs, has raised US$7.5 million in Series A round. The round was co-led by L...

From Wachovia to Danske Bank: Biggest Money Laundering Cases in Recent Times

Money laundering – the criminal activity of processing criminal proceeds to disguise their origin – is one of the gravest problems faced by the global economy, and its size is growing rapidly. It ...

A Modern Approach to Address the Reconciliation Challenges of Financial Services

Reconciliation of transactions is deemed critical for the smooth running of every financial institution. The speed and accuracy of data reconciliation can distinguish a successful institution from its...

Busting a Myth: Compliance Officer’s Job is All About Risk

Regulatory compliance has become a dreadful task for banks after regulators across the globe set stricter norms in the aftermath of the 2008 financial crisis in an effort to prevent financial crimes s...

SocGen Goes Next-Gen with Tookitaki Reconciliation Suite

Société Générale leveraged Tookitaki’s Reconciliation Suite to automate the bank’s existing break reconciliation system. Key Challenges Addressed The bank’s finance department was unable to ...

Attending ACAMS Conference in Singapore? Tookitaki Awaits You with Its Disruptive AML Solution

“In today’s era of volatility, there is no other way but to re-invent. The only sustainable advantage you can have over others is agility, that’s it.”- Jeff Bezos Singapore is hosting ACAMS’...

MAS’ Stress on Transaction Monitoring for Effective AML/CFT Compliance and Machine Learning is the Answer

Singapore is known for its top-notch AML/CFT regime created through up-to-date legislation, stringent policy and uncompromising supervision to safeguard against the abuse of the city state’s financi...

Mifid II and the Pressing Need for a New Reconciliation Approach

The financial services industry in the EU has been confused with the introduction of a revamped version of the Markets in Financial Instruments Directive (Mifid II). The ambitious regulatory reforms t...

Is Automated Reconciliation Next to Impossible in Today’s Complex Financial World?

The 2008 global financial crisis and fairly new regulatory requirements like Basel III asked financial institutions (FIs) to cut operating costs and adopt a lean operations structure, pushing FIs to r...

Modern Tech to Reshape US AML Compliance with Regulators’ Recent Handshake

George Bernard Shaw once said: “Those who cannot change their minds cannot change anything.” The past week has seen a significant change of mind from financial regulators in the US in their ardent...

Skills Development: We Have Talents and We Strive to Multiply Them

“Mastery lies on an infinite continuum, and as a result, we will never reach the end. We can, however, see to it that we are as far along that continuum as our circumstance allows.” ― Chris Mat...

It’s Our Fourth Founding Day; Taking a Pause to Cherish Our Simple but Awesome Journey

Today, as we step into our 4th year of foundation, I feel proud and honored to be leading Tookitaki that has been successful in creating added value to all its stakeholders. I was never a CEO and Took...

Tookitaki Expands into the US with New Office in Charlotte

SINGAPORE, Sept. 24, 2018: Tookitaki Holding Pte Ltd, a leading regulatory technology company, is pleased to announce the official opening of its North American office in Charlotte, NC, in the Unite...

We Tame Machines but We Unleash Human Spirits

We are well aware of the fact that our progress as an organization is in the hands of our employees. The more energy, time and attention we invest in them, the more yield we receive. So, we always mak...

5 Methods That Modern Money Launderers Use To Beat Detection

Society prepares the crime, the criminal commits it. DID YOU KNOW? Every year, an estimated amount in the range of US$800 billion-US$2 trillion (2-5% of global GDP) is being laundered globally Regulat...

Risk Management Conference: Positive Vibes from All Corners

The Risk Management Association’s (RMA) premier annual event, the Risk Management Conference, came to an end on 6 November, and Tookitaki had the privilege to attend the event which we believe was ...

Singapore Fintech Festival: Tookitaki to showcase advanced machine learning solutions in financial services

Singapore is assured of the Fintech world’s unwavering attention next week, as the city state, is hosting this year’s Fintech Festival during 12-16 November. Touted as the world’s largest platfo...

The RMA Clarion Call to Address Risks and the Tookitaki Way

Risk officers, doing your best today is good while preparing hard for tomorrow is extraordinary. Risk management at banks has become difficult due to operational and regulatory changes. The Risk Manag...