Fake online stores exploit loopholes in banking system to process illegal banking transactions

This shadow banking system is used to launder billions of dollars. Here is how it functions.

An examination by Reuters has opened a can of worms: a network of dummy online stores selling household goods have been used as a front for routing payments for internet gamblers.

Operated out of Europe, the 7 sites, purport to sells items, including, grift wraps, flags, DVD cases, fabric, mechanical tapes and pin badges, items that would normally not draw scrutiny.

These fake outlets are part of a $40 billion multinational system to garb online gambling related payments to many states and countries, including the U.S., where gambling is illegal.

This reveal has raised many questions as to how e-commerce is policed worldwide. More importantly, as per fraud specialists and regulators, this has thrown light on an area, known as “transaction laundering”, wherein card issuers and banks have to work on.

The way “transaction laundering” works is when an online merchant processes payment card related transactions on behalf of another, which thus puts a veil on the true nature of payments.

Credit card issuers, including Mastercard and Visa require that all online purchases be coded so as to leave an audit trail. A purchase deemed illegal can then be blocked if it is found to be illegal in a particular country.

These codes, known as Merchant Category Codes are given the code of 7995 and are typically subject to additional scrutiny.

As per the findings of the Reuters report, although the websites accepted the payments for the household items, they however did not deliver any products. According to their helpdesk numbers, the sites do not sell the advertised product advertised, but instead process the payment towards gambling debts. They are typically used by Americans.

As per Mastercard and Visa “categorising a gambling transaction as a purchase of something else is against the rules of card issuers”.

“Transaction laundering is serious misconduct – often criminal,” said Dan Frechtling, head of product at G2 Web Services, a financial compliance company which works with leading banks and card issuers.

“It violates the merchant’s agreement with its acquirer, allows prohibited goods and services to enter the payment system, and may flout anti-money laundering laws.”

As per three fraud experts, these laundered transactions help online merchants trade in areas that bank and credit card issuers would consider as “high risk” which include drugs, pornography and gaming.

It is estimated that transactions worth billions of dollars are routed this this mechanism which would otherwise be blocked by credit card issuers and banks.

“It is the digital evolution of money laundering,” said Ron Teicher, CEO of Evercompliant, a cyber-intelligence firm that works with banks to identify suspect sites.

“The only thing is it is much easier to do, and much harder to get caught.”

As per the PCI Security Standards Council, it was up to the card companies to regulate payment processors.

A spokesperson for Visa said, “We require all gaming sites to be processed under the relevant Merchant Category Code. Our rules are always subject to local law and we do not tolerate criminal activity.”

“When we are alerted to activities that may be against our rules or against the law, we work with the merchant’s bank to confirm or investigate the allegation.” Said a spokesperson for Mastercard.

These transactions are able to fly under the radar since they exploit loopholes.

“Some PSPs will make a basic anti-money laundering check – for example, using sanctions lists. But they may not do a full vetting of you until you start transacting. That is a weak link,” said Ron Teicher, CEO of Evercompliant, a cyber-intelligence firm that works with banks to identify suspect sites.

He went on to add, “Transaction laundering directly through a bank doing thorough due diligence would be relatively difficult, but at a PSP that is sponsored by a bank it is often easier.”


Categories: Creativity, Economy & Finance, Entrepreneurship, HR & Organization, Regulations & Legal, Strategy

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