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Transaction Laundering: How LegitScript Helps Payment Providers Beat It

It is an age-old rule: criminals, in order to survive, try to stay one step ahead of the good guys. Despite rules put in place by companies like Visa and MasterCard that disallow criminals from getting merchant accounts, some illicit drug and other merchants still get paid via Visa, MasterCard, PayPal, and other popular payment methods. 

Sometimes, this is because the illegal gambling, payday, pharmacy, tobacco or other merchant is directly approved by the payment provider. But more commonly, the merchant is engaged in transaction laundering.

Here’s how it works. Transaction laundering refers to the processing of payments through a merchant account underwritten by a payment provider on behalf of a different merchant not known to, approved by, or underwritten by the payment provider. (It may also be referred to as “factoring” or “undisclosed aggregation.”) A simple example would be a rogue Internet pharmacy operator who approaches a bank, ISO, or payment facilitator, shows them a website selling shoes, and gets a Visa or MasterCard merchant account. But after that, the merchant runs credit card transactions from illegal pharmaceutical sales through the fake shoe business. Popular goods and services paid for through transaction laundering include counterfeit goods, illegal pharmaceuticals, gambling, and human trafficking.

So how do illicit merchants get in? Transaction laundering usually takes one of the following three forms:

  1. Underwritten merchant as shell. Here, the underwritten merchant may initially appear to be independent and legitimate, but it is in fact a shell company created for the purpose of acquiring a merchant account, and is under the control of the illicit merchant.
  2. Underwritten merchant as co-conspirator. In this case, the underwritten merchant may be approached by the illicit merchant, either before or after underwriting, and offered something of value (i.e., a commission) for illicit use of the underwritten merchant account.
  3. Underwritten merchant goes rogue. The merchant may have a legitimate line of business, and a hidden one — like a rogue gambling website that sets up a separate page for approved customers.
  4. Underwritten merchant as victim. The underwritten merchant may be a victim of the illicit merchant and unaware, at least temporarily, of the use of the merchant account.

The first and second form are the most common. Transaction Laundering is a huge problem for banks, payment processors, and credit card networks. Underwriters have limited time and expertise to do forensic-type research on every single merchant they underwrite, but expose financial institutions to significant liability, including huge fines from the credit card networks. As shown in the 2012 HSBC Money Laundering case in which HSBC paid a record fine of nearly $2 billion, regulators have a low tolerance for financial institutions servicing illicit merchants.

How LegitScript Can Help

LegitScript works directly with payment providers, including acquiring banks and ISOs, to stay one step ahead of cybercriminals by preventing and detecting transaction laundering (as well as violative content). By virtue of processing millions of rows of merchant and advertiser data each week for some of the world’s largest platforms, we have the world’s largest database of abusive merchants and industry map, and can rapidly draw connections to current or prospective merchants who seek to infiltrate payment providers’ merchant portfolios -- one of several ways that LegitScript partners with payment providers to create a safer payments ecosystem.