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The Green Sheet Online Edition

August 08, 2016 • Issue 16:08:01

Telltale signs of transaction laundering

By Chris O'Donnell
Instabill Corp.

It was a simple, engaging website that appeared to be selling spices, rare seasonings and food-related goods. The items were expensive, but not terribly; the acquiring bank that had granted the merchant account initially had no cause for alarm. It was quickly discovered that the merchant was indeed selling spice ‒ the illegal, deadly drug ‒ and the merchant account was promptly closed.

The acquirer called upon G2 Web Services, a Bellevue, Wash.-based firm that provides risk management solutions for merchants and acquiring banks, to further investigate the merchant. G2 found far more than a rogue drug dealer working his trade online. It was a well-organized operation with multiple merchant accounts and similar websites ready to go live should one or more be shut down.

When the spice operation had seemingly disappeared, it resurfaced and within two months was able to accept four credit card types. It had also rebranded and now offered products such as herbal incense and potpourri ‒ harmless products to a new acquiring bank, but familiar, decipherable language to drug users and dealers.

It's called transaction laundering: the use of legitimate merchant accounts to process credit card transactions for rogue or illegal services or products. It is the consummate game of whack-a-mole.

"In this specific case, the criminals won in the short term," said Dan Frechtling, Senior Vice President of Marketing and Chief Product Officer at G2. "They adjusted their tactics to continue operations, skirting detection by using both separate and new merchant accounts, and further exploring alternative routes for processing payments.

"Fortunately, we had been monitoring the sites to see if the syndicate would resurface. When it did, we informed the organizations so they too could terminate the accounts."

Illegal drug sales moving online

The illegal narcotics trade in the United States is increasingly finding refuge online. According to G2, 14 percent of transaction laundering cases in 2014 involved illegal recreational drug sales. That escalated to 34 percent in 2015 and, perhaps most disturbing, has risen to 60 percent midway through 2016.

There are three reasons for this dramatic increase, according to Frechtling:

  • Drug users' experience with higher service levels, competitive choice and anonymity of buying drugs online instead of on the street
  • Drug users' habit of using credit cards online to make purchases
  • Drug sellers' inability to obtain direct merchant accounts, compared with the perceived easy alternative of transaction laundering

The 2016 Global Drug Survey, which queried over 100,000 self-identified drug users from over 50 countries, found ecommerce now represents more than half of all drug purchases. Pharmaceuticals sold without a prescription are prevalent in transaction laundering as well.

In 2006, the major credit card brands instituted content compliance programs that targeted pharmacy websites selling medicine without prescription through merchant accounts. A massive operation spearheaded by Interpol followed in 2015, resulting in nearly 2,500 rogue pharmacy websites being taken offline and 156 people arrested in 115 countries.

"Since then, we've observed a rise in illegal pharmacy transaction laundering ‒ indirect merchant accounts ‒ coinciding with the demise of rogue pharmacies with direct merchant accounts," Frechtling said. "Demand for illegal pharmacy remains robust, so supply has simply adopted laundering tactics."

In addition to becoming adept at recognizing the signs of transaction laundering, the major card brands are also imposing fines on acquiring banks and processors that ‒ inadvertently or on purpose ‒ furnish launderers with payment processing capabilities.

'They weren't buying fragrances'

Dione Hodges, Senior Director of Risk Management and Underwriting at Sterling Payment Technologies in Tampa, Fla., recalls one investigation of a merchant who advertised the sale of perfumes online. Hodges and his team were alerted to the merchant by a major credit card issuer, which had discovered it wasn't fragrances being peddled; it was video content containing bestiality.

"I decided to do a controlled purchase of one of his products, a fragrance you could buy in any Walgreen's, and received an e-mail back that he was unable to get it to me, but that he had something similar," Hodges said. "So that was a red flag."

Also, the transactions Hodges and his team observed didn't match the prices the merchant had set up. They contacted the website's customers to ascertain what they were purchasing. "The cardholders we inquired on didn't admit they were buying the content," said Hodges. "But they did admit they weren't buying fragrances." When Hodges and his team had gathered enough evidence, the merchant was immediately shut down and turned over to law enforcement.

Industries under scrutiny

When asked in which industries Frechtling and Hodges see the most cases of transaction laundering, they cited online pharmacies, tobacco, incense and potpourri, nutraceuticals and websites peddling counterfeit goods.

G2 reported that 56 percent of all transaction laundering cases it studied in 2016 involved illegal drugs. Illegal pharmaceutical and psychoactive substances sales made up 20 and 18 percent, respectively, while illicit tobacco and nutraceutical products made up 3 percent each.

Such industries now draw the attention of underwriters and drug users: the former, who have reason to investigate such merchants more thoroughly, and the latter identifying those industries as possible havens to score.

Signs of transaction laundering

Credit card issuers and private risk management firms have made important gains in the ongoing battle against transaction laundering. Acquiring banks and payment service providers can follow them by noting these tell-tale signs:

  • Poor website design: A website that lacks aesthetics, appears to be incomplete or contains dead links is worth investigation. Other bad signs include an abundance of stock imagery, particularly photos with watermarks.
  • Irregularly high pricing: A website advertising mass market products well above their worth is a red flag. It is an indicator that there are other products behind the mass market products for sale.
  • High rate of chargebacks and complaints: Online businesses that sustain frequent complaints and chargebacks might not be selling what they're advertising. Transaction redirects: A merchant website that redirects customers to a different site during checkout indicates the consumer's payment (and credit card data) is headed elsewhere.
  • Unusual merchant behavior: Merchants who launder transactions often seem impatient and overzealous, concerned about the transaction posting or account debit timing.
  • Slow to offer processing history: Certain web hosts and registrars, shopping carts and payment gateways are known to offer resources and turn a blind eye to merchants. Detailing the processing history of a prospective merchant is a must.
  • Fake reviews: Collect reviews of the merchant ‒ positive and negative ‒ and validate whether they are genuine.

They'll be back

Frechtling said 25 percent of merchants who launder transactions return under different acquiring banks while other offenders will change their websites, their names and alter their product line (similar to the aforementioned spice merchant).

Translated, business is good for risk management and investigative companies such as G2 and Sterling Payment. It will likely stay that way as long as there is ecommerce. "You should expect [launderers] are going to reappear," Frechtling said. "And you should expect that they're going to reappear smarter and wiser." end of article

Chris O'Donnell is a Senior Copywriter for the Instabill Corp. in Portsmouth, N.H. Instabill is a full service provider of merchant accounts to e-commerce, MO/TO and POS businesses. A resident of coastal New England, O'Donnell is also a contributor to The Daily News (Newburyport, Mass.) and Newburyport magazine.

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