We Need Evidence, Not IP Expertise
When a merchant applies to sell branded electronics, luxury handbags, or high-demand sneakers, the challenge is not determining whether they have trademark rights (that is the brand owner's domain). The challenge is verifying whether they can legitimately source, authenticate, and support the products they claim to sell.
This guide provides the complete assessment framework we use to evaluate merchants selling branded goods, focusing on operational evidence rather than intellectual property law. We examine supply chain documentation, sourcing patterns, return capabilities, pricing anomalies, and warranty legitimacy to classify merchants into one of three categories:
- Authorized resellers: Merchants with documented relationships to brands or authorized distributors (lowest risk)
- Gray market resellers: Merchants selling authentic goods sourced through unauthorized channels (medium to high risk)
- Counterfeit operators: Merchants selling fake or misrepresented goods (critical risk)
Payment processors, acquiring banks, and marketplaces face different compliance obligations and risk exposures for each category. Misclassification creates financial liability, reputational damage, and potential regulatory scrutiny.
Understanding the Core Distinction
The branded goods market includes multiple distribution models with different risk profiles:
Authorized resellers: Merchants with direct relationships to brands or franchised distributors, carrying proper authorization documentation, offering manufacturer warranties, and operating within brand-controlled distribution channels (low risk, subject to standard merchant due diligence)
Gray market resellers: Merchants selling authentic products obtained through unauthorized channels such as bulk liquidations, cross-border arbitrage, or diverted inventory (medium to high risk depending on product category and brand enforcement posture)
Counterfeit operators: Merchants selling fake, replica, or misrepresented goods while claiming authenticity (critical risk requiring immediate action)
According to CISA's guidance on supply chain security, the gray market provides "access to sellers and buyers through unauthorized channels, those not affiliated with the brand or original component manufacturer". While gray market goods may be authentic, they present supply chain integrity concerns, warranty complications, and brand relationship risks that differ from both authorized resale and counterfeiting.
The OECD reports that in 2021, global trade in counterfeit goods was valued at approximately USD 467 billion, representing 2.3% of total global imports. This scale demonstrates why payment processors and acquiring banks must implement robust verification frameworks during merchant onboarding.
The Complete Verification Framework
Supply Chain Evidence and Authorized Status
Why it matters: Who a merchant buys from determines product authenticity, warranty validity, and supply chain traceability. Authorized distributors maintain contractual relationships with brands. Gray market sources operate outside these channels. Counterfeiters fabricate sourcing claims entirely.
Supply chain documentation reveals whether claimed products can be obtained through stated channels at claimed volumes.
High-Risk Sourcing Patterns
Vague or generic sourcing claims:
- "We work with authorized suppliers"
- "We source from reputable distributors"
- "All products are 100% authentic"
- No specific supplier names or documentation provided
Why this is high risk: Generic authenticity statements without verifiable sourcing evidence are the primary indicator of either gray market sourcing or counterfeiting. Legitimate authorized resellers provide specific documentation.
Example: A merchant applying to sell premium headphones states "We source from authorized channels in Asia" but cannot name specific distributors. When pressed, they provide a list of three companies. Independent verification reveals one company does not exist, one operates from a residential address, and the third is a known gray market broker. This pattern indicates either counterfeit sourcing or undisclosed gray market operations.
Inconsistent supplier relationships:
- Supplier names change frequently between questions
- Cannot produce authorization letters or distributor agreements
- "Suppliers prefer to remain confidential"
- Different sourcing stories for different product categories
Why this is high risk: Inability to consistently identify suppliers suggests ad hoc gray market purchasing or counterfeit sourcing.
High-volume claims without distributor capacity:
- Merchant claims to sell 500 luxury handbags monthly
- Cannot name distributors with inventory to support that volume
- Claimed sourcing channels cannot provide claimed product quantities
- Purchase history does not match claimed sales volume
Why this is critical risk: Volume and sourcing capacity mismatches indicate counterfeit operations or fabricated business claims.
Example: A merchant claims to sell 200 units monthly of a limited-edition sneaker with documented production runs of 10,000 pairs globally (distributed across 500+ authorized retailers worldwide). This single merchant would represent 24% of annual global production (200 × 12 = 2,400 units). The claimed volume is implausible without being one of the brand's largest authorized partners, which the merchant is not.
Cross-border sourcing without import documentation:
- Products claimed to be sourced internationally
- Cannot provide customs documentation, import records, or duties payment
- "We have partners who handle imports"
- Shipping origins do not match claimed sourcing locations
Why this is high risk: Legitimate international sourcing generates customs paperwork, import duties, and shipping documentation. Absence suggests dropshipping from unverified sources or direct counterfeit manufacturing.
Acceptable Sourcing Patterns
Documented authorized relationships:
- Merchant provides authorization letters from brands
- Distributor agreements showing franchised status
- Direct invoices from authorized distributors
- Verifiable account numbers with known authorized distributors
Traceable gray market sourcing (disclosed):
- Merchant openly discloses sourcing through liquidation channels
- Provides purchase documentation from liquidators or closeout sellers
- Explains why products are below typical wholesale (overstock, discontinued models, etc.)
