Cyber criminals abusing payment systems

Shah Md Ahsan Habib | Published: February 02, 2019 21:46:33

As a whole, technology-driven payments and services have ushered in several macro and micro benefits. The products and services have allowed firms, individuals, governments and other economic agents to transfer money on a daily basis without having to use cash. Retail payments are becoming increasingly more prevalent in today's economy as the dynamic digital innovation has paved the way for mobile and online payment solutions and products. Meanwhile, international efforts continue to appear to promote universal access to and use of financial services in an attempt to reduce poverty and improve opportunities and living standards for people that do not use such services. As a result of this interaction between an intensive agenda focussed on promoting financial inclusion and the greater presence and participation of retail payments in economic activity, the latter represents a highly potential instrument for fostering financial inclusion. This is because individuals and firms interact in the economy via the payments they make to each other through different instruments and channels. Mobile money has established itself as a critical tool for facilitating international remittances, while reducing remittance costs and maximising the impact of remittances on development. Because of its reach and growing use, mobile money is uniquely positioned to transform formal remittance markets and to advance financial inclusion.

In 2017, mobile payment was used for international transfers in 51 of the 92 countries where the service is available. Internet-based payment providers are also getting involved. These companies have global reach and substantial experience in the remittance business, bringing additional expertise and robust compliance systems. The services brought notable changes to the payment arrangement by increasing speed, reducing cost and improving convenience.

Alongside offering remarkable benefits, these growing number and types of technology driven payment methods raised concerns about crimes because criminals can take advantage of these tools swiftly and exploit the system to achieve their unlawful agendas. While the benefits of technology-based payment systems are clear, the risks are somewhat less perceptible and vary based on a financial institution's connections to products and services. The risk common to all, however, is the one presented by a lack of face-to-face interaction with the customers. Electronic payment has accelerated money circulation speed, making trade easy. But the features of new payment method such as invisible, high speed, concealment and so on are creating challenges for anti-money laundering efforts and arrangements. Referring to the challenges, the Financial Action Task Force (FATF) states, 'the absence of face to face contact may indicate a higher money laundering risk situation' and 'an absence of Customer Due Diligence (CDD) increases the difficulty for the service provider to identify suspicious activity.' With each passing year, non-face-to-face interaction risk continues to heighten for banks and financial institutions as the shift towards online and mobile banking steadily increases. Criminals are rapidly embracing new products and technologies in order to further their schemes and launder their illicitly derived funds.

Risks of mobile payment might stem from four categories: anonymity, elusiveness, rapidity, and poor oversight. A study by the Association of Certified Fraud Examiners notes that financial criminals continue to abuse different payment systems by committing fraud, money laundering, and other crimes. The ACFE added that despite hefty fines imposed by regulators on prominent banks and financial institutions, funds from criminals continue to flow through banks and payment operators. The growth of e-commerce payment systems continues to create opportunities for cyber criminals to abuse the legitimate payments ecosystem. Transaction laundering has now been recognised as a massive problem throughout the payments system, and regulators are taking notice and taking action. The evolution of e-commerce and mobile payments has enabled money laundering to reach an unattainable level that became popular with the title 'transaction laundering which occurs when an undisclosed business uses an approved merchant's payment credentials to process payments for another undisclosed store selling unknown products and services. Transaction laundering, also known as credit-card laundering, is a serious problem for the payments industry.

This advanced, merchant-based fraud scheme takes advantage of legitimate payment systems by funnelling unknown e-commerce transactions through legitimate merchant accounts. Valid websites act as payment processing storefronts for criminal enterprises selling firearms, illicit drugs, child pornography and other illegal goods. Merchant Service Providers can unknowingly facilitate money laundering or end up processing payments and expose themselves to financial and legal liability, penalties from the credit card companies and severe reputation damage. Transaction laundering through online sales of products and services is the criminality in question.

Digital payment systems laundering often involves the use of micro-laundering techniques where multiple, small payments are made so that laundering limits are not exceeded and no alarms are triggered. Digital payment systems when combined with other digital resources can help to hide the money trail thus confusing law enforcement and financial regulators. There are evidences that a significant portion of cyber criminals have exploited the globally reputed and big online and money transfer service providers.

Some of the internet's biggest marketplaces are being exploited by money launderers through using online payment systems. A number of recent reports have highlighted that social media is increasingly being used to recruit young people as money mules through offers of 'make money quick' schemes or fake job offers. WhatsApp is allegedly a communication method used by criminals to contact would-be victims.

Another aspect of Peer to Peer (P2P) is direct communication and the growth of instant messaging apps is nothing short of remarkable. These apps have quickly gone from simply sending text and images to offering a full buffet of services, including payment functions. All these accounts and transactions make for another target for money launderers.

Gift cards are also big business today. There are reports that fraudsters copy the serial numbers of the cards, scratch off the security code and then cover them up. Then, when the card is activated, they can access the funds on the card.

A relatively recent area of technology-driven product is the crypto-currencies like Bitcoin which are also encouraging cyber crimes. The main reason of their popularity among cyber criminals is that Bitcoin is straightforward, relatively anonymous, and its use is unimpeded by borders or legislation. Steadily, Bitcoin has proven itself to be a vital part of criminal enterprises as the mode is being used to cash-out and launder money. It is claimed that when individuals successfully use a Bitcoin mixer and subsequently an underground bitcoin exchange, only mistakes will leave sparse traces of one's identity or the outcome of the crime. Crypto-currencies may offer, at least theoretically, a near-perfect alternative to tax-evaders who can no longer find a safe haven in tax-haven jurisdictions.

From regulatory perspective, generally, crypto-currencies are in a sort of twilight zone. In many countries, Bitcoin is neither banned nor regulated. In some instances, mainstream bitcoin exchanges are lobbying to become regulated. It is yet to be determined whether banning or regulating a payment system can play a role against criminals.

Dr. Shah Md. Ahsan Habib is Professor and Director (Training), Bangladesh Institute of Bank Management (BIBM). ahsan@bibm.org.bd

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