By Ron Teicher, CEO, EverCompliant
With the holiday season in full swing, credit card companies anticipate a significant increase in revenue from online shopping. In fact, this year alone retail e-commerce revenues are projected to amount to 94.71 billion U.S. dollars, a 17.2 percent increase from 2015. And, while this may seem like a reason for credit card companies and ecommerce sites to celebrate, it’s not a time to be complacent. Surely, fraudsters will get in on the action as well, taking advantage of the increased sales and promotions on the Internet to mask their illegal businesses, which may consist of selling drugs, weapons, counterfeit goods, and child pornography, to name a few.
It’s easier for criminals to hide when there are a lot of transactions, since they are less afraid of being caught. In fact, many cyber criminals have such extensive ecommerce knowledge, that they’ve been able to develop their own expertise of online, merchant-based fraud referred to by the payment industry as Transaction Laundering (TL). TL occurs when an emerchant processes payments on behalf of another unauthorized merchant, knowingly or unknowingly —and it’s fairly simple to get started. All transaction launderers need to do is set up an internet domain, display a product catalogue, and add a payment page. As long as they have permission from a payment processor to sell products or services online, the transaction launderers can set up a legitimate ecommerce shop through which they can route payments from their illicit sites or social media pages.
Increased legal shopping, hand-in-hand with illegal e-commerce
Payment processors have reason to worry about these unlawful transactions: discovery of transaction laundering among their merchants will subject the payment processors to fines, sanctions or reputational damage. The increased shopping activity during the holidays goes hand in hand with more illegal shopping, and in turn, more potential fines.
While the occasional fine may not seem so important to a profitable bank, it can become quite serious when one realizes the actual numbers of transaction laundering within a merchant portfolio. While many emerchants are trustworthy, the average size of the unknown merchant portfolio is 6 to 10 percent of the known client base. In other words, for every 10,000 known merchants in an acquiring bank’s portfolio, there may be 1,000 unknown merchants routing purchases through the bank’s payment network, without the bank’s consent or knowledge. Our research estimates that there are 1.6M unregistered merchants operating in the U.S.
Unregistered merchants hidden in plain sight
Whereas holiday time may be a period to celebrate profits, payment processors are often at risk, surprisingly, from their seemingly low-risk merchants. With so much activity happening online, it can be easy for payment processors to miss key indicators, for example when there is a peak in cranberry sauce sales on online grocery stories before Thanksgiving or wrapping paper before Christmas. But if that same credit card statement lists magic mushroom supplements instead of berries or marijuana rolling papers, the merchants will be marked ‘high-risk’.
Changing the mark
Taking these factors in mind, the payment industry needs to shift its strategy before the holiday season, as they plan for 2017, and onwards:
The payment industry should adopt cyber-intelligence, machine learning and analysis tools that are able to determine whether or not a transaction is legitimate. This solution can provide payment processors with a clear picture of what clients’ true actions are in their payment environment. Repeatable patterns can provide clues regarding the structure of a TL scheme. These patterns would need to be monitored on an ongoing basis to check for any changes. Many merchants are on their best behavior when they join a payment platform, only to start their TL activity weeks or months after getting their site up and running. This monitoring system should be in place year-round and especially during the holidays, vetting low risk merchants as well as high-risk ones. Additionally, they should use cyber intelligence solutions to detect unknown activity on sites that their merchants have not registered or reported.
After all, technological advances in ecommerce have made merchants prosper, as have banks and payment processors. But that doesn’t mean that criminals should prosper as well. Therefore, investing in an efficient transaction laundering detection solution can be a very worthwhile New Year’s resolution indeed.