- Can demonstrate product authenticity despite unauthorized channel
Transparent international sourcing:
- Customs and import documentation for all international shipments
- Commercial invoices showing shipper and consignee
- Payment records to foreign suppliers
- Shipping manifests and tracking history
What to Request from Merchant
Category
Documentation Needed
Supplier relationships
- Specific supplier names and contact information
- Authorization letters from brands or franchised distributors
- Distributor agreements or reseller contracts
- Account statements from authorized distributors
Purchase documentation
- Invoices from suppliers for past 90 days
- Purchase order history
- Payment records to suppliers
- Volume purchased versus volume claimed to be sold
Import records (if applicable)
- Customs entry documents
- Commercial invoices for international shipments
- Proof of duty and tariff payments
- Shipping manifests and bills of lading
Inventory sourcing
- Physical supplier locations and addresses
- Verification contact for suppliers
- Supplier business registration documentation
- Explanation of how products are sourced and at what prices
Testing Protocol
- Supplier verification: Contact claimed suppliers (with merchant's permission or through public channels) to verify the merchant has an active account and purchasing relationship
- Volume reconciliation: Compare supplier purchase volumes to claimed sales volumes to identify discrepancies
- Authorization check: For merchants claiming authorized status, request direct confirmation from the brand or franchised distributor
- Documentation authenticity: Verify invoices and agreements against known supplier formats and contact information
Merchant assessment checklist
- Merchant provides specific supplier names and contact information
- Authorization documentation is verifiable (letters, agreements, account numbers)
- Purchase volumes match claimed sales volumes
- Suppliers are recognized authorized distributors or gray market sourcing is disclosed with evidence
- International sourcing includes proper customs and import documentation
- Supplier locations and business registrations are verifiable
- No significant inconsistencies in the sourcing narrative
Red flag threshold:
- Generic "100% authentic" claims with no supplier documentation = HIGH RISK
- Cannot name specific suppliers or changes story = HIGH RISK
- Volume claims without supporting purchase documentation = CRITICAL RISK
- No import documentation for international sourcing = HIGH RISK
- Claimed supplier denies relationship with merchant = CRITICAL RISK (immediate decline)
Purchase Documentation and Sourcing Trails
Why it matters: Authentic purchase documentation creates an auditable trail from manufacturer to merchant. Authorized channels generate invoices, contracts, and payment records. Gray market sources produce different documentation patterns. Counterfeiters cannot produce legitimate purchase trails.
Payment and sourcing documentation patterns reveal whether products are obtained through legitimate commercial channels.
High-Risk Documentation Patterns
Missing or fabricated purchase records:
- Cannot provide recent supplier invoices
- Invoices lack standard commercial elements (tax IDs, addresses, terms)
- Invoice formatting is inconsistent or unprofessional
- Supplier names on invoices do not match claimed sourcing
Why this is critical risk: Inability to produce standard commercial documentation for inventory purchases indicates either fabricated sourcing claims or dropshipping from unverified sources.
Example: A merchant submits invoices for luxury watch purchases. The invoices show a supplier address that Google Maps reveals is a residential apartment. The supplier's tax ID format does not match the country's standard business registration format. The email contact is a free Gmail address. The phone number listed connects to a disconnected line. These signals together indicate fabricated documentation.
Payment method inconsistencies:
- Pays suppliers only through wire transfers to foreign accounts
- Cannot demonstrate commercial payment terms (net 30, net 60, credit lines)
- Uses personal payment accounts to purchase inventory
- No payment documentation matching invoices
Why this is high risk: Legitimate wholesale and distribution relationships involve commercial payment terms and standard business banking. Cash-only or personal payment arrangements suggest unauthorized sourcing.
Supplier contact information anomalies:
- Invoices show generic email addresses (Gmail, Yahoo, etc.) for suppliers
- Supplier addresses are residential or mail forwarding services
- Supplier phone numbers are disconnected or go to unrelated businesses
- Cannot provide direct contact for supplier verification
Why this is high risk: Professional distributors operate from commercial locations with professional contact information. Consumer email addresses and residential addresses indicate non-commercial sources or fabricated suppliers.
Purchase price inconsistencies:
- Merchant claims to purchase luxury goods at prices below known wholesale
- Cannot explain how they obtain preferential pricing
- Purchase prices are inconsistent with claimed sourcing channels
- Pricing suggests products are obtained outside normal distribution
Why this is medium to high risk: Below-market purchase pricing without justification indicates either gray market arbitrage, liquidated or defective inventory, or counterfeit sourcing. Context determines risk level.
Example: A merchant claims to purchase current-model smartphones at 40% below authorized distributor wholesale pricing. They explain this as "volume purchasing power" but invoices show orders of only 50 units per month. Authorized distributors offer volume discounts at this order size, but not at 40% levels. The extreme discount is inconsistent with claimed volume and suggests either counterfeit products (manufactured for a fraction of authentic costs) or fraudulent invoicing (real purchase price is much higher, invoices are altered for underwriting).
