Marty Byrde and his family in the runaway hit Netflix series “Ozark” gives viewers an inside look at criminal enterprises and the efforts they go through to launder money. In the show, Byrde leverages legitimate businesses — a funeral home, strip club and casino — in an effort to launder money for a Mexican drug cartel.
To make the series as realistic as possible, producers brought in FBI agents and financial compliance specialists to ensure the plot was accurate when it came to how money laundering was depicted on the small screen. But producers could never foresee how the world would change in 2020.
Cartels and other criminal enterprises that traditionally have relied on physical businesses to clean dirty money were hit hard by the COVID-19 pandemic. The world shut down and money stopped flowing. Instead, e-commerce boomed, so criminals pivoted.
“It wasn’t just consumers or even employees that got pushed to those online channels; criminals also got locked down and could not move things the way they were used to, including money,” explained Tracy Manning, director of financial crime compliance with LexisNexis Risk Solutions.
A billion dollar market
Manning, who also has a background in e-commerce prior to her position with LexisNexis, estimates that about 2.7% of global GDP is a result of “criminal proceeds.” With e-commerce now surpassing $4 trillion a year, that figure could be in the billions.
“If you think about it, it’s a huge issue if you just look at the value of the e-commerce market and the way it has grown because of the pandemic,” she said.
Technically speaking, the United Nations’ Office on Drugs and Crime describes money laundering as “the conversion or transfer of property, knowing that such property is derived from any offense(s), for the purpose of concealing or disguising the illicit origin of the property or of assisting any person who is involved in such offense(s) to evade the legal consequences of his actions.”
In reality, money laundering is just one part of growing fraud businesses that e-commerce has, as an unintended consequence, helped flourish. From stolen credit cards to charge-back schemes, from refund fraud to account takeover attempts, the online nature of e-commerce is a convenient way to hide crime.
“Even in streaming media, you see a lot of, ‘Hey, come try this streaming media for 30 days for free,’” Manning explained. “I can sign up with a stolen credit card, take that credential that is issued to me for 30 days and I can sell that to someone … and before the credit card is ever charged for that first month, I’ve already extracted that value.”
This type of crime is not new, but it has accelerated because of the pandemic. In 2017, the Daily Beast reported on a scheme in which stolen credit cards were used to rent Airbnb houses, only to see the reservation canceled before anyone showed up. The “host” receives 50% payment for the cancellation, essentially turning the dirty money into cold, hard, usable cash.
High profit margins
A 2018 Thomson Reuters article highlighted the growing danger of e-commerce money laundering.
“Before e-commerce, the most straight-up way to launder money was through hotels and casinos,” Dennis Lormel, a former chief of the FBI’s Financial Crimes Program, told the publication. “The way it works is that the ‘legitimate’ part of the hotel business might fill half the rooms, but on the books it looks like the place is operating at full capacity all the time.”
Lormel went on to explain how e-commerce has changed the game.
“If they’re reasonable and conservative about [the value of the product being sold], this kind of fraud is hard to detect,” he said. “But people with extra cash in their pockets often can’t resist spending it, and therein lies the danger.”
Any sort of marketplace or merchant platform where it is easy to sign up for an account [is a target]. If I am a drug dealer, what’s to stop me from signing up for a merchant account, advertising a fake product … and if I want to make it legitimate, maybe I shop a box of rocks.
Tracy Manning, director of finanical crime compliance, Lexisnexis risk solutions
Manning said it can be anyone who has received criminal proceeds and needs to clean them. “Folks have had to look for new ways to do that.”
The pandemic slowed foot traffic in stores, casinos and other locations where money laundering traditionally took place and moved it online, and as criminals looked for ways to fund their illicit activities, the ease of opening an online store proved attractive, with higher margins.
“Any sort of marketplace or merchant platform where it is easy to sign up for an account [is a target],” Manning said. “If I am a drug dealer, what’s to stop me from signing up for a merchant account, advertising a fake product that is of similar value to the drug transaction I want to make with someone, sending the [buyer] a link … and if I want to make it legitimate, maybe I ship a box of rocks.”
That last part is a key part of the new scheme. To help combat fraud, many online commerce platforms require proof that an item was shipped to a customer. Manning said that package could be empty boxes shipped to a nonexistent address or empty warehouse. The effect is to “prove” a transaction took place so as to avoid scrutiny. But without the need to have a physical product to sell, the payout is greater.
“The fact of the matter is that it is highly likely, if you think about the way companies grow up today, especially digitally native companies, a lot of them didn’t come from a financial services background where they have familiarity with regulations,” Manning said. “I’ve stumbled upon examples where there were some really meaningful steps that had been skipped in terms of identity verification or screening of customers and due diligence done.”
Know your partners
The U.S. Treasury has issued warnings about the increase in Mexican drug cartels using e-commerce sites to launder money, but Manning said legitimate e-commerce businesses and platforms needn’t worry too much, although there are steps they should be taking to protect themselves.
Watch: What happened to the supply chain?
“It’s very important that they actually work with folks that have expertise in compliance and financial crime and prevention,” she said. “In some cases, the platforms will have a really solid banking platform and the banking platform will know [what policies need to be in place].”
Manning also said knowing who your partners and suppliers are is important.
“That burden should be on [the platforms] and those are the folks that should be relying on a diligent screening process. Know your customer or know your partner to know the risk,” she said. “Consumers should know their risks as well — are the businesses they are buying from known for bad things?”
LexisNexis has advised businesses to rely on “data-driven technology” to screen entities and remain in compliance with the Anti-Money Laundering and Counter Financing of Terrorist rules.
“By doing so, they can stay at the frontlines of combating money laundering and the financing of terrorism, ensuring effective policies, controls and human capital,” the firm said.
Click for more articles by Brian Straight.
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