Reuters recently conducted an independent investigation into "transaction laundering" websites and released a report on its findings. Transaction laundering is a growing trend in online gambling transactions, in which websites pretend to be online vendors which sell everyday products.
In its months-long investigation, Reuters found a network of online dummy sites which allow U.S.-based online bettors to process payments which do not look like gambling payments. Using a third-party site with different "Merchant Category Codes", online gamblers ostensibly buy a mundane product from the fake vendor, such as "fabric for lightweight drapes". Instead of buying drapes, though, he or she makes a payment to an online gambling site.
Reuters exposed seven particular dummy sites in its expose. Alasdair Pal, a London-based reporter, produced the Reuters article on transaction laundering. Mr. Pal wrote, "The seven sites, operated out of Europe, purport to sell items including fabric, DVD cases, maps, gift wrap, mechanical tape, pin badges and flags."In fact, they are fake outlets, part of a multinational system to disguise payments for the $40 billion global online gambling industry, which is illegal in many countries and some U.S. states."
Merchant Category Codes Used for Processing Payments
Credit card companies and other financial institutions use "Merchant Category Codes" to determine whether a transaction is legal or illegal. If a gambling transaction has the code 7995, then VISA or MasterCard checks to see whether gambling is illegal in the country or state of the transaction's origin. If a real money bettor makes a payment to a gambling website from the United States flagged "7995", VISA or MasterCard declines the payment.
With transaction laundering, the payment looks like it's made to a nongaming online merchant. It is the latest ways illegal payment processors trick credit card companies. After a 6-month investigation, Reuters exposed the tactic.
The investigation began when Reuters reporters found an anonymously posted online document in late 2016. The e-document named 3 online dummy sites which engage in transaction laundering. A reporter posted an order with one of those sites, the UK-based Sarphone Ltd., for "a yard of burlap fabric". Sarphone never sent the burlap. In fact, Sarphone never intended to send nongaming products to customers.
Agora Online Services
Weeks later, the reporter received an email from "My Fabric Factory" and a refund. The Reuters employee called a helpline posted online for customers, which was answered by "Anna Richardson". Anna claimed to work for Agora Online Services, a payment services provider which verifies and processes coded credit card transactions.
Anna Richardson gave surprisingly truthful information on the business practices of My Fabric Factory in the original phone conversation. She said her company processes payments for poker websites, along with "hundreds of others" of online gambling sites. Anna told the Reuters reporter, "If you have been using a betting site of any sort...they are normally processed by us."
Later, Andrej Brandt, one of two directors at Agora Services, was contacted and was a great deal less forthcoming. He only said, "Thank you very much for your interest, but I don't like to share my views and insights. I presume you understand."
A second director, Joerg Henning, was approached online, but did not answer an email request for answers.
Online Gambling Transaction Laundering Sites
Eventually, the investigation found 7 different transaction laundering services. The seven sites discussed pretend to sell DVD or gift wrapping paper, so they have different merchant codes. When the credit card company sees those codes, they allow payments to transpire, not knowing they are funding illegal gambling. Such transactions are against the rules of card issuers like VISA or MasterCard, though.
Dan Frechtling of G2 Web Services says that circumventing the merchant's agreement is the latest form of digital money laundering.
Mr. Frechtling said, "Transaction laundering is serious misconduct -- often criminal. It violates the merchant's agreement with its acquirer, allows prohibited goods and services to enter the payment system, and may flout anti-money laundering laws."
"The Digital Evolution of Money Laundering"
Ron Teicher, a CEO of the cyber-intelligence firm, Evercompliant, said that transaction laundering is difficult for credit card companies to monitor, because it is a cutting edge technique that card issuers, banks, and regulators often do not track. New sites appear all the time, making it hard to create a comprehensive list of offenders.
Mr. Teicher said, "It is the digital evolution of money laundering. The only thing is it is much easier to do, and much harder to get caught."
Gregory Lisa, a law partner for Hogan Lovells and former FinCEN officer, told Reuters, "Illicit finance is incredibly creative. It is a very difficult arms race between the government and illicit actors and their financiers."
Simon Dowson: Alleged Money Laundering Mastermind
The Reuters investigation did its part in exposing the practice. The seven sites it found stopped accepting payments, though they remain visible online. Simon Dowson and his wife, Tanaporn Thompson (Tanaporn Dowson), owned the seven sites. Mr. Dowson shut down his previous consulting business in 2015 when UK authorities linked Dowson's clients to money laundering. At the time of the investigation, Sarphone Ltd. listed Tanaporn Dowson as a director.
In the Reuters article, Alasdair Pal reported there are many other transaction laundering sites. Pal wrote that at least 50 transacting laundering websites remain active in the online gambling industry. The fake online vendor sites exist on servers located in Eastern Europe, beyond the authority of United Kingdom and United States regulators.
Mr. Pal said Reuters "found they were part of what it called an 'ecosystem' of nearly 50 interlinked websites, owned by companies in countries ranging from Georgia to Latvia."
What Is Transaction Laundering?
International online gamblers need to know if they engage in transaction laundering, which is "when one online merchant processes payment card transactions on behalf of another, which can help disguise the true nature of payments."
Transaction laundering is illegal in the United States and United Kingdom. US online gamblers in the United States who engage in the practice are violating their credit card terms and conditions agreement. If you use a third-party website to process online gambling payments, it might be illegal.
