Transaction laundering threat is the biggest challenge faced by the digital payment industry. Let’s deep dive to know a little about what it exactly means.

What is Transaction Laundering?

Transaction laundering, often known as electronic money laundering, is an extension of money laundering. Transaction laundering is a criminal activity where an entity that is unknown to the merchant acquirer processes hidden payments. He transfers funds from the merchant to some of their known merchants via facilities provided by the acquirer, violating the agreement with the acquirer.

The illegally collected money is depicted as collected legally to mislead third parties. In other words, it is the process of turning black (Illegal) money into white (legal). It is a well-organized way of money laundering where the launderer processes the credit card or other digital payments to his or his known party’s benefit.

With the digitalization of payments and building Digital India, there is a rapid increase in the number of digital transactions. Launderers are finding new ways to commit fraud. One of the new methods they employ is transaction laundering, also called digital transformation (avatar) of money laundering. The rise of e-commerce and digital payments has made money laundering unrivaled crimes.

Regulators and governments across the globe are introducing new laws to prevent transaction laundering, while launderers are creating new methods to commit crimes. It calls for an interesting battle between the two. Many Anti Money Laundering (AML) laws have been framed and implemented by various governments and regulating authorities. Launderers set up unknown digital transactions through known vendor accounts, converting illegal into legal.

How does it work?

Launderers create legitimate-looking websites where they sell illegal or forged products. They receive the payments in real accounts and wipe them away once the payments have been made. Most scams are done by using transaction laundering.

There are three stages of transaction/money laundering. These are:

  • Placement
  • Layering
  • Integration/Extraction  

A dexterous merchant escapes from the vigilance systems of the banks. Let’s check out how the game is planned.

A clever merchant selling illegal goods creates a forged website alongside a real website selling legal goods. Then he applies for a legitimate merchant account using a legal/authentic website. Now he links this legal merchant account with his forged website. The process is so cleverly planned to collect the payments from the forged website to the legal account, turning illegal money into legal. All this is done in a manner to convey that the legal payments are received but from the illegal website, while the bank remains unaware. Finally, the launderer flies away by transferring the funds or closing the bank account at this blink spot by the time banks get suspicious. The scams are completed. Such scams are called transaction laundering or payment aggregation.

In the first stage, money enters the banking system, which is called placement. The second phase necessitates the mixing of funds, called layering, and in the third phase, the launderer flies away with the funds, which is termed extraction.

Some of the big causes linked to transaction laundering are:

  • Tax Evasion
  • Theft
  • Fraud
  • Bribery
  • Corruption
  • Smuggling
  • Modern Slavery
  • Human Trafficking

How are industries trying to curb transaction laundering?

Corporations are trying to curb transaction laundering in many ways. One method is red flag indication, which helps companies detect and report suspicious activities more easily and faster. Red flag indication helps the Money Laundering Reporting Officer (MLRO) to categorize suspicious activities and keep vigilance. It helps them write Suspicious Activity Reports (SAR) faster and report to the Financial Crimes Enforcement Network FinCEN) if required.

A simple prevention process of transaction laundering:

FinCEN describes suspicious activities as transactions that serve no business or other legal purposes. It further adds that transactions for which available facts do not provide any reasonable explanation can be classified as suspicious activities. Activities such as money laundering, cash transaction structuring, check fraud, check kiting, wire transfer fraud, mortgage and consumer loan fraud, misuse of position (self-dealing), identity theft, and terrorist financing are some activities put under surveillance as suspicious transactions.  

A few ways corporates can prevent transaction laundering threats are:

  • Examination of the suspected seller’s website
  • The content of the suspect website must be compared with the volume of transactions
  • Goods sold at the suspect website must be compared with estimated sales
  • Conducting customer due diligence
  • Adopting advanced technology and AI for prevention and early detection

How can HyperVerge help?

ID verification must be solidly built to mitigate any lacunas in the system breach or prevent any transaction laundering threat. HyperVerge is a leading technology partner with transaction laundering threat detection technology to help acquirers, banks, and PSPs detect such forged websites using such facilities and linkages. We have a high detection built-in technology, AML controls, and monitoring processes to detect high-risk content and websites providing the best services.

HyperVerge provides the fastest ID verification, KYC/AML, and forgery/fraud prevention for all industries, enabling frictionless customer onboarding. We are the largest solution provider globally, having processed 700+ million fraud/ID audits in various domains across industries, spanning 195+ countries in the last 2.5 years. Grab, Vodafone, SBI, Swiggy, CRED, and Home credit are some top clients who trust our preventive security services. Do check out our services for all your needs on our website.


What’s the difference between transaction laundering and anti-money laundering?

Money laundering is a wide area, while transaction laundering is a digital avatar of money laundering with an increase in digital payments.

What are the reasons for the growth of transaction laundering threats?

Rapid digitalization, an increase in the growing mechanism to aid these frauds, and blind spots where banks and regulators cannot track the pace of fraud are some reasons for an increase in transaction laundering threats.

Why is transaction laundering difficult to detect?

With the exponential growth in digital payments, dexterous launderers are inventing newer ways to commit fraud. Banks and regulators are finding it challenging to prevent the blind spots. For example, criminals could use many complex wire transfers to hide the illegal origin of funds. By the time regulators catch hold of them, the crime has already been committed.