Transaction laundering  also known as payment laundering or merchant laundering  is a form of financial fraud where an approved merchant processes credit or debit card payments on behalf of an unregistered, unauthorized third party. It allows bad actors to funnel payments for prohibited or illicit goods through seemingly legitimate merchant accounts, bypassing underwriting and compliance controls.

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This scheme poses a significant threat to acquirers, payment facilitators, and ISOs, as it allows high-risk or illegal businesses to operate covertly within the card network ecosystem. In a typical scenario, a front merchant (Merchant A) has an approved online store  such as one selling motorcycle parts  while an illicit business (Merchant B) sells narcotics, counterfeit goods, or other prohibited items. Merchant B routes its card transactions through Merchant A’s MID (merchant identification number), making the illegal sales appear legitimate in transaction records and cardholder statements.

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Because the visible transaction data points to an approved merchant, transaction laundering is notoriously difficult to detect. However, it is considered a severe violation by card brands and regulators, often resulting in immediate termination of processing privileges, fines, and even legal consequences.

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To combat this risk, payment providers deploy strategies such as:

• Monitoring merchant websites for hidden or mismatched content
  
• Analyzing transaction patterns for anomalies (e.g. volume spikes, unexpected product categories)
  
• Using web crawling, machine learning, and content matching to detect potential laundering fronts
  
• Re-screening merchants periodically to detect shifts in behavior or risk profile

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Ultimately, transaction laundering exposes the payment provider to compliance violations, reputational damage, and regulatory penalties. Proactive detection and enforcement are essential to maintaining the integrity of the payment ecosystem and avoiding complicity in illicit financial activity.