Transaction Laundering: Continuing its Evolution
In mid-January, Global RADAR reported on the growth of transaction laundering, a troubling trend that began gaining relevance at the international level beginning roughly one year ago. Defined in a basic sense as the action whereby one e-commerce merchant processes payment card transactions on behalf of another merchant, transaction laundering (TL) is commonly viewed as a more sophisticated form of money laundering and has emerged as one of the largest threats facing the financial services sector today. Transaction laundering is also becoming the primary means for the funding of dangerous terrorist activities due to the relative ease at which the process can be undertaken and performed successfully. Unfortunately for financial institutions conducting business both domestically and abroad, federal regulators have turned up the metaphorical heat in regards to the strict compliance requirements banks of all sizes have been subjected to in recent years. The imposition of multi-million dollar fines against organizations with anti-money laundering (AML) failures has become commonplace of late, and the risks involved with the respective failures to detect and prevent illicit financial activity have only increased with the arrival of new, pervasive criminal measures.
Since our last update on this topic, the transaction laundering trend has continued to grow, both in prevalence and scope of practice. The article “The growing threat of transaction laundering”, cited in BSA News Now on September 20th, 2017, discusses the fundamentals involved with the new features of the practice, and touches on additional areas that surround the issue, such as the response by federal regulators to transaction laundering, and the overall scale of activities of this nature. The article notes, “The biggest transaction launderers are the purveyors of counterfeit merchandise, illegal drugs, sex services, and Internet casinos operating without a license” (Reuters, 2017). Through this practice, fake merchants are able to direct unauthorized transactions into legitimate payment networks while avoiding detection by both regulators and payment processors themselves in some cases. As was covered in the general definition provided earlier, front companies are one of the principal means used to cover for criminal activities, but pass-through companies and the use of funnel accounts have also grown in usage over the course of 2017. Pass-through companies function by processing credit card receipts for illicit activity through the use of a legitimate company’s payments processing account. The author writes that “this is done by embedding a payment link on the illegitimate company’s website and then manually entering the illicit sales into the payment system to make them harder to detect” (Reuters, 2017). Funnel accounts work by accepting credit card charges from companies engaged in illegal activity, and essentially entering legitimate payments for these companies on their own payment processing system.
The amount of laundered payments has continued to escalate, especially with the incorporation of these criminal efforts of this nature. Statistics provided in the article from the Electronic Transactions Association (ETA) show that “50%-70% of online sales for illicit drugs, counterfeit goods, and unlawful adult content involve some form of transaction laundering” (Reuters, 2017). Additionally, transaction laundering is also used by nearly 95% of illegal gambling websites to add card receipts into the payment system, a practice that reportedly accounts for billions of dollars annually. These striking findings have not gone unnoticed however, as the payments industry is beginning to introduce new measures to combat these illicit practices, and regulators have stepped up enforcement as well. As a result, the Financial Crime Enforcement Network (FinCEN), the bureau of the U.S. Treasury Department that combats domestic and international money laundering, terror financing, and financial crimes overall, has begun to crack down on financial institutions that use third-party payment processors. The article discusses one of a slew of measures developed by FinCEN to better establish beneficial ownership. In this circumstance, “FinCEN requires financial institutions (FIs) to verify the identities of all nominees with a 25% or greater ownership stake in any company for which they open an account” (Reuters, 2017). Regulators have had to adapt to these new forms of fraud, leading to increased fines and greater restrictions imposed on financial institutions, which have made navigating through the already complex realm of compliance even more complicated for banks and their respective compliance departments.
Although new methods of fraud detection and prevention continue to be developed in the financial industry, criminals are quick to adapt and alter their own approach to capitalize on loopholes and areas that can be exploited. One of the only ways to detect and prevent transaction laundering is to do your due diligence into a merchant’s website, their volume of business, and other areas such as age of the website and merchant codes used. These screening of these areas are often covered by comprehensive, automated AML services however, so research and investment into one of these technologies can ultimately be quite beneficial to financial institutions, and in the fight against transaction and money laundering altogether.
Cryptocurrencies Called Out by Big Bank CEO
Earlier this week at a banking conference in New York, Jamie Dimon, CEO of JP Morgan, openly denounced cybercurrencies such as the ultra-popular Bitcoin that have taken the world by storm in recent years. In candid fashion, Dimon shared his critical opinion of the growing industry, stating his firm belief that the currency is a “fraud” that will inevitably fail because “you can’t have a business where people can invent a currency out of thin air and think that people who are buying it are really smart” (Athow, 2017). Dimon points to the greater sense of anonymity provided to individuals through Bitcoin and other cryptocurrency options as one of several potentially problematic components that would benefit financial criminals attempting to launder funds without being apprehended.
