In 2023, the online demand for “trendy” drugs reached a fever pitch. While unlawful drug use is certainly nothing new, online access to drugs has grown significantly in recent years.
Since the COVID-19 pandemic, legitimate pharmacies increasingly moved online as a way to dispense medication more conveniently. However, industry experts estimate that, at any given time, there are also between 30,000 and 40,000 active illegal online “pharmacies” selling prescription-only medication and controlled substances without requiring a prescription.
Masquerading as legitimate merchants who operate innocuous-looking websites, illegal actors sell deadly drugs at a click. The public health dangers are clear, but there’s also a sobering reality for those that provide payment services to online merchants—the financial repercussions are theirs to bear.
Payment Providers Pay for Merchant Crimes
It is notoriously difficult to enforce drug laws against illegal online actors. As we often say, “Merchants commit the crimes, but payment providers pay the fines.”
Tracking down and prosecuting merchants who may be operating anywhere in the world requires significant time and resources. In the U.S., law enforcement agencies such as the Department of Justice and the Food and Drug Administration put pressure on third-party intermediaries within their jurisdiction—like payment providers—who may be facilitating these illegal transactions, even unknowingly. The financial repercussions from law enforcement, regulators, and card brands can be severe.
Over the course of 2023, fines against payment providers rose by nearly 20%. Pharma-related assessments represent more than 25% of all assessments in North America, and recent fines range from $25,000 to $150,000 per instance.
The harm to a payment provider is no deterrent to an unlawful merchant. They engage in a variety of techniques to mask their activity and keep the illegal drug trade thriving. Transaction laundering is often a central enabler of these schemes.
Illegal Merchants Hide in Plain Sight
Payment transaction laundering is a method of hiding illegitimate transactions. Merchants who unlawfully sell drugs have a conundrum: they need to provide a method of online payment that is “customer-friendly” but invisible to regulators and compliance teams. Because use of cryptocurrency is still relatively uncommon, and peer-to-peer payment methods may add friction or raise alarms for consumers, illegal merchants strive to remain competitive by accepting credit cards.
The obvious issue is that credit cards are not obscure forms of payment. Card brands work very hard to enforce standards that align with global laws and regulations. To process payments in violation of those standards, an illegal merchant obtains a payment account under the auspices of a legitimate, benign-looking business, such as a gadget website. This then becomes a shell website that is used as a front for illegal or violative drug transactions.
In the competitive marketplace of e-commerce services, payment providers are under pressure to onboard merchant customers quickly— in near real time— to avoid losing business to competitors. Bad actors capitalize on this, as it can be difficult to detect a shell site without more thorough investigation and access to a deeper spectrum of intelligence.
Transaction Laundering Red Flags
Although transaction laundering can be difficult to detect, expert analysts recognize signals that, when taken in context, provide a basis for investigation. Though any one of these signs doesn’t guarantee transaction laundering is at play, here are a few we watch for:
- A merchant applies for an account with no web presence to validate it—no URL, no social media, no reviews, or other digital credentials.
- A merchant’s website appears “too basic.” It’s not clear what they do or how to purchase products, or contact information is missing.
- Transactions originate from locales where the merchant doesn’t appear to be operating.
- The merchant has high chargeback ratios.
- Card authorization amounts don’t match advertised pricing.
Staying ahead of illegal merchants is a never-ending battle. To be successful, payment providers should equip themselves with powerful artificial and human intelligence and remain constantly alert, adapting to emerging trends, schemes, and tactics. Every identified red flag provides a new piece of intelligence, protects against costly fines, and is an important step toward preserving the integrity of the payments ecosystem.
Sarah Craven is the transaction laundering product manager at risk intelligence firm G2 Risk Solutions. Learn more at www.g2risksolutions.com.
