E-commerce, or the sale of goods and services online, has reportedly reached $29 trillion in 2017. In the UK alone, the volume of e-commerce sales in 2017 was estimated at $586 billion. Inevitably, this vast amount of legitimate activity offers opportunities for the concealment of criminal transactions. E-commerce businesses can be exploited for criminal purposes in four major ways:
Committing fraud against the customer by failing to deliver goods or services.
Buying goods or services using stolen bank card data.
Creating e-commerce businesses as a front for illicit transactions (for example, to accept bank card payments for drugs).
Abusing online marketplaces to move criminally obtained funds (for example, through the sale of computer-generated books sold via Amazon).
Of these criminal modi operandi, the latter two present particular money-laundering and terrorist-financing (financial crime) threats because they involve consensual transactions that are intended to remain undetected. Despite their role in concealing criminal income, these phenomena remain poorly understood. For instance, there are multiple examples of criminal groups using e-commerce businesses to receive payments for illicit transactions – a criminal typology known as ‘transaction laundering’ – including the case detected by one of the interviewees of an art-trading company selling illicit drugs online. But, save for a range of enforcement actions by the US Federal Trade Commission (FTC) against complicit payment processors, there is little evidence of a law enforcement or government focus on this issue. As a result, there are no verifiable estimates of how prevalent the problem is, nor is it clear what compliant financial institutions should do to better detect this type of criminal abuse. This stands in contrast to other sectors – such as online gambling or cryptocurrency – where instances of criminal exploitation have prompted a reappraisal of their anti-money-laundering/counter-terrorist-financing (AML/CTF) standards.
In a similar vein, there is no doubt that fake or mispriced transactions through online marketplaces can be used as a pretext for moving funds, as demonstrated by the case of a terrorist sympathiser who received money under the cover of selling printers online. There are, however, encouraging indications that online marketplaces are aware of their opportunities to detect such behaviour, such as a press report that the recent rise in the number of ‘defence against money laundering’ suspicious activity reports (SARs) filed in the UK may be attributable to e-commerce businesses such as Amazon Pay and Airbnb. But, unlike the case of VAT fraud – which was the subject of a House of Commons hearing in 2017 – there has been no examination of the effectiveness of online marketplaces’ defences against financial crime.
Against this background, this paper makes the following recommendations:
The Financial Conduct Authority should consider a thematic review of risks related to transaction laundering and financial institutions’ ability to detect it, with a view to identifying best practices.
The National Crime Agency should consider arrangements for law enforcement engagement with payment processors and e-commerce marketplaces in order to share information on typologies and criminal trends.
In the context of the development of new e-commerce rules in the UK and the EU, HM Government and the European Commission, respectively, should take account of financial crime risks along with more well-known threats such as counterfeit trade, drug trafficking or VAT fraud. In doing so, they should address the role of both online marketplaces and AML/CTF-regulated financial institutions involved in processing related payments.
The Home Office and HM Treasury should ensure that the UK’s next national risk assessment of money laundering and terrorist financing addresses the risks of phantom transactions and mispricing involving online marketplaces. This should involve engagement with major online marketplaces used by UK customers to better understand the scale of the problem and measures taken to mitigate it.
Anton Moiseienko is a Research Fellow at RUSI’s Centre for Financial Crime and Security Studies. His current and recent research covers a range of financial crime issues, including money laundering via online businesses, corruption in the UK and overseas, the intersection between cybercrime and money laundering, and financial crime risks posed by free trade zones.
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