Acceptable Documentation Patterns
Complete commercial documentation:
- Standard supplier invoices with complete business information
- Purchase orders and order confirmations
- Payment records matching invoice amounts and dates
- Commercial terms and account statements from suppliers
Verifiable supplier information:
- Supplier business addresses at commercial locations
- Professional contact information (business domains, direct lines)
- Suppliers can be independently verified through business registrations
- Supplier contact information matches known distributor records
Consistent purchase patterns:
- Regular purchasing from same suppliers over time
- Purchase volumes align with claimed inventory turnover
- Pricing is consistent with wholesale or distribution pricing
- Payment methods reflect commercial relationships (ACH, commercial credit, net terms)
What to Request from Merchant
Category
Documentation Needed
Purchase invoices
- Invoices from past 90 days showing supplier name, date, items, quantities, prices
- Purchase order documentation
- Delivery receipts or packing slips
- Complete supplier business information on each invoice
Payment records
- Bank statements or payment confirmations showing payment to suppliers
- Payment method used (check, ACH, wire, commercial credit)
- Payment amounts matching invoice totals
- Payment dates corresponding to invoice terms
Supplier verification
- Supplier business name, address, and contact information
- Permission to contact supplier for verification
- Account number with supplier if applicable
- Length of relationship with each supplier
Pricing justification
- Explanation of how merchant obtains wholesale pricing
- Any volume purchase agreements
- Justification for below-market pricing if applicable
- Comparison of purchase price to market wholesale rates
Testing Protocol
- Invoice verification: Examine invoices for standard commercial elements including tax IDs, complete addresses, professional formatting, proper product descriptions
- Payment reconciliation: Verify payment records match invoice amounts, dates, and suppliers
- Supplier contact verification: Independently verify supplier contact information against business registrations and public records
- Volume and pricing analysis: Assess whether purchase volumes and pricing align with merchant's claimed business model and product authenticity
Merchant assessment checklist
- Recent purchase invoices provided (within 90 days)
- Invoices contain complete commercial information
- Supplier contact information is professional and verifiable
- Payment records match invoices
- Purchase volumes support claimed sales capacity
- Pricing is consistent with the claimed sourcing channel
- Supplier relationships are stable over time
- No significant documentation gaps or inconsistencies
Red flag threshold:
- Cannot provide supplier invoices = CRITICAL RISK
- Invoices show residential addresses or generic email addresses = HIGH RISK
- Payment methods only cash or foreign wire transfers = HIGH RISK
- Purchase prices significantly below market without explanation = HIGH RISK
- Supplier information is unverifiable or fake = CRITICAL RISK (immediate decline)
Return and Defect Handling Capabilities
Why it matters: How merchants handle defective products, returns to suppliers, and manufacturer warranty claims reveals their position in the supply chain. Authorized resellers can process returns through official channels. Gray market sellers face return obstacles. Counterfeiters have no legitimate return capabilities.
Return and defect handling patterns demonstrate whether the merchant operates within authorized distribution channels.
High-Risk Return Patterns
No supplier return capability:
- Cannot return defective products to suppliers
- No return merchandise authorization (RMA) process with suppliers
- "All sales final" from suppliers
- Handles all defects internally without supplier involvement
Why this is high risk: Legitimate wholesale and distribution relationships include return rights for defective inventory. Inability to return products suggests unauthorized sourcing or counterfeit goods.
Customer return policy inconsistencies:
- Offers customer returns but has no supplier return capability
- Return policy promises manufacturer warranty but merchant cannot access warranty service
- Unusually restrictive return windows (7 days or less for high-value items)
- Returns are heavily discouraged through restocking fees or complex processes
Why this is medium risk: Merchants without supplier return capabilities who offer customer returns either absorb losses (suggesting high margins consistent with counterfeits) or provide poor customer service (suggesting gray market constraints).
Example: A merchant selling luxury cosmetics offers customers a 30-day return policy but states they have "all sales final" terms with suppliers. When asked how they handle defective products, they explain they "work directly with customers to resolve issues" without supplier involvement. This pattern suggests either gray market sourcing (where upstream suppliers will not accept returns on diverted goods) or counterfeits (where there are no legitimate suppliers to return to). Absorbing all returns without supplier recourse indicates margins inconsistent with authentic luxury goods.
Warranty claim obstacles:
- Cannot demonstrate how manufacturer warranties are honored
- Directs customers to third-party repair services instead of manufacturer warranty
- Warranty claims must go through merchant, not manufacturer
- No documented process for warranty registration or claim submission
Why this is high risk: Difficulty processing manufacturer warranties suggests products were not obtained through channels that preserve warranty coverage.
No quality control or authentication process:
- Merchant does not inspect products before shipping to customers
- No process to verify authenticity of incoming inventory
- Cannot demonstrate how they ensure products are genuine
- Relies solely on supplier claims without verification
Why this is medium to high risk: Legitimate resellers implement authentication and quality control, especially for luxury goods and high-value electronics. Absence suggests either counterfeiting or reckless sourcing.
Acceptable Return Patterns
Established supplier return channels:
- Merchant has documented RMA processes with suppliers
- Can return defective or problematic inventory
- Suppliers provide replacement inventory or credits for returns
- Return terms documented in supplier agreements
Transparent customer return handling:
- Clear return policy consistent with supplier return capabilities
- Manufacturer warranty honored through documented processes
- Return policy is competitive with authorized retailers for the category
- Customer service can explain warranty and return processes clearly
Quality control implementation:
- Incoming inventory inspection procedures
- Authentication verification for luxury goods (using brand-specific methods or third-party authenticators)
- Documentation of quality control (QC) failures and how they are handled
- Relationship with authentication services if applicable
Example: An authorized watch reseller provides their RMA history with distributors showing 15 return authorizations processed in the past 6 months for defective or damaged units. They demonstrate their QC process: each watch is inspected upon receipt, serial numbers are verified against brand databases, and any inconsistencies trigger supplier contact before customer delivery. Return rates align with category norms, and RMA capability with suppliers is documented and functional.
