Only three years ago, online retail giant Amazon was completing as many as 398 transactions per second. Then in 2016, that number jumped up to an estimated 636 transactions per second. While these numbers are again estimates based on annual sales figures, it isn’t difficult to imagine that Amazon or any online retailer rack up overall impressive sales figures across thousands of merchants. Alibaba is estimated to have at least 8.5 million vendors, with 278 million orders (in 2015), and $270 billion in merchandise.
The volume of online retail transactions highlights the potential for money laundering. If even 10% of online transactions were illicit in some way, that would reflect tens of billions of dollars’ worth of merchandise which could have been stolen items fenced on line, phantom transactions for nonexistent goods, or the goods themselves that could have been counterfeit.
The Organization for Economic Co-operation and Development (OECD) places the market for counterfeit goods at around $461 billion per year. However, it is impossible to justify an amount even half that high coming from street-level sales alone. The bridge between those two figures, therefore, must be somewhere in the online retail and services space.
The Inception of Transaction Laundering
There is a perpetually decreasing need to physically place funds into the stream of commerce, and even more ways to virtually layer and then digitally leverage those funds. Thus, online laundering or “transaction laundering” was born. Broadly, transaction laundering is the process of leveraging e-commerce and merchant processing to create fictitious transactions which appear legitimate. These transactions can be used to place and layer illicit funds, or even to generate those funds through entirely fraudulent transactions.
This definition can include both deliberate transaction laundering by a collusive merchant, or passive transaction laundering where a merchant’s payment credentials are stolen by the money launderers and used to launder funds.
The concept has been in existence, in its infancy referred to as a derivative of cuckoo smurfing, in which a pair of global criminals transfer money and payments between themselves. Similarly, in trade-based money laundering cases, there have been instances where payments have been made for shipments of goods which were either much lower in value or entirely nonexistent.
The global inspection rate for shipping containers hovers somewhere at an average of 6%, thus the opportunity to send or receive payments for so-called “phantom shipments” is another optimal route for trade-based money laundering.
Another area of trade-based money laundering is the ability of a launderer to manipulate the apparent price of the goods, known as under- or over-invoicing. In macroscopic iterations, it can be easier to detect. However, smaller variations on a price, for example 15 cents above market rate, can easily be explained by falsely claiming that the product is more difficult to get in a certain geography or is of slightly better quality than ordinary products (e.g. ground round vs. wagyu beef).
However, with the advent of multiple online merchants and value transfer systems, a new threat has evolved: ghost laundering. Ghost laundering is the multifaceted process of leveraging true or passive merchants to appear to sell items which are counterfeit, valueless, or entirely nonexistent.
Ghost laundering combines the inability to detect phantom sales (i.e. transactions where no actual or real goods are being offered) with the diversity of merchant typologies and vendors. A couple of years ago, Apple completed a research project and found that 90% of purportedly genuine Apple-branded chargers sold on one online retailer were in fact counterfeit. This paralleled stories about fictitious items being sold on Amazon such books filled with completely nonsensical text being sold for thousands of dollars. In one case, a true author’s name was used to sell a book in an online-only transaction for more than $24,000. The book contained none of the author’s work and, like many others created via self-publishing and sales through a litany of vendors, was full of strings of babble.
How it Could Work: Books and Online Gaming
In exchange for routine sales of street drugs, portions of the debts owed could be repaid through a single purchase or a series of purchases through an online vendor. A book could be listed as a rare, first, or limited edition at a falsified price of anywhere from $1 to $1,000 and sold repeatedly. The reality is that for ghost laundering, merchandise doesn’t even have to be sold.
A collusive merchant could arrange the online transaction through a vendor like Amazon or Alibaba and forward the profits of the transaction at the drug dealer’s discretion. Similarly, in the context of counterfeit goods, a drug purchaser could list counterfeit goods, generating the amount owed to a seller through fraudulently claiming the legitimacy of a product and using the proceeds of that fraud to repay a drug debt.
Online gaming programs and systems can also be leveraged for ghost laundering. A criminal engaged in identity theft, for example, could open up dozens of credit cards in victims’ names and use those cards to make in-app purchases, or simply to store value within an online game.
One investigation found fraudsters used 20,000 compromised credit cards to make in-app purchases and build out high profiles (i.e. more powerful or with better skills/abilities) in the game Clash of Titans and other similar games. The fraudsters could then sell those profiles on third-party vendors to other gamers who want to advance in the game, thus creating an informal value transfer.
In part 2 of our series, Michael Schidlow demonstrates that ghost-laundering transactions are not limited to just gaming and online retailers. Schidlow will discuss both Airbnb and Uber technologies. Additionally, to learn more about how Airbnb is being used in money laundering scams, see our interview with Dennis Lormel, where he examines different types of ecommerce fraud typologies.