Transaction Laundering - Money Laundering Goes Electronic in the 21st Century

The age-old art of hiding money from governments truly took flight in the online era. The good news for us (and bad news for cyber criminals) is that regulators are starting to use technology to catch up.

In October 1931, American gangster Al Capone was convicted of tax evasion of approximately $1 million and sentenced to 11 years in prison. Federal Anti-Money Laundering (AML) laws didn’t exist yet, but prosecutors were able to prove that Capone was illegally hiding his bootlegging profits to avoid paying federal taxes. To this day, it remains the most famous case of financial crime in American history, as it put an end to his Chicago-based crime operations.

The FBI’s success in using financial law against Capone forced criminals to devise a more sophisticated method to disguise profits from their illicit practices. Succeeding gangsters learned from Capone’s demise, and realized the importance of establishing businesses as “fronts” for their underground, illegal activity. Casinos were probably the most obvious examples of fronts, where large volumes of money could flow in and out.

The legal struggle against money laundering began, in earnest, some 50 years ago with the Bank Secrecy Act of 1970. This law required financial institutions to record large cash transactions, and report suspicious fiscal activity to the government. Various legislation over the following decades mitigated criminal activity, and made it much more difficult for criminals to hide illicit funds.

But then, came the age of the Internet and online commerce, where hiding behind a computer screen was able to give you a degree of anonymity.

And with this, a new category of online crime began exploiting the industry of digital payments in order to facilitate money laundering. Regulators, who previously devoted massive resources to building complex, mostly manual, AML processes – now simply can’t keep up in this digital age.

Transaction Laundering – The New Face of Money Laundering

Electronic money laundering, also known as Transaction Laundering, is the most common, but least enforced , method of money laundering. The principle is simple: an unknown online business uses an approved merchant’s payment credentials to process credit card transactions for unknown products and services.

For example, a cyber criminal can set up a website in a matter of minutes, accepting payment via card, and disguise their income from illegal activities by rerouting payments through a legitimate merchant account, like an online book shop.

In addition to regulatory offenses, Transaction Laundering infringes upon credit card brand policies, putting merchants and acquirers in violation of KYC requirements  and violates numerous federal regulations.  This leads to potential fines, legal action and brand damage.

Transaction Laundering is happening, right now,  directly under the noses of regulators through the exploitation of online anonymity. The threat of this criminal activity grows as the volume of Internet commerce grows. How big is Transaction Laundering, really?

Our research has shown that Transaction Laundering for the online sales of products and services reaches over an estimated $200 billion a year in the US alone. Of this, $6 billion involves illicit goods.

Not Just Drugs, Guns, and Trafficking: Transaction Laundering Also Finances Global Terror

Just like in the days of Al Capone and the early advent of money laundering, Transaction Laundering is linked to illegal activity.  Perhaps an even worse reality, in our current times, it is now proven to be the source of financing for numerous terror attacks – including the violent attack on the offices of French satire magazine Charlie Hebdo.

Moreover, the FBI recently revealed that ISIS was using Transaction Laundering to finance a US domestic terror agenda via eBay and PayPal. As reported in The Wall Street Journal, the FBI announced that an American-born ISIS operative and US citizen was arrested after he received nearly $10,000 via PayPal for fraudulent sales of fake computer printers via eBay.

Transaction Laundering is not just a domestic U.S. threat. The Daily Beast recently reported that Russian criminals are using Airbnb to launder illicit funds from stolen credit cards. Unlike other Transaction Laundering instances, the Airbnb scheme also involves fraudulent, complicit hosts instead of merchants – exploiting Airbnb’s online marketplace to conduct illegal activity.  The scam is simple: fraudsters use stolen credits cards to launder the dirty money through complicit Airbnb hosts they meet in underground, online forums. Once the Airbnb booking transaction is processed, no one actually stays at the advertised accommodation; instead the two parties split the payment and create fake end-of-stay reviews to close the transactional loop.

The Good News: Regulators are Finally Catching Up

The good news for 21st century is that AML regulations are starting to sync with the digital world. There are an estimated 40 million e-commerce websites worldwide, making manual monitoring and long onboarding  processes inefficient and overall impossible. As new Regulatory Technology, or "RegTech" players, enter the scene, AML regulators are able to take advantage of emerging technologies like AI and machine-learning solutions to more effectively fight digital money laundering. This is a game changer for regulators who have long been statutorily powerful, yet unable to exert the full measure of their power against digital money launderers.

Newfound regulatory confidence and advanced RegTech are making the detection and prevention of Transaction Laundering a shared responsibility among law enforcement agencies, e-commerce players, MSPS, fintech providers and individual users. With the right digital tools in place, electronic money laundering can be detected, and ultimately intercepted. After so many years of hiding their illegal practices behind the screen, e-money launderers have good reason to be worried. Much like Al Capone’s, their elaborate schemes and operations could soon come to an end.