Factoring – Credit Card Laundering

Credit Card Factoring is a type of business fraud that I commonly refer to in the blog.

What is factoring:

Credit card factoring is essentially processing transactions through a merchant account for a business or entity other than the specific business that was screened for the merchant account. Credit card factoring, also known as credit card laundering, or even money laundering, can exist in many forms. The most basic form of factoring would be a business processing transactions for another business. Another common case of factoring is when a business opens a branch, DBA, or sub-business and attempts to process through the central company’s merchant account. This case is often seen when a business starts a website, and tries to process credit card transactions without opening a separate merchant account for their website.

Telemarketing and call centers used solicit factoring often, but their business practices have come under close scrutiny in the recent years due to massive fraud and losses by major financial institutions.

Why exactly is factoring bad?

First, factoring is used as a method to launder money via credit cards. A business would theoretically process payments for illegal products or services and end up with a clean deposit in their bank account a few days later. It is rumored that a huge amount of terrorist activity is funded illegally with credit cards.

A slightly less severe result of factoring, is the loss of accountability for credit card transactions when a business processes for someone else. In the event of fraud or chargebacks, the processing banks have a hard time figuring out who is responsible for the credit transactions, because they could have been run by multiple businesses. In the end, the customer gets their money back, and the processing bank is left to recoup from the business.

Telemarketing companies have been notorious for employing individuals to open merchant accounts and process transactions for them in exchange for a quick buck. The telemarketing company would keep the bank account empty, and when the chargebacks started rolling in, the processing bank was stuck with the bill. Millions of dollars have been lost to this type of fraud, which has also helped telemarketing companies to be labeled as high risk businesses, whether legitimate or not.

What is considered factoring?

• Processing a transaction for another business or person
• Processing a payment for an illegal or restricted product or service
• Processing the merchant account owner’s credit card
• Processing transactions in a method not allowed by the merchant account type (Ex: ecommerce transactions through a retail merchant account)
• Processing transactions for a separate division / branch / DBA of a company not approved on the merchant account
• Unauthorized scanning / reading / decoding of the information on a credit card with or without the intent to process the card
• Attempt to employ, or solicit another company or person to process a transaction through their merchant account
• Unauthorized re-charging of a credit card (often seen if a business looses a chargeback)

Repercussions for being caught factoring:

Simply put, Visa and MasterCard will have your merchant account shut down, and you can be substantially fined, and placed on the TMF (Terminated Merchant File). Depending on the severity and intent of the factoring, there may be legal repercussions as well. Since deliberate factoring often qualifies as money laundering, there are a variety of laws that are also being broken when a business is guilty of factoring. Also, depending on whether the factoring took place across different states there are federal and state penalties, for factoring. In many states factoring and money laundering are felonies.

Why am I writing about this?

Factoring is something that many businesses do and may not even know its wrong. Factoring is a crime, and is easily avoidable, but is most often done through ignorance or due to the disregard of established fraud prevention measures.