What to Request from Merchant
Category
Documentation Needed
Supplier return terms
- Return authorization process with suppliers
- RMA documentation from past 90 days if applicable
- Supplier agreements showing return rights
- Examples of returned defective inventory
Customer return policy
- Customer-facing return policy documentation
- Return rate data for past 6 months
- How manufacturer warranties are processed
- Process for handling defective products
Warranty documentation
- Manufacturer warranty cards or registration process
- How customers access warranty service
- Examples of warranty claims processed
- Relationship with manufacturer warranty departments
Quality control
- Inspection process for incoming inventory
- Authentication methods for luxury goods
- Rejection or return rate from QC failures
- Third-party authentication relationships if applicable
Testing Protocol
- RMA verification: Request examples of recent return authorizations with suppliers to verify return capability exists
- Warranty process test: Walk through how a sample warranty claim would be processed from customer request to manufacturer service
- Return policy analysis: Assess whether customer return policy is viable given supplier return capabilities
- QC documentation review: Examine procedures and examples of quality control and authentication processes
Merchant assessment checklist
- Merchant can return defective products to suppliers
- Documented RMA process with suppliers
- Customer return policy is clear and aligned with supplier capabilities
- Manufacturer warranties are honored through documented processes
- Quality control or authentication procedures are implemented
- Return and defect rates are disclosed and reasonable
- No significant gaps between customer-facing promises and supplier capabilities
Red flag threshold:
- No supplier return capability = HIGH RISK
- Cannot explain how manufacturer warranties are honored = HIGH RISK
- No quality control or authentication process for luxury goods = MEDIUM to HIGH RISK (category-dependent)
- Customer return policy promises merchant cannot fulfill = MEDIUM RISK
- Zero returns or defects despite claiming sales of thousands of units = HIGH RISK (suggests fictitious business activity)
Pricing Patterns and Market Position
Why it matters: How merchants price products reveals their sourcing economics and market positioning. Authorized resellers typically follow Minimum Advertised Price (MAP) policies. Gray market sellers undercut MAP to move unauthorized inventory. Counterfeiters price at whatever maximizes sales, often well below authentic wholesale.
Pricing patterns, when analyzed against sourcing costs and market rates, indicate whether the merchant operates within authorized channels, exploits gray market arbitrage, or sells counterfeits.
According to brand protection data, 58% of brands report MAP violations as a recurring issue, driven by unauthorized sellers and automated repricing tools. These violations create pricing instability and indicate unauthorized distribution channels.
High-Risk Pricing Patterns
Consistent below-MAP pricing:
- Merchant advertises branded products below manufacturer's minimum advertised price
- Pricing is systematically below authorized retailer pricing
- No explanation for ability to undercut authorized channels
- Occurs across multiple brands with MAP policies
Why this is high risk: Systematic MAP violations indicate gray market sourcing (medium risk) or counterfeiting (high risk). Authorized resellers bound by MAP agreements cannot advertise below these thresholds.
Pricing economics that do not support claimed margins:
- Sells products at prices below claimed wholesale purchase cost
- Cannot explain margin structure or profitability model
- Pricing leaves no room for legitimate overhead, shipping, or returns
- Claims low prices are due to "volume" but cannot demonstrate volume purchases
Why this is critical risk: When selling prices are below or marginally above claimed purchase prices, the merchant either misrepresented sourcing costs (suggesting counterfeit inventory with much lower actual costs) or operates at implausible losses.
Example: A merchant sells designer handbags at $800. They provide invoices showing purchase costs of $750 per unit. After accounting for payment processing (2.9% + $0.30 = $23.50), shipping ($15), customer returns (estimated at $16), and chargebacks (estimated at $4), their gross margin is negative. When questioned, they cannot explain how the business is profitable. This pricing structure suggests either the invoices misrepresent actual costs (products are counterfeits purchased for far less) or the business is fraudulent.
Extreme discounting for high-demand products:
- Offers 40%+ discounts on products with waitlists or limited availability
- Sells limited-edition or allocation-controlled products at deep discounts
- Has continuous inventory of products that are sold out at authorized retailers
- No plausible explanation for inventory access or pricing capability
Why this is critical risk: Deep discounts on scarce products indicate counterfeits. Limited-availability authentic goods do not reach unauthorized channels at significant discounts.
Pricing uniformity across product condition:
- No price differentiation between new, refurbished, open-box, or gray market sourcing
- All products priced identically regardless of sourcing channel claims
- Cannot explain pricing for different condition categories
- Pricing does not reflect sourcing cost variations
Why this is medium risk: Legitimate resellers price products according to condition, warranty status, and sourcing costs. Uniform pricing suggests either simplified operations or inability to explain true product sourcing.