Dimon’s comments have angered the masses in the crypto-community, as many have found the seasoned financial veteran’s views to be antiquated and uneducated in this regard. The executive’s comments are also ironic considering that they come from someone who runs a financial intermediary, the same entities that are being removed from financial transactions made through various cybercurrencies. The comments were also surprising in that while “Mr.Dimon openly criticizes Bitcoin, JP Morgan is quietly advancing its own, proprietary crypto ledger, Quorum” which is based on the cyber currency Ethereum (Athow, 2017). Regardless of the strange circumstances that surround this criticism, many believe that the comments that came from an individual as renowned as Dimon had a significant negative impact on the 6% drop in the value of Bitcoin seen last week. We will simply have to wait to see if the effects of these comments continue to bring about more negative outcomes in the coming weeks, or if this instance was simply a blip on the radar for a currency steered for long-term success.
Scams Emerging Following Hurricanes
Following the tragic hurricanes that wreaked havoc in the Caribbean, United States, and other parts of the world in the last month, a post-storm period generally designated for recovery and aid can often be a time of great profit for scammers and financial criminals preying on the weak and naïve. A report from Forbes highlights several scams that criminals often employ in their attempts to con the victims of natural disasters and other catastrophic events. The primary areas exploited following disasters have been found to be charities and donation services. The Department of Justice’s National Center for Disaster Fraud recently “issued a statement to the public to be aware of fraudulent activity related to relief operations and funding for victims”, as a reported “743 domain names containing the phrase ‘Irma’ and most include a combination of the words ‘help,’ ‘relief,’ ‘victims,’ ‘recover,’ ‘claims,’ or ‘lawsuits’” were registered as of September 7th, according to The Center of Internet Security (Peck, 2017). Crowd-funding pages are commonly created to raise money for victims, but unfortunately in many cases these funds never make it to those that are in need. Many believe that more of these potentially-malicious domains are likely to arise in the coming weeks as more hurricanes are on the horizon.
Other scams commonly run by criminals are the posing as insurance representatives, Federal Emergency Management Agency (FEMA) officials, and local power company employees in attempts to con citizens out of funds and valuable information. In addition, individuals often offer help with unlicensed home repairs and other services, only to never perform the service(s) after being paid up-front. The article offers solutions to many of these issues however, including verifying the licensing information of individuals arriving at your home or business, avoiding making cash donations (as legit charities almost never require cash payments), and exercising caution and always researching an individual and/or organization before donating.
Severe Laundering Occurring in Australian Banks
Earlier this week, Australian federal and state investigators revealed the findings of their recent investigations into regional financial crime that do not bode well for the financial services sector, nor the major banks of Australia. The investigations discovered that “Australian crime gangs launder up to $5 million AUD ($4 million USD) per day through major banks”, due in large part to failures seen in the anti-money laundering procedures found within these respective institutions (Southurst, 2017). The findings involve Australia’s four largest banks: Commonwealth Bank (CBA), ANZ, National Australia Bank (NAB) and Westpac. Commonwealth Bank in particular has been the subject of international headlines recently due to the severe civil penalties the organization faced earlier this summer for allegedly allowing hundreds of millions of Australian dollars to be laundered by way of cash deposits made through the intelligent deposit machines that the bank employs.
In addition to the shocking laundering findings, it has also been reported by local media outlets that Aussie “crime syndicate members have acquired franchises in mid-tier banks, like Bendigo Bank and Bank of Queensland” (Southurst, 2017). Many of these issues fall on failures within compliance departments, specifically in regards to know your customer (KYC) requirements that are not being met, and a lack of information sharing amongst regional financial institutions and law enforcements agencies. In addition, the creation of shell companies to facilitate the movement of illicit funds has made the task of keeping up with this activity very difficult for banks with fully-functional and adequate compliance departments, let alone smaller banks that have far fewer AML capabilities at their disposal. Unfortunately, this now-negative connotation that accompanies Australian banks has led to an increased sense of public mistrust in the world’s sixth largest country, with a resolution to these issues currently being nowhere in sight.
Athow, Desire. “JP Morgan CEO Publicly Denounces Bitcoin as ‘currency for
Criminals’.” TechRadar. TechRadar Pro IT Insights for Business, 15 Sept. 2017. Web.
Liu, Winnie. “The Growing Threat of Transaction Laundering.” Dealbreaker.
Thomson Reuters, 19 Sept. 2017. Web.
Peck, Liz Frazier. “In The Wake Of Harvey, Irma And Equifax – 3 Strategies Criminals
Are Using To Run Scams.” Forbes. Forbes Magazine, 14 Sept. 2017. Web.
Southurst, Jon. “Gangs Launder $4 Million a Day Through Aussie Banks:
Police.” Bitsonline. 15 Sept. 2017. Web.