Risk and Compliance Basics

Suspicious payment processing activities can indicate potential fraud, money laundering, regulatory violations, or high-risk behavior. Identifying and mitigating these risks is critical for compliance with Anti-Money Laundering (AML) laws, Bank Secrecy Act (BSA) requirements, and general payment processing security.

This guide covers some basics that payment processors like Payabli look out for to maintain compliance and minimize risk.

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Transaction pattern anomalies

Unusual transaction patterns can indicate fraudulent or high-risk activities. Common anomalies include:

• Sudden spikes in volume: It’s suspicious when a merchant suddenly posts significantly higher transaction amounts or volumes than their historical average.
• Frequent high-dollar transactions: When there are frequent high-dollar transactions that are inconsistent with the merchant’s business type or prior history, that can indicate potential fraud.
• Multiple small transactions (micro-transactions) : Sometimes fraudsters use many small transactions to test stolen credit cards or circumvent fraud detection systems.
• Round-dollar transactions: An unusual frequency of transactions with whole numbers (for example, $100, $500) can be suspicious and might indicate money laundering or fraud.
• Rapid-fire transactions: Making many transactions in a short period can possibly indicate card testing activities.

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Financial irregularities

Some financial indicators can signal potential risks in payment processing. The following sections are common examples of financial irregularities.

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Chargeback and refund manipulation

Some merchants may engage in chargeback or refund schemes to defraud payment processors or customers. Common indicators can include:

• Excessive chargebacks: High chargeback rates may indicate fraud or poor business practices.
• Frequent refunds to different credit cards: This can signal money laundering or fraudulent activity.
• Refunds without corresponding sales: This suggests potential fraudulent refund schemes.

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Unusual payment flow and third-party involvement

Unusual payment routing or third-party involvement can indicate money laundering or other illicit activities. Common indicators include:

• Use of third-party payment processors: Routing transactions through unauthorized intermediaries can indicate money laundering or fraud.
• Unusual payment routing: Transferring funds through multiple accounts before settlement can indicate money laundering.
• Processing for other businesses (factoring): Processing payments on behalf of another entity without authorization is a red flag for money laundering.

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Identity and representation concerns

Identity and representation concerns can indicate potential fraud or compliance issues. Sometimes bad actors may try to hide their true identity or business activities to evade detection.

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Mismatched or misleading merchant information

Some merchants may use misleading or inaccurate information to evade detection or compliance requirements. Common indicators include:

• Inconsistent merchant descriptor: Sometimes, merchants try processing under different business names to evade scrutiny.
• Unusual Merchant Category Code (MCC) assignments: A mismatch between the business type and transaction activity can indicate fraud.
• Multiple business accounts for the same merchant: This can indicate a strategy known as “transaction laundering” to hide illicit activity.

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Suspicious customer behavior

Some customer behaviors can indicate potential fraud or compliance risks. Common examples include:

• Multiple transactions from the same IP or device: This can indicate potential bot activity or fraud.
• Cardholder location mismatch: For example, a U.S.-based customer making frequent international purchases without a valid reason can indicate fraud.
• Multiple failed payment attempts: This can suggest card testing or fraudulent activity.

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Compliance and risk indicators

Some compliance and risk indicators can signal potential regulatory violations or high-risk activities. Payment processors must monitor these indicators to maintain compliance and minimize risk.

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High-risk industry indicators

Some industries are inherently high-risk due to regulatory requirements or potential for fraud. Common issues with high-risk industries include:

• Merchant avoiding compliance requests: A merchant might avoid providing legal or financial documentation when requested.
• Ties to sanctioned individuals or countries: This can include transactions involving flagged entities or high-risk jurisdictions.

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Fraudulent account behavior

Some account behaviour can indicate potential fraud or money laundering. Common indicators include:

• Synthetic identity or stolen credentials: This can include accounts created with fake or stolen business identities.
• Multiple merchant accounts under the same owner: This can indicate attempts to evade fraud detection or risk controls.
• Unverified beneficiary accounts: This might include settlement accounts (where funds from transactions are deposited) that aren’t verified with legal documentation.