The Fintech industry is evolving at a breakneck pace, with new payment solutions, marketplaces, and neobanks emerging daily. But as opportunities grow, so do the risks. Today, we’ll discuss two interconnected and extremely dangerous threats that can not only lead to massive fines but can also completely destroy the reputation and operations of any payment company: transaction laundering and miscoding.

What is Transaction Laundering?

Imagine you have a reputable client—an online store that sells books. As a Payment Service Provider (PSP) or an acquiring bank, you’ve verified their documents, website, and onboarded them to accept payments. However, behind this legitimate “storefront” lies a completely different business. Through the very same payment gateway, this client is secretly processing payments for prohibited goods or services—such as unlicensed online casinos, a counterfeit pharmacy, or adult content.

Transaction Laundering is the process by which an illicit merchant uses a legitimate, approved merchant’s account to process their payments. In essence, it’s a Trojan horse within your payment system.

Fraudsters create a front website with harmless products, pass all your verification checks (KYC/KYB), and then funnel traffic from their shadow websites to this payment gateway. To your system, it appears as if customers are buying books, when in reality, they are placing bets at an underground casino.

This is one of the most sophisticated forms of money laundering because it bypasses standard compliance procedures by masquerading as normal commercial activity.

Miscoding: The Instrument of Deception

If transaction laundering is the “what” fraudsters do, then miscoding is the “how.”

Every merchant is assigned a special code when they are onboarded to accept card payments—the MCC (Merchant Category Code). This four-digit number tells the bank and card schemes (Visa, Mastercard, etc.) what industry the business operates in. For example, 5942 is for Book Stores, while 7995 is for Gambling Transactions.

MCCs are critical because they determine:

• The interchange fee.
• The risk level and associated monitoring requirements.
• The applicability of card scheme rules and restrictions (e.g., for high-risk industries).

Miscoding is the intentional assignment of an incorrect MCC to a business in order to circumvent restrictions or hide the true nature of its activities. For example, an online casino might register under the MCC for “Software” (5816) or “Subscription Services” (5968) to prevent its transactions from being blocked by the payment networks.

Often, miscoding and transaction laundering go hand-in-hand. A fraudster first establishes a company with a low-risk MCC (miscoding) and then uses it to process illicit payments (transaction laundering).

What Are the Risks to Your Business?

The consequences for a payment company found to be facilitating (even unintentionally) such schemes can be catastrophic.

1. Financial Losses:
   • Hefty fines from card schemes. Visa and Mastercard have special monitoring programs (e.g., BRAM/GBPP) and impose fines of tens or even hundreds of thousands of dollars for each identified case.
   • Liability for losses. You will be held liable for all chargebacks related to the illicit merchant’s activity.
   • Increased processing fees. Following an incident, your acquiring bank may classify you as a high-risk client, severely impacting your bottom line.
2. Regulatory Risks:
   • Scrutiny from financial regulators. Aiding and abetting money laundering is a serious violation of AML/CFT laws. This can lead to license revocation and even criminal liability for management.
   • Frozen corporate accounts. Your corporate accounts could be frozen during an investigation.
3. Reputational and Operational Risks:
   • Termination of partnerships. Acquiring banks and card schemes can immediately terminate their relationship with you. For a fintech company, this is tantamount to a death sentence.
   • Loss of trust. News that your platform was used for money laundering will do irreparable damage to your reputation among clients and investors.
   • Placement on industry blacklists. Being placed on global terminated merchant files (like Mastercard’s MATCH list) can effectively bar you from operating in the international market.

How to Protect Your Business: Proactive Compliance is Your Best Defense

Standard KYC/KYB procedures are no longer enough. To detect such complex schemes, a multi-layered and in-depth approach is required.

• Enhanced Due Diligence. Don’t just check documents; analyze the client’s business model. Scrutinize their website for hidden links, inconsistencies in pricing and products, and analyze traffic sources and online reviews.
• Advanced Transaction Monitoring. Use AI and Machine Learning-based systems capable of detecting anomalies: atypical average transaction values, spikes in activity at unusual hours, and strange payment patterns.
• Website Crawling and Scanning. Implement automated tools that regularly scan your clients’ websites for content changes, the appearance of prohibited keywords, or hidden payment pages.
• Staff Training. Your compliance officers and relationship managers must be trained to recognize red flags and understand how fraudsters operate.
• Legal Expertise. Develop and implement internal policies and procedures that comply not only with legal requirements but also with the rules of international payment schemes.

Conclusion

Transaction laundering and miscoding are not abstract concepts; they are a real and constant threat to any player in the payments market. A proactive stance, investment in modern monitoring technologies, and a deep legal review of your compliance processes are not expenses, but investments in the stability and long-term success of your business.

Our team of legal and compliance specialists has deep expertise in fintech regulation and payment scheme rules. We help our clients build robust defense systems, conduct risk audits, and mitigate the threats associated with fraudulent schemes.

Don’t wait for a problem to knock on your door. Contact us today for a consultation to ensure your business is securely protected.