Money launderers find refuge in e-commerce boom

Marty Byrde and his family in the hit Netflix series “Ozark” give viewers insight into criminal enterprises and their efforts to launder money. In the show, Byrde operates legitimate businesses—a funeral home, strip club, and casino—in an effort to launder money for a Mexican drug cartel.

To make the series as realistic as possible, the producers brought in FBI agents and financial compliance specialists to ensure the plot was accurate in terms of how money laundering was represented on the small screen. But the producers could never predict how the world would change in 2020.

Cartels and other criminal enterprises that traditionally relied on physical businesses to clean up dirty money have been hit hard by the COVID-19 pandemic. The world stopped and the money stopped flowing. Instead, e-commerce boomed, so criminals pivoted.

“It’s not just consumers or even employees who have been pushed into these online channels; criminals were also locked in and couldn’t move things like they used to, including cash,” explained Tracy Manning, director of financial crime compliance at LexisNexis Risk Solutions.

Unlike traditional money laundering schemes, money transferred through e-commerce sites can bring higher returns to drug and other cartels because physical products do not need to be bought and then resold. In most cases, the criminal enterprise can simply ship an empty box to a warehouse to “prove” that a transaction took place. (Photo: Shutterstock)

A billion dollar market

Manning, who also has a background in e-commerce prior to his position at LexisNexis, estimates that around 2.7% of global GDP is the result of “proceeds of crime”. With e-commerce now exceeding $4 trillion a year, that figure could be over $1 billion.

“If you think about it, it’s a huge problem if you just look at the value of the e-commerce market and how it’s increased because of the pandemic,” she said.

Technically speaking, the United Nations Office on Drugs and Crime describes money laundering as “the conversion or transfer of property, knowing that such property is derived from one or more offences, for the purpose of concealing or disguise the illicit origin of the goods”. or to help any person implicated in this or these offenses to avoid the legal consequences of their acts”.

In reality, money laundering is just one part of the growing fraudulent businesses that e-commerce has, as an unintended consequence, helped to thrive. From stolen credit cards to chargeback schemes, from refund fraud to attempted account takeovers, the online nature of e-commerce is a convenient way to conceal crime.

“Even in streaming media, you see a lot of ‘Hey, come try this streaming media free for 30 days,'” Manning explained. “I can sign up with a stolen credit card, take that ID issued to me for 30 days, and I can sell it to somebody…and before the credit card is charged for that first month, I have already extracted this value.”

This type of crime is not new, but it has accelerated because of the pandemic. In 2017, The Daily Beast reported on a scheme in which stolen credit cards were used to rent Airbnb homes, only to have the reservation canceled before anyone showed up. The “host” receives a 50% payout for the cancellation, essentially turning dirty money into cold, hard, usable money.

High profit margins

A 2018 Thomson Reuters article highlighted the growing danger of money laundering in e-commerce.

“Before e-commerce, the most direct way to launder money was through hotels and casinos,” Dennis Lormel, former head of the FBI’s financial crimes program, told the publication. “The way it works is that the “legitimate” part of the hotel business can fill half the rooms, but in the books it looks like the place is running at full capacity all the time.”

Lormel went on to explain how e-commerce has changed the game.

“If they are reasonable and conservative about [the value of the product being sold], this type of fraud is difficult to detect,” he said. “But people who have extra money in their pockets often can’t help but spend it, and therein lies the danger.”

Any type of marketplace or trading platform where it is easy to create an account [is a target]. If I’m a drug dealer, what’s stopping me from creating a merchant account, advertising a fake product…and if I want to make it legit, maybe I’m buying a box of stones.

Tracy Manning, Director of Financial Crime Compliance, Lexisnexis risk solutions

Manning said it could be anyone who has obtained proceeds of crime and needs to clean them up. “People had to look for new ways to do it.”

The pandemic has slowed foot traffic in stores, casinos and other places where money laundering has traditionally taken place and moved it online, and as criminals look for ways to finance their illicit activities, the Ease of opening an online store has proven attractive, with higher margins.

“Any type of market or trading platform where it is easy to create an account [is a target]”, Manning said. “If I’m a drug dealer, what’s stopping me from signing up for a merchant account, advertising a bogus product of similar value to the transaction? drugs I want to do with someone, to send the [buyer] a link… and if I want to make it legit, maybe I ship a box of stones.

This last part is a key element of the new regime. To combat fraud, many e-commerce platforms require proof that an item has been shipped to a customer. Manning said the package could be empty boxes shipped to a nonexistent address or an empty warehouse. The effect is to “prove” that a transaction took place in order to avoid scrutiny. But without the need to have a physical product to sell, the gain is greater.

“The point is, it’s highly likely, if you think about how businesses are growing today, especially digital native businesses, that a lot of them don’t come from a financial services background where they know the regulations,” Manning said. “I came across examples where there were really significant steps that had been skipped in terms of identity verification or customer screening and due diligence.”

Know your partners

The US Treasury has issued warnings about the rise in the number of Mexican drug cartels using e-commerce sites to launder money, but Manning said legitimate e-commerce companies and platforms don’t have to. worry too much, although there are steps they should take to protect themselves. .

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“It’s very important that they actually work with people who have expertise in compliance and financial crime and prevention,” she said. “In some cases, the platforms will have a really solid banking platform and the banking platform will know [what policies need to be in place].”

Manning also said it’s important to know who your partners and suppliers are.

“This burden should rest on [the platforms] and these are the people who should rely on a diligent selection process. Know your client or know your partner to know the risk,” she said. “Consumers should also know their risks – are the companies they buy from known for doing bad things?”

LexisNexus advised companies to rely on “data-driven technology” to screen entities and stay compliant with anti-money laundering and anti-terrorist financing rules.

“By doing so, they can remain at the forefront of the fight against money laundering and terrorist financing, ensuring effective policies, controls and human capital,” the company said.

Click for more articles from Brian Straight.

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