The COVID-19 pandemic has brought in fundamental changes to many industries, and the payments sector is no exception. Consumers across the globe now have a different approach as they consider commerce and payment options. They tend to flock to those options that are safer and faster. According to the Visa Back to Business Study, 78% of global consumers have adjusted the way they pay for items in the wake of intensified safety concerns. “This shift to digital-first commerce and technologies like contactless payments has ushered in a new generation of consumer tendencies that will have a ripple effect on the global economy for years to come,” says the study.
Businesses also prefer non-cash and contactless payment methods amid lockdowns and changing consumer preferences. Expectations abound for global cash in circulation to reduce in the next few years on the back of digitization initiatives by governments led by Finland and Sweden. Increasing digitalization in payments gave rise to a new number of payment companies, while incumbent payment processors are adapting their strategies to match the new-age payment technologies. However, digitalization may not address the age-old problems related to transactions -- money laundering, terrorist financing and other financial crimes. It would rather help criminals adapt their strategies and remain undetected.
Transaction laundering and its possibilities
The proliferation of e-commerce and digital payments have already given new avenues for criminals to run their illegal businesses and then launder crime proceeds. Criminals resorting to transaction laundering, also known as electronic money laundering or cyberlaundering, have a favourable situation now as people shop online more. Criminals can set up apparently legitimate websites to sell illegal goods and divert the payments to merchant payment accounts. They may either open by their own accounts or manage to get access to accounts set up by third parties. By routing payments to these accounts, they would be able to launder criminal proceeds through Payment Service Providers. Given below are some factors that help transaction laundering:
- The process of creating an online store with a checkout page and credit card info storing feature is very easy now. This helps criminals conduct the three steps of money laundering -- placement, layering and integration -- digitally.
- There are a large number of e-merchants and payment facilitators that provide a great degree of anonymity, helping criminals.
- Banks are outsourcing their merchant acquisition operations to third-party payment service providers and facilitators who don’t have rigorous onboarding systems.
- Alternate payment methods such as digital wallets, mobile wallets and payment gateways have seen significant growth in userbase but they lack proper monitoring systems.
- Payment companies either do not come under the purview of AML/CFT regulations or are not governed by the same level as that of banks.
Transaction Laundering puts Payment Service Providers -- a group of banks, acquirers and payment processors -- into a difficult situation where they unknowingly become facilitators of money laundering. The results are legal actions, hefty regulatory penalties and ultimately severe damage to the reputation.
Transaction Laundering Types
There are three forms of transaction laundering:
- Front Companies: Appearing as legitimate online businesses selling goods or services, these are set up criminals to launder criminal funds by means of over/under-invoicing, inflating transactions or misreporting earnings. For authorities, it is very hard to detect these criminals as the value of the services involved is often subjective.
- Pass-through Companies: These are not set up by criminals but they allow criminals to launder money through their accounts, in many cases for a hefty commission.
- Funnel Accounts: They involve payment processors for multiple companies who knowingly or unknowingly process illegitimate transactions along with legitimate ones. These illegal transactions are hard to detect as they are mixed in with legal ones.
Possibilities of Micro Laundering
Micro laundering refers to the money laundering technique where criminals break large sums of ill-gotten money into tiny portions and transact them without being detected by AML systems. At present, criminals can operate the scheme from their mobile phones making use of digital payment platforms. While a transaction worth US$10,000 would form a red flag, 100 transactions worth US$100 each would easily surpass system checks. A 2018 study by HP Threat Research found that an estimated 10% of cybercriminals are using PayPal to launder money. A further 35% use other digital payment systems, including Skrill, Dwoll, Zoom, and mobile payment systems like M-Pesa.
How to Prevent Money Laundering via Payment Companies
Payment firms must reinforce their AML checks and monitoring processes in compliance with applicable regulations in order to prevent the misuse of their platforms for criminal purposes. Given below are some of the areas where they should focus on:
Know Your Customer (KYC) and Customer Due Diligence
Strengthened Know Your Customer (KYC) and customer due diligence (CDD) measures can prevent transaction laundering to a great extent. Payment processing companies must ensure they do not onboard malicious merchants by mistake. Firms should gather necessary information on merchants and their beneficial owners, if applicable. They should analyse each piece of information and assess the potential risks of doing business with each client. Proper KYC measures also ensure that honest merchant customers are not troubled at all.
Transaction Monitoring
Payment firms need to properly monitor the transactional patterns of their clients. In the case of online merchants, a sudden increase in sales volumes or amounts compared to historical levels or projections should be thoroughly investigated. Unrealistic sales projections should also form a red flag. International payment providers need to develop deep understandings of the markets and merchant sectors they operate in to be able to pinpoint high-risk interactions.
Proper customer risk assessment while onboarding and on an ongoing basis has become difficult. With systems dependent on a few parameters prescribed by regulations, payment firms might not be able to gauge risk accurately. They need a system that can take into account a large number of parameters and dynamically adjust risk rating. In the case of transaction monitoring, human investigators might find it cumbersome to examine each and every one of hundreds of alerts generated on an hourly basis. The current need is for a mechanism that accurately sifts out ‘false positives’ so that compliance staff can focus on true suspicious cases.
And no doubt, modern technologies such as artificial intelligence (AI) and machine learning can take up the task. For example, machine learning can analyze thousands of transactions in a faster manner than human investigators, helping reduce the number of false positives drastically. In addition, it can detect true cases better than myopic legacy systems.
How We Can Help
Tookitaki’s end-to-end AML operating system, the Anti-Money Laundering Suite (AMLS), powered by AML Federated Knowledge Base is intended to identify hard-to-detect money laundering techniques. AMLS is available as a modular service across the three pillars of AML activity – Transaction Monitoring, AML Screening for names and transactions and Customer Risk Scoring. The AI-powered solution has the following features to aid payment companies with their AML/CFT compliance.
- AI-powered detection of interactions and network relationships between customers or interested parties to flag suspicious activity
- World’s biggest repository of AML typologies providing real-world AML red flags to keep our underlying machine learning detection model updated with the latest money laundering techniques across the globe.
- Smart alert management to identify alerts that matter and that are non-productive
- Advanced data analytics and dynamic segmentation to detect unusual patterns in transactions
- Risk scoring based on matching with watchlist databases or adverse media
- Visibility on customer linkages and related scores to provide a 360-degree network overview
- Constantly updating risk scoring which learns from incremental data changes
AMLS was designed keeping in mind the ability of AML/CTF compliance systems to integrate with disparate data sources and platforms. Users may it as a standalone system or on top of legacy systems to augment their efficiency.
Our solution has been proven to be highly accurate in identifying high-risk customers and transactions. For more details of our AMLS solution and its ability to identify the latest money laundering techniques, please contact us.