Acceptable Pricing Patterns
Transparent pricing rationale:
- Merchant explains margin structure and pricing model
- Pricing is consistent with claimed sourcing costs
- MAP policies are followed for brands requiring them
- Below-MAP pricing only where merchant discloses gray market sourcing and has documentation
Pricing reflects product category and condition:
- New authorized products priced at or near MAP
- Gray market or international market products disclosed and priced accordingly
- Refurbished or open-box items clearly marked and discounted appropriately
- Pricing differences are explained and documented
Market-aligned pricing:
- Pricing is competitive with comparable authorized or unauthorized resellers
- Not systematically below all market pricing without explanation
- High-demand or limited products priced at market rates, not deep discounts
- Pricing leaves room for legitimate business margins
What to Request from Merchant
Category
Documentation Needed
Pricing strategy
- Margin structure and profitability model
- How pricing is determined for each product category
- MAP policy compliance for applicable brands
- Explanation for any below-market pricing
Purchase cost documentation
- Wholesale purchase costs from invoices
- Landed costs including shipping, duties, and fees
- Calculation showing pricing supports business viability
- Volume discount agreements if applicable
Product condition and sourcing disclosure
- How new, refurbished, gray market, or open-box products are differentiated
- Customer-facing disclosures about product sourcing or condition
- Pricing differences between condition categories
- Labeling or product descriptions indicating sourcing
Competitive position
- How merchant's pricing compares to authorized retailers
- Explanation for competitive pricing advantages
- Any manufacturer pricing programs or incentives
- Market positioning (discount reseller, authorized premium, etc.)
Testing Protocol
- Pricing survey: Compare merchant's advertised pricing to authorized retailers, MAP policies, and known gray market sellers
- Margin analysis: Calculate implied margins using claimed purchase costs and advertised selling prices
- Scarcity verification: For limited-availability products, verify whether merchant's pricing and inventory access align with market scarcity
- MAP policy check: Identify which brands have MAP policies and verify merchant compliance
Merchant assessment checklist
- Pricing is explained and consistent with claimed sourcing
- MAP policies are followed or gray market status is clearly disclosed
- Margins are viable for a legitimate business
- Pricing for limited-availability products is market-aligned
- Product condition and sourcing disclosures explain pricing differences
- No pricing patterns that suggest a counterfeit cost structure
- Competitive positioning is clear and credible
Red flag threshold:
- Systematic MAP violations without gray market disclosure = MEDIUM to HIGH RISK
- Pricing below claimed purchase costs = CRITICAL RISK
- Deep discounts on scarce/limited products = CRITICAL RISK
- Pricing economics suggest counterfeit cost structure = CRITICAL RISK
- Cannot explain pricing or margin model = HIGH RISK
Warranty Language and Support Structure
Why it matters: Warranty coverage and customer support capabilities reveal whether the merchant operates within manufacturer-authorized channels. Authorized resellers offer manufacturer warranties and can access brand support. Gray market sellers face warranty restrictions. Counterfeiters provide misleading warranty language while offering no genuine coverage.
Warranty language, support infrastructure, and actual capability to service products expose the merchant's true relationship to brands.
High-Risk Warranty Patterns
Vague or misleading warranty claims:
- "Manufacturer warranty included" without specifying how it is activated or serviced
- "100% satisfaction guarantee" substituting for actual warranty information
- Warranty language is copied from manufacturer but merchant cannot service claims
- No clear explanation of who provides warranty service
Why this is high risk: Vague warranty language conceals that manufacturer warranties are not valid (gray market) or do not exist (counterfeits). Legitimate resellers explicitly state warranty terms and servicing process.
Example: A merchant selling camera equipment states "Full 2-year manufacturer warranty on all products" on their website. When asked how warranty claims are processed, they cannot provide details. They have no relationship with the manufacturer's warranty department, no service center partnerships, and no examples of successfully processed warranty claims. Customer reviews reveal buyers attempting warranty claims were directed to contact the merchant (not the manufacturer), and the merchant offered replacements only if customers paid return shipping internationally. This pattern indicates gray market products where manufacturer warranties are not honored due to unauthorized import.
Merchant-only warranty with no manufacturer involvement:
- Merchant provides warranty directly, manufacturer is not involved
- Warranty servicing is entirely merchant's responsibility
- No manufacturer warranty registration or activation process
- Warranty claims do not go through manufacturer channels
Why this is medium to high risk: Merchant-only warranties for products that should carry manufacturer warranties indicate gray market sourcing (manufacturer will not honor warranties on unauthorized imports) or counterfeits (merchant knows manufacturer will reject warranty claims).
No warranty support infrastructure:
- Merchant has no repair facilities or service partners
- Cannot explain how warranty repairs or replacements are handled
- No documented warranty claim history
- Customer support cannot articulate warranty process
Why this is high risk: Offering warranty coverage without capability to service claims is fraud. It suggests either the merchant knows products are counterfeit (and expects no claims), or they have no intention of honoring warranty obligations.
Warranty exclusions or geographic restrictions:
- Warranty is only valid in specific countries (not customer's location)
- Warranty explicitly excludes "international purchases" or "gray market"
- Manufacturer warranty is disclaimed in fine print
- Warranty requires customer to ship products internationally for service
Why this is medium risk: Geographic warranty restrictions are common with gray market goods (authentic products imported outside authorized channels). This indicates unauthorized sourcing, not counterfeiting, but creates customer risk and support burden.
