Hiding in plain sight Transaction laundering

Lives Well LLC — a small, domestic start-up — purports to sell herbal teas and specialty brews. One man sells his wares on a website that he built and maintains for not much more than the price of a cup of coffee. Lives Well allegedly keeps its stock in storage and claims to quickly dispatch it from the same rented warehouse.

Lives Well is a fictional name for a real perpetrator of transaction laundering. It's the kind of company that flies through automated application checks for most financial products because this thoroughly modern-day enterprise is nothing but a front — an empty shell company hiding a dark secret. No exotic red flags of incorporation structures here because the owner incorporated it domestically. And thanks to the internet, he can sell practically anywhere with little scrutiny.

Lives Well actually sells "legal highs" — highly volatile and potentially dangerous chemical and herbal products designed to replicate and sometimes increase the effects of illegal drugs. (See The Week article, Legal highs: What are they and will the ban work? May 26.) These addictive stimulants often have severe and worryingly untested side effects. The packages often include inexplicable warnings such as "Not for human consumption."

Lives Well uses pictures and strategically placed "credible" reviews on every page of its website to advertise its teas and fool the casual observer.

Lives Well doesn't sell to causal browsers or beverage enthusiasts but to denizens of niche forums and blogs on the Deep Web. Each stimulant is carefully matched to the legitimate product it purports to be. For example, savvy shoppers know that the 5-ounce Earl Grey tea is really a marijuana substitute called Spice — a drug with side effects that can be as potentially detrimental as crack cocaine.

Transaction laundering

If Lives Well LLC had incorporated with a more brazen name like Chem Rage LLC many credit-card companies would've looked into it and declined to support it. After all, credit-card companies like Visa and MasterCard have robust policies and enforcement options that actively discourage payment processing for this kind of merchandise. (See Visa's Global Acquirer Risk Standards and MasterCard'sBusiness Risk Assessment and Mitigation Program.)

This is where transaction laundering — a form of money laundering — comes into play. Sometimes also known as "factoring," transaction laundering occurs when legitimate merchants process payments for illicit purposes on behalf of another party (See, Transaction Laundering: A Growing Threat to the Payments Ecosystem, by Trulioo, Dec. 2, 2005). Sometimes, the entire construct is a front and all transactions are compromised. Other times, criminal transactions are commingled with legitimate income.

Factoring isn't a new modus operandi. In a 2006 case, which ended up creating legal precedent in the U.K., Barclays Bank discovered that one of its clients, Lancore — a low-key, mail-order service company selling low-value, low-risk items such as kitchenware — had discovered that it was involved in transaction laundering for various providers of high risk and sometimes prohibited goods worldwide and was retaining its share of the financial proceeds.

The promise of significant returns for comparatively little endeavor most likely drove Lancore to allow third parties to utilize its Barclays-supplied card-processing facility to launder payments online for hardcore pornography and prescription drugs, including Viagra.

The unexpected increase in actual funds processed alerted Barclays. This is a noteworthy point for investigators: Had Lancore managed the transaction flow —Barclays' expectations — in line with its expected volume, it's entirely plausible that the crimes might have continued undetected for far longer. [See the England and Wales Court of Appeal (Civil Division) Decisions.]

Transaction laundering made headlines in 2015 when former NBA star, Chris Gatling, was arrested for running a massive online fraud scheme using credit cards belonging to people across the country. (See the USA Today story, " Ex-NBA All-Star Chris Gatling arrested in online credit card scam," May 30, 2015.) In his scheme, Gatling told a fitness studio owner he'd met on a dating website that he operated several internet businesses, which created websites and fixed credit. He persuaded the victim to charge credit card numbers for him through her business and allegedly told her she could have 10 percent of the amounts charged. According to the article, he also convinced her to give him his share upfront in cash.

According to the article, police detectives discovered that Gatling operated multiple online businesses for gathering credit card numbers. The numbers were then run through other businesses for services that the cardholders never authorized.

Gatling managed to achieve transaction laundering by exploiting a legitimate facility belonging to a legitimate customer to process proceeds of criminal activity. He'd created a credible separation between his own activities and the front destined to be the first suspect. And by allowing a third party to process compromised payments, he'd managed to get all three stages of money laundering (placement, layering and integration) one step removed from his own activities.

FinCEN recently singled out transaction laundering as a variation on the standard themes of money laundering. But what's remarkable about transaction laundering is the sheer "hiding in plain sight" nature of this gambit.

Criminals and their associates understand the industry and know the types of businesses that are likely to evade enhanced front-end due diligence. At the very least, they seem to understand how to present a credible proposition, such as the Lives Well case.

Challenges for fraud examiners

Fraud examiners face two fundamental challenges when encountering transaction laundering or factoring.

First, bad actors are able to impersonate legitimate businesses to a remarkable degree of credibility so fraud examiners often can't detect foul play at the know-your-customer stage, especially in high-volume environments in which analysts don't always manually assess new applicants deeply enough to detect laundering. Liability for detection shifts from the initial assessors to fraud examiners who usually intervene when the compromised customer is already making transactions or as a result of a contract termination.

Secondly, front companies disguise operations under a veil. From counterfeit goods to prescription pharma, illegal substances to weapons and prohibited services — the list is endless. And the front company bears no resemblance to the actual product it's offering, so investigators have to second-guess what the real product might be.

Though transaction laundering isn't new, it's remarkably viable for criminals to exploit. It's also resilient because it doesn't solely apply to card payments. Fraudsters can use it with electronic money and — to an even greater degree of anonymity — with virtual and cryptocurrency. Criminals can apply its almost universal methodology across the globe.

Fraud examiners need to use the full spectrum of all investigative tools at their disposal, including maximizing all sources of open source intelligence to validate suspects' claims and assessing all available financial intelligence. They need to profile transaction volumes that actually pass through a facility against similar, legitimate enterprises in comparable locations at similar maturity stages.

As more transactions flow globally and move online we're just seeing the beginning of this fraud hiding in plain sight.

Albert James Galloni is director of anti-money laundering and the money-laundering reporting officer for a large financial institution in the U.K. and EMEA (Europe, Middle East and Africa). His email is:avgalloni@gmail.com.

Source: ACFE Fraud magazine - http://www.fraud-magazine.com/article.aspx?id=4294994349


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