Credit Card Factoring is Money Laundering

Accepting credit cards is smart for any business in this era; however it is important to know and follow all of the card industry rules and Federal and State laws that govern card acceptance. While the common belief among society is that money laundering is only the worst thieves moving ill-gotten funds around within the criminal underworld, there is a little known activity within money laundering called credit card factoring that can cause big problems for merchants that accept credit cards.

Below is a description of credit card factoring, how to avoid it, and some of the problems that will occur if you’re not diligent in educating your staff on how to prevent it.

What is credit card factoring?

Any credit card transaction that is processed by a different merchant than the actual merchant selling the product/service or any transaction that uses a different merchant account not directly affiliated with the business can be considered credit card factoring.

The transaction can be as simple as a business using the next-door neighbor’s credit card terminal to process a single transaction because they don’t take credit cards or their terminal is down but more commonly it is a complex series of transactions within a scam.

For example, a fraudulent telemarketer will recruit a business owner or unsuspecting employee of a business that does possess a merchant account to process transactions for them. The customer’s account is charged for the goods or service and the business who will become the victim gives the proceeds of the sale to the telemarketer. However, when the customer contests the charge on their statement as a chargeback because they didn’t buy anything from the victim, the bank will have to refund the money to the customer and processes the chargeback against the merchant account. It becomes the responsibility of the victimized business to go after the telemarketer for the lost funds. Unfortunately, the telemarketer is long gone with the money and the business owner is out of luck.

“In many cases, these companies need other merchants to process their credit card transactions because investigations and credit checks by banks and/or credit card companies revealed that these companies are bad risks and may end up having excessive charge-backs,” wrote Cheryl Linkloff in an inc.com article on credit card laundering.

How do you avoid it?

The simplest way to avoid factoring is to refuse to process any credit cards for another company—at all. This includes your neighboring store whose credit card machine is down. It may seem strict but there are serious liability issues involved and once you’ve processed a charge on your merchant account, you are legally liable to back up that charge and respond to any bank inquiries about potential chargebacks. If the banks find that you are not the actual originator of the sale, you could be in trouble.

But knowing this information and keeping it to yourself also does little good. Effective training on card processing practices and the consequences of ignoring the rules must be impressed upon any employee who processes transactions. While the issue might not come up regularly, you never know when someone who is ill-informed is asked to make this one exception, just this one time.

The Consequences

Financial liability for any losses associated with the transaction is the first, most minor, concern. Your business, as the merchant who processed the charge, would be responsible for the cost if the customer reports the charge as fraud. When it’s your own store and product, that’s one thing, but vouching for and guaranteeing the charges of another merchant is not wise.

More importantly, though, credit card factoring is considered fraud/money laundering and is a class C felony. Criminal prosecution stands as the biggest risk, but businesses might also lose the ability to work through a third party merchant for credit card processing, which can also result in serious financial losses. While criminal prosecution is mostly reserved for obvious criminal intent, small mistakes can also hurt your business because outside merchants will not want to take the risk of becoming involved in a criminal prosecution.

Bottom line: educate your employees and ensure that they are reminded regularly of the risks associated with accepting fraudulent cards or processing payments for others. Your customers will thank you for it.