Ariel Tiger, CEO of EverC, a fintech specializing in merchant fraud monitoring, talked with BankBeat about the evergreen topic of fraud and how to thwart it.
What types of transaction fraud are the most common to look out for right now?
Ariel Tiger: Last year, transaction laundering ranked as the most common method for illicit payment activity by 22 percent. Even more startling, it saw the largest increase in online fraud in the first quarter of 2023, accounting for 39 percent. Criminals will use approved merchants to process payments on behalf of another entity unknown to the acquirer or payment provider, thus violating the merchant’s agreement with the latter. In essence, the traditional “carwash” method of cleaning money from illicit activity has moved online.
This is a major blind spot for traditional banking as transaction laundering falls outside the scope of more established monitoring protocols. The speed and sophistication of transaction laundering rings is an expensive and time-consuming problem. Risk and underwriting departments are unable to pivot quickly enough. Transaction laundering rings know this and exploit the vulnerable ecosystem to run their insidious transactions. Combined with the addition of new payments avenues, transaction laundering becomes increasingly difficult to disrupt.
How can banks mitigate these risks?
A.T.: Banks must expand their transaction laundering detection capabilities in line with technology used by major card brands. This means ensuring a thorough assessment of merchants on their platforms and continuous monitoring. Some banks are also leveraging automation and machine learning to identify and eliminate fraudulent merchants faster.
As of 2023, ecommerce sites now control more than 60 percent of the American retail market, meaning online sales account for most transactions. This makes it even more critical for banks to prioritize efforts to identify and eliminate transaction laundering, both to limit their exposure to risk, but to also protect their reputations and their customers.
What should community banks know about the evolving regulatory rules around transaction monitoring?
A.T.: Despite efforts to combat illicit financial crime around the world, criminals have demonstrated their ability to adapt and reinvent new methods. In response, regulators are working to tighten legislation, including:
INFORM Consumers Act, which will require online marketplaces to implement higher levels of seller verification and offer reporting mechanisms for consumers to report suspicious seller activity.
The US Enablers Act aims to expand the Bank Secrecy Act’s definition of “financial institution” by placing new requirements on various players who have a part in facilitating transactions.
Under the U.S. Corporate Transparency Act, FinCEN will require individuals and foreign organizations to report their true beneficiary information.
What are some of the latest threats you’ve seen?
A.T.: Super apps are certainly a threat but aren’t new. Instead of one application with one or a few capabilities, super apps provide multiple services in one place, like China’s WeChat. They capitalize on open banking to offer a range of payments and financial services. With this increased integration of banking, fraudsters therefore have more opportunities to access the financial system.
Additionally, developers are racing to get new offerings on the market, often at the expense of strong security protocols and putting the burden on banks to ensure their customers’ data and transactions are protected. We’re also seeing potential vulnerabilities in identity verification procedures and criminals targeting super apps through fake accounts with stolen or falsified information.
Another super scam to emerge is “Pig Butchering.” As crude as it sounds, it is a method where criminals “fatten the pig before going in for the kill.” Scammers groom their targets to invest in cryptocurrencies or online gaming through sham websites. Once victims invest enough money, scammers take it all and vanish. Losses can range from tens of thousands to even millions.