As with all things digital, e-commerce has changed how we do business. It’s made shopping easier. But it’s also presented new opportunities for fraudsters to commit their crimes.
Now, fraud comes in many forms, but money laundering, specifically, is no joke. It’s even been estimated that 2% to 5% of the total global GDP, or $800-$2 trillion, is affected by it. This statistic only is more than enough to stress how important anti-money laundering (AML) is in the global e-commerce landscape. But let’s dive into the details and make it all the more clear.
Why e-commerce is vulnerable to money laundering
E-commerce means buying and selling goods and services online, with a capital O. This means that the buyer and the seller won’t get to meet in person, making it simpler for criminals to hide their identities and more complicated for authorities to track activities back to them.
But besides this, the e-commerce landscape witnesses:
- A lot of transactions: Around 34% of shoppers shop something online at least once a week, so you can imagine how many online sales are taking place daily. And keeping track of so many transactions is almost impossible without security measures in place.
- Possibility to use cryptocurrencies: Cryptocurrencies are great. I mean, who doesn’t like crypto? Turns out fraudsters also do. Cryptocurrencies are all about anonymity and speed, and that’s just about everything fraudsters need to hide their tracks.
- Cross-border transactions: E-commerce is designed so that customers and buyers from around the world can easily make deals with each other. And while this is convenient for them, it might also get tricky due to each country having its own AML rules – some stricter, some not as tight – allowing fraudsters to take advantage of these differences and move money between countries without getting caught.
All these perfectly explain why e-commerce is vulnerable to money laundering and, more importantly, why AML is a must in the e-commerce landscape. That said, in this next section, we’ll talk about AML more thoroughly so there won’t be any confusion regarding its practices.
Understanding anti-money laundering (AML)
Simply put, AML includes rules, measures, policies, solutions – everything that an organization can take into its own hands to potentially prevent money laundering. But to understand better what AML strives to prevent, let’s explain money laundering. So, basically, this is when criminals attempt to clean money that they have illegally obtained. Here’s how the process usually goes:
- Placement: Once a criminal gets their hands on illegal money, they’ll try to get it into the financial system. In the e-commerce world, for example, they might create fake stores and sell sought-after items at higher prices than usual. They then purchase these items by themselves, making it look like it entered their account through legal means. What they’re trying to do is get this money into circulation without drawing too much attention.
- Layering: Their next step would be to make the money harder to trace. To “layer” them. To hide the origin of where it initially came from. They’ll transfer them between different accounts, make multiple smaller transactions, or convert them into cryptocurrencies.
- Integration: Ta-da, the money can finally enter the economy, looking all clean and steady. Criminals will then invest it into businesses or properties to make it appear as if it’s legitimate. At this point, it’s safe to say that they’ve succeeded in their scheme.
What AML does is try to stop this process at the very beginning. To cut off criminals at the source. Or, at the very least, make it impossible for them to get to the very end. The AML practices that organizations usually implement and are mandated by law are the following:
Customer due diligence (CDD)
Making sure that customers are who they say they are isn’t just recommended for e-commerce businesses and financial institutions. In many regions, it’s actually mandatory. In the US, for example, the Financial Crimes Enforcement Network (FinCEN) mandates that all financial institutions that deal with large transactions must implement CDD measures.
So, what does this mean?
This means that e-commerce businesses and institutions that allow them to process payments in the first place should get to know their customers better in terms of basic information and transaction patterns. It all starts with collecting information about the customer, such as their name, age, address, and ID, to create a profile of who they really are. This is known as KYC.
Now, you won’t have to do this manually. Collecting information about customers and confirming they’re actually true can be easily done with solutions such as SEON that automate the entire process. These solutions pull data from different sources to verify the identity of customers. Not only that, but they will also monitor their behavior and how, when, and how large of transactions they usually make to determine whether there’s a potential money laundering risk.
Judging from this, it’s obvious that online sales aren’t completely anonymous. But they do come with a certain level of anonymity that fraudsters can exploit. For example, they could create fake accounts using stolen identities. They could also use a VPN like ExpressVPN to hide their current location.
This would be much harder for someone to do in person, and considering that e-commerce sales are only expected to grow, AML measures are about to become all the more important.
Transaction monitoring
Monitoring the nature of transactions is also part of AML and for very obvious reasons. This monitoring includes finding out more about the transaction and the person initiating it, such as:
- Frequency and amount: It doesn’t mean that the person has evil intentions, but when a customer suddenly starts making frequent large transactions, it’s almost always considered a red flag for a potential money laundering attempt. However, if transaction monitoring isn’t part of your business’s measures, this will be hard to detect.
- The payment method used: Seeing that a customer uses cryptocurrencies, for example, is considered a good enough reason to double-check their identities and the origin of the transaction, as crypto carries a higher risk for anonymity and fraud.
- Its origins: The same goes for the location from where the transaction was initiated. If you notice that it comes from a country where AML regulations are lacking or one that’s known for high levels of fraud, it makes sense to keep a close watch on the customer.
Once again, monitoring transactions against anti money laundering is mandatory in many jurisdictions, including the United States, United Kingdom, Australia, Canada, etc. Most of these laws require financial institutions to implement transaction monitoring to not only detect but also report any suspicious behavior.
Most of the time, transaction monitoring is conducted with the help of transaction monitoring solutions that do all the monitoring in real time. They leave no room for future deviations.
Working closely with financial institutions
It’s probably a relief to hear that you don’t have to fight fraud alone. In fact, it’s mandatory that you don’t fight fraud alone. If there’s a reason for you to suspect potential money laundering attempts, you must partner up with a financial institution to make sure you take the right steps.
They can help you with everything from verifying the identity of your customers and determining the origins and nature of the transaction to reporting unusual patterns to the relevant authorities.
Why AML shouldn’t be overlooked
Yes, it’s pretty obvious that anti-money laundering is there to stop money laundering. However, there’s more to it. E-commerce businesses that fail to implement it could face not only financial issues but also legal ones due to not adhering to the specific AML guidelines in your country.
It could also damage your reputation. And once your reputation has been ruined and your business is associated with money laundering, you’ll have a hard time getting back on your feet.
AML for the win
The growing importance of AML in the e-commerce landscape lies in the fact that the e-commerce landscape is only continuing to grow, and with it, the potential for money laundering and all types of fraud. So, basically, there’s no other option but to fight it.
Once again, money laundering is no joke, and no criminal will go easy on you once they find a weak spot. So, it’s safe to say that the only way to get around money laundering is to implement AML measures. You’ll be saving yourself from both financial losses and legal issues.
Author Bio
Makedonka Micajkova is a freelance content writer and translator, always bringing creativity and
originality to the table. Being multilingual with professional proficiency in English, German, and
Spanish, it’s needless to say that languages are her biggest passion in life. She’s also a skilled
communicator, as a result of her three years of experience as a sales representative. You can
find her on LinkedIn.