Acceptable Warranty Patterns
Clear manufacturer warranty terms:
- Merchant states manufacturer provides warranty
- Warranty terms match manufacturer's published warranty
- Process for warranty registration is provided to customer
- Warranty claims go through manufacturer's official channels
Authorized reseller warranty support:
- Merchant is authorized service center or can direct customers to service centers
- Warranty registration is handled at point of sale
- Merchant can facilitate warranty claims with manufacturer
- Documentation shows merchant's authorized status enables warranty support
Transparent gray market warranty disclosure:
- Merchant clearly discloses products are gray market if applicable
- States manufacturer warranty may not apply
- Offers merchant warranty as alternative
- Has infrastructure to service merchant warranty (repair partners, replacement inventory)
What to Request from Merchant
Category
Documentation Needed
Warranty terms
- Customer-facing warranty documentation
- Manufacturer warranty terms for key products
- Who provides warranty service (manufacturer or merchant)
- Warranty duration and coverage specifics
Warranty servicing
- Process for customer warranty claims
- Repair or replacement service partners
- Examples of warranty claims processed in past 6 months
- Contact information for warranty service
Warranty registration
- How manufacturer warranty is activated or registered
- Warranty cards or registration materials provided to customers
- Manufacturer systems merchant has access to for warranty support
- Proof of authorized service center status if applicable
Support infrastructure
- Customer support contact information and availability
- Technical support capabilities for products sold
- Repair facilities or service partnerships
- Return and replacement inventory for warranty fulfillment
Testing Protocol
- Warranty language review: Compare merchant's warranty claims to manufacturer's published warranty terms for discrepancies
- Service capability verification: Verify merchant has infrastructure (staff, partners, inventory) to fulfill warranty obligations
- Claim history review: Examine examples of past warranty claims to verify process is functional
- Manufacturer verification: For claimed authorized resellers, verify with manufacturer that merchant's warranty statements are accurate
Merchant assessment checklist
- Warranty terms are clearly stated and accurate
- Warranty servicing process is documented and functional
- Merchant has infrastructure to support warranty obligations
- Manufacturer warranty is offered or gray market status is clearly disclosed with alternative coverage
- No misleading warranty language
- Customer support can clearly explain the warranty process
- Warranty claim history demonstrates a functional process
Red flag threshold:
- Vague warranty language without clear servicing process = HIGH RISK
- Promises manufacturer warranty but is not authorized = HIGH RISK
- No warranty support infrastructure despite warranty claims = HIGH RISK
- Warranty language is misleading or copied without authorization = CRITICAL RISK
- Zero warranty claims despite claiming sales of thousands of units = MEDIUM RISK (suggests fictitious business or customers unable to use warranty)
Ecosystem Mapping and Related Entities
Why it matters: Counterfeiters and unauthorized sellers operate multiple storefronts to distribute risk, test messaging, and evade detection. A single merchant application may represent one node in a network of related operations. Ecosystem analysis reveals whether the merchant operates in isolation or as part of a coordinated unauthorized distribution or counterfeiting network.
This assessment dimension is required for comprehensive merchant risk evaluation and aligns with Ballerine's framework for mapping merchant ecosystems.
High-Risk Ecosystem Patterns
Multiple storefronts with identical characteristics:
- Same beneficial owners operate 5-10 different merchant entities
- All sell similar product categories (e.g., all luxury goods or all electronics)
- All exhibit the same sourcing vagueness or documentation gaps
- Domains registered on the same dates or in rapid succession
Why this is critical risk: Multiple storefronts selling the same categories with the same risk indicators suggest a systematic unauthorized distribution or counterfeiting operation spreading risk across entities.
Example: During underwriting, you discover the merchant's Ultimate Beneficial Owner (UBO) is also listed as the owner of six other businesses registered in the past 18 months. All six sell luxury handbags and watches. All six domains were registered within a 3-week period. None can provide authorization letters. All have similar website templates and identical "About Us" language. This pattern indicates a counterfeit operation using multiple fronts to increase sales volume while limiting exposure if one storefront is shut down.
Shared infrastructure across entities:
- Same customer support email or phone across multiple domains
- Same business address for different merchant names
- Identical website hosting, templates, or payment gateway configurations
- Same supplier names across multiple unrelated merchant applications
Why this is high risk: Shared infrastructure indicates centralized operations disguised as independent merchants.
Previous merchant failures or enforcement actions:
- UBO previously operated merchants that were terminated for counterfeiting
- History of brand enforcement actions (cease and desist letters, IP litigation)
- Prior chargebacks or fraud issues at previous merchant entities
- Pattern of short-lived businesses (operating 6-12 months then dissolving)
Why this is critical risk: Historical enforcement actions or merchant failures indicate the individual or entity has a track record of unauthorized operations.
