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The New Problem For Banks In Online Banking: Transaction Laundering

The evolution of banking from brick and mortar to online banking has come with many benefits to the society characterized by increased financial inclusion, the easiness of sending and receiving money and reduction of transaction costs. But the problems that face online banking weighs heavily against its benefits.

Banking problems likewise are evolving like banking itself. Money Laundering is the most voiced problem of both online and traditional banking.

Money laundering is used by criminals to hide the source of their cash. Traditionally, this was done by diverting funds from an illegal business through a legitimate business like a store or restaurant.

Whilst the banking community is still grappling with containing the traditional money laundering, a new form of money laundering is on the rise

What’s the new problem?

Transaction Laundering. The principle of transaction laundering is as simple as traditional money laundering: It happens when an unknown business uses an approved merchant’s payment credentials to process payments for unknown products and services.

Transaction launderers essentially tap into the payment ecosystem by using an e-commerce storefront merchant account to process transactions originating elsewhere.

Perhaps an example explains better

A criminal would set up an illegal blog or website where shoppers can order marijuana. When it comes time to payment, customers would submit their credit card credentials or mobile money account, like they would do in any legitimate purchase. However, the payment would not be processed by the drug site, but rather by a legitimate-looking site that pretends to sell legitimate products like books. The book site would be operated by the criminal for the purpose of gaining access to a card processing system or mobile money system. The credit card or mobile money account will then be charged, and the criminal collects his/her payment via the legit site. Thus, a customer who buys marijuana will be charged for a copy of a book by Tsitsi Dangarembga for example and that’s how the payment will show up on the credit card statement issued by their bank.

What are the risks and costs for banks?

Banks don’t really incur financial loss in the process of transaction laundering. However, when transaction laundering has been exposed by the financial regulatory authorities like The Reserve Bank of Zimbabwe(RBZ), a bank’s reputation could be tarnished and on top of that RBZ will fine it for negligence. Therefore, bad reputation is their biggest risk and fines are their biggest cost if transaction laundering occurs.

The solutions proposed

Since this is a new problem, no technical solutions in terms of software development have been specifically made. But there are some certain guidelines that have been advanced to help the financial institutions to exercise due diligence. Here are the guidelines;

A look ahead

Banks would be well-advised to take a proactive role and engage with the software development community so that softwares to curb this rising problem be developed.


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9 thoughts on “The New Problem For Banks In Online Banking: Transaction Laundering

  1. mmmm…Some of these articles need someone to evaluate them before they are published. Which bank in Zimbabwe is handling eCommerce, and do we have any website that handles massive ecommerce. Dont create unnecessary panic from your ill-researched articles. Can you give a practical example of a website handling Online sales.

  2. Was excited by headline…but soon realized article lacks relevence to our context. Ended up sounding like a stretch just to write and publish something.

  3. What has any claim in the article have to do with online banking? Secondly, can you cite a real world example of an organisation that has used the outlined laundering method? It is quite naive to think banks cannot detect laundering in online transactions vs “traditional” transactions. It’s actual easier to analyse and audit online transactions, unlike physical lump sum deposits which aren’t backed by any trading data. Machine learning lends itself well to fraud detection in the banking sector. I strongly suspect banks ignore fraud and laundering reports from their systems due to their own involvement in such activities. Overally, the article sounds like hypothetical “bar talk”.

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