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Online Criminals Are Tricking Entrepreneurs Into Doing Their Dirty Work Cyber-crooks skillfully launder money through unwitting legitimate online storefronts, creating major legal liabilities for careless entrepreneurs.

By Ron Teicher Edited by Dan Bova

Opinions expressed by Entrepreneur contributors are their own.

xijian | Getty Images

Online storefronts are enormous entrepreneurial opportunity but , unbeknown to many, those virtual storefronts have become increasingly popular with cyber criminals who have learned to hide illegal activities in a new form of online fraud called transaction laundering.

Transaction laundering is a merchant-based fraud scheme whereby illicit transactions are funneled through seemingly unrelated ecommerce merchant accounts causing significant damage to legitimate merchant acquirers. Merchants suffer heavy losses from transaction laundering at the hands of the affiliates who they rely on to drive traffic and revenue.

Here, we'll take a look at how affiliates are taking advantage of poor vetting and onboarding, and what merchants can do to avoid becoming victims of this new digital form of money laundering.

Related: Top 10 Affiliate Marketing Tracking Software Platforms

What is affiliate marketing?

Affiliate marketing is a performance-based sales system wherein merchants reward third parties (affiliates) for driving traffic or sales. Depending on the merchant's business model and affiliate marketing strategy, affiliates are compensated either directly or according to sales. This has become a multi-billion dollar industry, one in which merchants spent almost $5 billion in 2016. Primary affiliate business models include:

Pay-per-click (PPC): The affiliate is compensated each time someone visits or is referred to the merchant's site, even if a sale is not made.

Pay-per-performance (PPP): The merchant pays the affiliate based on a commission basis, as a percentage of actual sales or conversions generated.

Multi-tier: Similar to multi-level marketing offline, affiliates earn commission based on the new affiliates they themselves refer.

Related: The Affiliate Marketing Model: A Blueprint for Success in the Gig Economy

Affiliates drive traffic to merchant websites using a variety of online marketing and promotion channels, including blogs posts, advertising, social media, incentivized traffic (giveaways, etc), email marketing and so forth. Affiliate marketing fraud occurs when any type of action on the part of affiliates is used to mislead merchants in relation to the quantity or quality of whatever metrics have been agreed upon.

Historically, affiliate fraud encompassed generating false traffic, which would involve the affiliate driving traffic for which he or she is compensated through various false pretenses, including links planted on popular sites, or misleading (and often inappropriate) content. However, affiliate marketing fraud goes one level deeper. Affiliates not properly vetted or monitored may not only misrepresent results, they may also misrepresent their very identity and the true nature of their business.

When affiliates drive fraudulent traffic, merchants can lose money and brand equity. When affiliates conduct fraudulent transactions under the auspices of legitimate merchants (transaction laundering), merchants are exposed to an entirely different and more severe legal and regulatory liability.

Related: Don't Fall Prey to a Money-Laundering Scheme

What is affiliate transaction laundering?

Affiliate transaction laundering occurs when an affiliate uses his or her credentials with a merchant to process online payments for the sale of illegal or unreported goods or services. By way of example, consider an illicit merchant selling illegal drugs online who needs a legitimate online storefront to process credit card payments. This merchant couldn't pass the rigorous vetting process required by most large MSPs but he or she can become an affiliate of a legitimate high-risk merchant, whose onboarding is less stringent. As an affiliate of a legitimate site, he could sell $100 worth of drugs through his own website, then use the $100 from the drug sales to pay for content on his affiliate partner's website. The unsuspecting merchant receives what appears to be a legitimate order and pays a large commission under their Pay-Per-Performance business model. The affiliate now has $50-$80 in "clean" money that was received as a commission from the legitimate merchant.

Ultimately, the unscrupulous affiliate earns money from selling $100 worth of illicit drugs on his own website, and then cleans the money through his affiliate partner program. Some affiliate programs pay handsome commissions: up to 80% in some high risk industries, making this scheme very attractive for transaction laundering purposes. A scheme this sophisticated is difficult to detect and very lucrative for the affiliate. Negligently allowing these transactions makes the legitimate merchant complicit in facilitating illicit trade, with all the liability (civil, regulatory, and possibly criminal) that this entails.

What can be done?

Merchants need to dramatically tighten their affiliate vetting and onboarding process to protect against the liability of affiliate transaction laundering. Merchants bringing in a new affiliate should follow these seven steps:

1. Review and constantly monitor affiliate sites to ensure that affiliates are not using inappropriate content or false advertisement to promote traffic.

2. Understand exactly how merchant products are marketed by affiliates, and if other seemingly-unrelated products are bundled with them.

3. Ask for all URLs where their products are sold.

4. Monitor their affiliate sites' ecosystem, including additional sites that may sell products yet not be reported.

5. Closely evaluate affiliate networks and work only with reputable networks.

6. Adopt advanced technology to monitor affiliates.

7. Create and enforce a clear affiliate policy.

When merchants let down their guard, affiliates can take advantage of them. Insufficient vetting and sloppy onboarding can turn legitimate merchants into innocent victims of affiliate transaction laundering who are unwittingly complicit in crime. By adopting the right technological solution, merchants can ensure more secure vetting and constant monitoring of affiliate activity, eliminating the liability of affiliate transaction laundering.

Ron Teicher

CEO of EverCompliant

Ron Teicher is the founder and CEO of EverCompliant. He led EverCompliant from inception to become a leader in the field of merchant base fraud and transaction laundering detection. Today, EverCompliant serves some of the world’s largest financial intuitions. Prior to EverCompliant, Teicher led the compliance product initiatives at Watchfire (acquired by IBM). He is a member of the Israeli bar association, and is frequent speaker at payment and fin-tech events.

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