Acceptable Ecosystem Patterns
Single or limited operations with clear business rationale:
- Merchant operates one primary business or limited number of related entities
- Different businesses serve different purposes (e.g., wholesale entity and retail entity)
- UBO business history shows stable, long-term operations
- No history of regulatory actions or merchant terminations
Transparent multi-brand operations:
- Merchant operates multiple authorized dealerships for different brands
- Each entity has proper authorization documentation
- Business structure is explained and reasonable
- No concealment of relationship between entities
What to Request from Merchant
Category
Documentation Needed
Related business entities
- All domains or storefronts operated by beneficial owners
- Business registration for each related entity
- Explanation of relationships between entities
- Shared infrastructure or resources across entities
Domain history
- Domain registration history and ownership
- Any previously operated domains (active or inactive)
- Reason for any domain changes or closures
- Timeline of business operations
Geographic operations
- Business registration location
- Fulfillment and warehouse locations
- Countries where products are sourced, stored, and shipped
- Explanation for any geographic discrepancies
Ownership structure
- Beneficial owners of applicant and related entities
- Corporate officer overlap across businesses
- Shared addresses, bank accounts, or contact information
- Rationale for operating multiple businesses
Testing Protocol
- UBO background search: Identify all businesses, domains, and merchant accounts associated with UBO
- Infrastructure analysis: Map shared infrastructure (addresses, phones, hosting, emails) across entities
- Litigation search: Search court records for IP litigation, fraud cases, or counterfeiting enforcement
- Brand outreach: For high-value onboarding, contact brands directly to ask about merchant's authorization status and any enforcement history
Merchant assessment checklist
- UBO operates a limited number of entities with a clear business rationale
- No history of merchant terminations for counterfeiting or fraud
- No IP enforcement actions or cease-and-desist letters
- Business addresses are legitimate commercial locations
- Infrastructure is not systematically shared across suspicious entity networks
- UBO business history shows stable operations rather than repeated short-term ventures
- No pattern indicating systematic unauthorized distribution or counterfeiting
Red flag threshold:
- Multiple storefronts with identical risk indicators = CRITICAL RISK
- UBO history of merchant terminations for counterfeiting = CRITICAL RISK (immediate decline)
- IP enforcement actions or litigation against UBO = HIGH RISK
- Systematic infrastructure sharing across multiple entities = HIGH RISK
- Pattern of short-lived businesses operated by same UBO = HIGH RISK
What Good Looks Like: The Legitimate Reseller Profile
When all elements align properly, a legitimate authorized reseller or transparent gray market operator presents:
Documentation Package
Business Structure
- Clear business registration and corporate structure
- Transparent ownership and beneficial owner identification
- Commercial business address and operational presence
- Appropriate business licenses for retail or wholesale operations
- No history of IP infringement claims or brand disputes
Supply Chain Evidence
- Specific supplier names and contact information
- Authorization letters from brands OR clear gray market disclosure
- Recent purchase invoices with complete commercial information
- Payment records matching sourcing claims
- Import documentation for international sourcing
Operational Capabilities
- Return capability with suppliers (RMA process)
- Quality control or authentication procedures for applicable product categories
- Warranty servicing infrastructure or clear manufacturer warranty access
- Customer support infrastructure matching business claims
- Inventory levels consistent with purchase volumes
Pricing and Market Position
- Pricing aligned with sourcing costs and market position
- MAP policy compliance OR disclosed gray market status
- Margin structure supports legitimate business operations
- Competitive positioning is credible and explained
Customer-Facing Transparency
- Clear product descriptions including condition and sourcing
- Accurate warranty information with servicing process
- Return policy consistent with operational capabilities
- No misleading authenticity claims
- Contact information and support channels are professional
Ecosystem
- Single focused business OR multiple related businesses with clear operational rationale
- Stable domain history (multi-year registration)
- No hidden related entities
- Geographic consistency between registration, sourcing, and fulfillment
Example: Compliant Authorized Reseller Profile
Company: TechPro Electronics Distribution
Model: Authorized reseller for consumer electronics brands (Apple, Samsung, Sony, etc.)
Supply chain:
- Direct purchasing relationship with franchised distributors (Ingram Micro, Tech Data, D&H Distributing)
- Authorization letters from brands for Apple Premium Reseller status
- Purchase invoices showing regular orders from authorized distributors
- Payment terms via commercial credit accounts (net 30)
- Distributor account numbers verifiable with suppliers
Pricing:
- MAP policy compliance for all brands requiring it
- Pricing at or slightly below manufacturer suggested retail price (MSRP)
- Margins consistent with authorized electronics distribution
- No systematic undercutting of authorized retail channels
Warranty and support:
- Manufacturer warranties provided and registered at point of sale
- Apple Premium Reseller status enables warranty service through merchant
- Non-Apple products direct customers to manufacturer warranty service
- Customer support can explain warranty process for each brand
Returns and quality control:
- 30-day customer return policy
- RMA capability with distributors for defective inventory
- Incoming inspection process for all products
- Return rate within typical range for electronics category
Ecosystem:
- UBO operates one related entity (wholesale division serving B2B customers)
- Both entities have proper authorization documentation
- 8-year operating history with no enforcement actions
- Commercial address verified with site visit
This profile represents acceptable risk for payment processing.
Example: Compliant Gray Market Reseller Profile (Disclosed)
Company: Global Imports Luxury Goods
Model: International gray market sourcing of luxury fashion and accessories
Supply chain:
- Purchases from European and Asian retailers and distributors outside US authorized channels
- Discloses gray market sourcing in terms of service and product descriptions
- Customs and import documentation for all international shipments
- Purchase invoices from foreign suppliers with payment records
Pricing:
- 20-30% below US authorized retail pricing
- Pricing explained by international arbitrage and unauthorized channel sourcing
- Does not claim to be authorized retailer
- Margin structure is transparent and viable
Warranty and support:
- Clearly states manufacturer warranty may not apply to international products
- Provides merchant warranty (90 days)
- Has repair partnerships to service merchant warranty
- Does not misrepresent warranty coverage
Returns and quality control:
- 14-day customer return policy
- Limited supplier return capability (gray market constraints acknowledged)
- Third-party authentication service (Entrupy, Real Authentication) for all luxury items
- Authentication certificates provided to customers
- QC rejection rate documented and disclosed
Transparency:
- Product descriptions state "imported" or "international version"
- Clear disclosure that products are not from US authorized channels
- Explains warranty limitations due to gray market sourcing
- No misrepresentation of authorized status
Ecosystem:
- UBO operates this single entity
- 5-year operating history
- No IP enforcement actions or brand disputes
- Transparent about business model limitations
This profile represents medium risk, acceptable with proper monitoring and disclosure requirements.
