Fake sub-merchants are using your platform to process illegal transactions; here’s how to stop them Skip to content

Fake sub-merchants are using your platform to process illegal transactions; here’s how to stop them

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In a previous blog, we discussed how fraudulent sub-merchants take advantage of weaknesses in Merchant Acquirers’, Payment Facilitators’ and ISOs’ onboarding processes to get on the platform and start accepting credit card payments. Transaction laundering, a related form of fraud, takes this even further and is even more nefarious, amounting to $500 billion per year.

A recent Wall Street Journal article titled “Fake Businesses Are Fooling Real Banks Into Processing Online Drug Purchases” detailed how fake businesses are funneling all kinds of illegal transactions through legitimate-looking businesses, which is the modus operandi of transaction laundering.

A good example is a website that’s selling illegal prescription drugs online but running the credit card transaction through another website like a legitimate bookstore. And it’s easy to do, the fraudulent sub-merchant pretends to be an online bookstore, sails through the merchant acquirer/payment processor’s on-boarding system and then starts running the illegal transactions through the fake bookstore.

The FTC and government investigators are cracking down on this form of fraud by specifically targeting payments processors, whom they see as “middlemen that connect merchants to the banks that help approve and settle transactions.”

You can stop this kind of fraud before it can even start. But how?

All online fraud has one thing in common: the fraudsters will always try to hide their real location through the use of location spoofing technologies and techniques such as VPNs or DNS proxies. Detect the location fraud and you’ll spot the fraudster.

In the case of transaction laundering, a fraudulent sub-merchant will use a VPN or DNS proxy to hide their real location in the on-boarding process. Then, they might appear to be an innocuous online bookstore located in, say, Dayton, Ohio, but their real location is in Minsk, Belarus. In reality, they’re running an online drug store selling prescription medications, but when your Visa bill arrives, it says “Joe’s Bookstore, Ohio” to hide the illegal transaction.

Since the customer didn’t buy anything from “Joe’s Bookstore, Ohio,” they initiate a chargeback, that you’re now on the hook to cover. Often, you may be totally unaware of this kind of fraud until the chargebacks pile in. By then, it’s too late; the fake sub-merchant disappeared long ago.

By integrating accurate, authenticated and unaltered data into your sub-merchant onboarding KYC processes, you can stop transaction laundering from happening by preventing fake sub-merchants from ever making it onto your platform in the first place.

GeoGuard’s proven technology can detect VPNs, DNS proxies and other forms of location spoofing. If you detect location spoofing, you’ll know not to continue onboarding that sub-merchant (or trigger enhanced due diligence) and stop fraud before it even has the chance to start.

Read our White Paper for more information on using accurate, authenticated and unaltered location data to stop sub-merchant fraud.

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