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A New Kind of Fraud: Transaction Laundering

What is transaction laundering and why might an application be denied because of it?


What is Transaction Laundering?

Previously known as “undisclosed aggregation” or “factoring,” transaction laundering occurs when a merchant processes transactions on behalf of another business. This other, “hidden” business is often engaged in dangerous or prohibited activities.

Using an approved merchant’s payment credentials, the unknown (fraudulent) business processes payments for products and services that the acquiring bank does not know about, leaving the bank exposed to a substantial amount of risk. Without proper monitoring, acquirers, payment service providers (PSPs), payment facilitators, and gateways can unknowingly facilitate transactions for scores of unknown merchants that are processing laundered transactions.

Experts say that the three most common types of transaction laundering are benign, malicious, and affiliate. Benign laundering means that two legitimate businesses are sharing the same gateway. Malicious laundering is when an illicit business sends transactions through a legitimate account. Affiliate laundering occurs when an illicit business takes customer payment info, creates an affiliate account at a 3rd-party merchant site, and then purchases goods to collect affiliate revenue.

Why the Rise in Transaction Laundering?

Money laundering is nothing new but transaction laundering is a relatively new phenomenon that can be traced to the evolution of e-commerce and mobile payments.

It’s easier than ever to become an online store and establish an e-commerce merchant account – and criminals know it. Fraudsters no longer have to go through the complicated process of setting up a physical storefront business which, unfortunately, means setting up a payment environment that actually contributes to the rapid proliferation of transaction laundering. Add to that the borderless, global aspect of e-commerce and the minimal know-your-customer requirements for establishing online merchants, and you get the ideal conditions for performing unauthorized financial activities.

With transaction laundering, criminals can manage the three steps of money laundering (placement, layering, integration) digitally. This allows them to achieve their goals faster and easier on a larger scale than traditional money laundering methods allow.

Combatting Transaction Laundering

Because transactions, especially those that are online, come from a variety of sources that use different payment methods and are sometimes hard to trace, there really is no single solution to safeguard businesses from transaction laundering. However, a good mix of technology as well as human experience and expertise can help to combat it by pinpointing certain risk factors in each transaction. Implementing specialized software is a great start at detecting potential fraud, and seasoned merchant service providers can also do their part by identifying any red flags.

According to LOLA POS.’s Director of Risk, Pablo Nuñez, being proactive is key in combatting transaction laundering. “It’s really up to us to do our due diligence in detecting and preventing cases of transaction laundering. That means increasing awareness and constantly reviewing merchant accounts and analyzing financials as well as other key factors to ensure that fraud is not occurring,” Nuñez said.

Denying a Merchant Application

Catching past violators before they are allowed to strike again while eliminating their methods should always be at the forefront of a processor’s anti-transaction laundering efforts. This means denying new merchant applications as well as cancelling them for existing merchants.

The the aforementioned “red flags” may include any number of suspicious elements that may ultimately result in a merchant application being denied. The overarching thing we’re looking for when reviewing a merchant’s application are inconsistencies and, most importantly, whether or not the pieces add up to a business model that makes sense. The application should tell us what we need to know about who the merchant is and how they operate. When the pieces don’t add up, that’s what will trigger additional diligence.

Applications may also be denied based on fraud risk or credit risk. Fraud risk may depend on a merchant’s business model or on the inconsistencies of an application. Credit risk indicates that due to elements of the merchant’s business or financial standing, there’s a significant possibility that the merchant will not be able to meet their financial obligations.


Since most traditional know-your-customer programs focus almost entirely on the physical rather than digital aspects of a business, they just aren’t capable of addressing transaction laundering properly when it comes to e-commerce payments. Merchant service providers and processors need to be aware of the holes in their own fraud mitigation methods, as it leaves them exposed to both regulatory and business risks.

Going forward, merchant service providers and merchants will need to become hyper-vigilant and work together to ensure that appropriate business is allowed to continue. Unfortunately, no one can take action unless they are actually aware of what’s going on. That’s why it’s imperative that everyone works together to educate themselves and ensure the future of safe shopping.

Count on LOLA POS. to keep your business safe from fraud attempts, no matter how simple or elaborate they might be. With over 10 years of expertise, our dedicated professionals stay diligent and our cutting edge software helps to thwart potential fraud. Contact LOLA POS for more information or to learn more!

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