Common Assessment Errors
Mistake: Accepting "authorized dealer" claims without verification
The problem: Merchants claim authorized reseller status, display brand logos, and use authorization language, but have no actual authorization from brands.
What to do: Verify authorization claims directly with brands or through distributor verification. Request authorization letters with verifiable contact information. Many brands maintain public lists of authorized resellers on their websites.
Example: A merchant displays "Authorized Rolex Dealer" on their website with Rolex logos and branding. Verification with Rolex reveals the merchant is not on their authorized dealer list and has no relationship with the brand. The merchant sourced a few authentic Rolex watches through gray market channels and misrepresented this as authorized dealer status to enhance credibility.
Mistake: Treating all non-authorized sourcing as counterfeiting
The problem: Assuming gray market resellers selling authentic products obtained through unauthorized channels are the same risk as counterfeiters selling fake goods.
What to do: Distinguish between authentic products from unauthorized channels (gray market, medium risk) and counterfeit products (critical risk). Gray market sellers can provide authentic product documentation, customs records, and may use third-party authentication. Counterfeiters cannot.
Mistake: Focusing only on product authenticity, ignoring supply chain legitimacy
The problem: Verifying that products appear authentic without examining whether sourcing channels support claimed business model.
What to do: Even if products appear genuine, examine whether the merchant can legitimately source claimed volumes at claimed prices through claimed channels. Supply chain implausibility indicates risk regardless of product appearance.
Mistake: Not testing warranty claims process
The problem: Accepting warranty language at face value without verifying the merchant can actually service warranty claims.
What to do: Request examples of warranty claims processed. Verify with manufacturers whether merchant has authorized service status. Test the warranty claim process to ensure it is functional, not just described.
Mistake: Ignoring product category risk differences
The problem: Applying the same assessment rigor to low-counterfeit-risk categories (e.g., books, basic household goods) as to high-counterfeit-risk categories (luxury goods, electronics, pharmaceuticals, cosmetics).
What to do: Calibrate assessment depth to category risk. High-demand branded goods, luxury items, and electronics require deeper supply chain verification than commodity products. Risk-based assessment allocates resources appropriately. Ballerine's risk-based approach enables teams to apply appropriate due diligence levels based on merchant risk classification.
Mistake: Overlooking ecosystem signals
The problem: Assessing the merchant in isolation without examining related businesses, domains, or entities operated by the same individuals.
What to do: Map the merchant's ecosystem including other domains, business registrations, and operations. Counterfeiters and gray market operators run multiple storefronts. Patterns across the ecosystem (e.g., all selling below MAP, all vague sourcing) strengthen risk signals. Know Your Business (KYB) processes must include ecosystem mapping for comprehensive risk assessment.
The Critical Question
When evaluating whether a merchant is a legitimate authorized reseller, gray market operator, or counterfeit seller, ask:
"What is your minimum acceptable sourcing evidence?"
For authorized resellers, this means: authorization letters, distributor agreements, or direct brand confirmation. Without these, the merchant is not authorized regardless of claims.
For disclosed gray market resellers, this means: purchase documentation from identifiable sources, customs records for imports, third-party authentication for luxury goods, and transparent disclosure to customers. Without these, you cannot verify authenticity or manage customer risk.
For any merchant, this means: auditable sourcing trails, payment documentation, supplier verification, and operational evidence that supports claimed business model. Without these, you are onboarding based on claims rather than evidence.
The absence of minimum sourcing evidence is the decision point. No evidence means the merchant has not met the threshold for onboarding, regardless of how professional their website or application appears.
Ballerine's Role
Ballerine provides the infrastructure to make supply chain verification scalable and continuous. Our platform automates supplier verification by cross-referencing claimed suppliers against business registrations and known distributor networks, detects fabricated documentation through forensic analysis of invoices and authorization letters, maps merchant ecosystems to reveal multiple storefronts operated by the same entities, monitors pricing patterns to identify MAP violations and pricing economics inconsistent with claimed sourcing, and delivers real-time alerts when authorized resellers shift to gray market sourcing or when operational patterns change post-onboarding.
But the foundational knowledge in this guide gives risk teams the framework to establish minimum evidence requirements during merchant onboarding: what suppliers do you purchase from, can you provide authorization documentation, what are your return capabilities with suppliers, and how do you service warranty claims. These operational realities determine whether sourcing claims are credible, regardless of what the merchant's marketing materials state.
For risk teams managing large merchant portfolios, merchant monitoring capabilities maintain visibility across your entire merchant base, detecting sourcing pattern changes, pricing anomalies, and ecosystem signals before counterfeit exposure or brand disputes materialize. Unlike point-in-time underwriting, continuous monitoring identifies when legitimate merchants evolve into higher-risk operations, when gray market operators expand into counterfeiting, or when ecosystem expansion indicates systematic unauthorized distribution.
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