E-commerce Fraud: Guide to Preventing Money Laundering with Identity Verification

Amazon, eBay, AliExpress. These are just a few of the household names that have been ruling the e-commerce world. While e-commerce has been successful in providing convenience to customers, it also poses challenges for businesses, such as fraud and money laundering. If left uncontrolled, e-commerce brands can face revenue loss and other major consequences.

The success of e-commerce businesses can be attributed to their ability to provide a more efficient and convenient way to buy and sell products. This is not surprising, given the increasing urbanization, internet usage, and integration of e-commerce platforms with devices like smartphones, all fueling this market’s growth.

But a single bad experience on an e-commerce platform can cause buyers and sellers to lose trust and look for other platforms to conduct their business. So it’s important to understand how e-commerce businesses are challenged by fraudsters.

While criminals use different types of scams to attack e-commerce sites, identity theft remains the most common type of fraud in this sector, causing significant losses for customers and merchants yearly.

In this article, we talk about fraud prevention and provide detailed steps on how to safeguard your e-commerce business with such tools as Know Your Customer (KYC) or Know Your Business (KYB) verification. 

Key topics: 

  1. Fraud in E-Commerce
  2. Money Laundering in E-Commerce
  3. Red Flags Indicating Fraud 
  4. Consequences of Inaction 
  5. AML Compliance 
  6. Fraud Prevention Measures for E-Commerce

What Is E-Commerce Fraud?

E-commerce fraud refers to any fraudulent activity that takes place during online transactions involving e-commerce platforms. It involves both buyers and sellers and can include a range of tactics, including identity theft, payment fraud, and chargebacks. 

E-commerce fraud can cause significant losses for both customers and merchants and can lead to the loss of trust in online marketplaces. Below, we go deeper into the main types of fraud in e-commerce. 

Identity Theft

Identity theft happens when a fraudster steals a person’s identity information to make fraudulent purchases or transactions. Typically, the criminal obtains this information through phishing scams, hacking, or by purchasing it on the dark web.

Once they access the victim’s details, they can use them to open new accounts, make purchases, or commit other fraudulent activities. In the famous words of the notorious hacker Ngo Minh Hieu, who had stolen personal data from over 60% of Americans – “when a person loses their identity, they lose it forever.”

Payment Fraud

Another type of e-commerce fraud is payment fraud, where a cybercriminal uses stolen payment information or creates fake payment details to complete a purchase. For example, a fraudster may use a stolen credit card number to make a purchase or create a fake bank account or payment gateway to trick the seller into accepting the payment.

Chargeback Fraud

Known as friendly fraud, chargebacks are also a common form of e-commerce fraud, where a customer disputes a charge with their bank or credit card company, claiming that they didn’t authorize the transaction or that the product was not delivered as promised. To prevent double refunds, some e-commerce marketplaces may ask their users to close the dispute they opened and work with their bank to resolve the issue instead of making fraudulent chargeback claims.

Infographic saying 71% of merchants are most concerned about identity theft and that they lose $3.94 for every $1 from a chargeback.

Case study: Learn how iDenfy’s identity verification service helped The Everset reduce fraudulent accounts by 83%. 

How Does Money Laundering Happen in E-Commerce?

Money laundering is common in e-commerce marketplaces. It happens when criminals attempt to transform illicit funds into seemingly legitimate transactions. In e-commerce, criminals can use stolen credit cards or other forms of illegal payment methods to purchase items, which can be resold for cash or cryptocurrency. 

This process makes it difficult for law enforcement to trace the origin of the funds and allows criminals to avoid penalties.

For example, a criminal may create multiple fake accounts on an e-commerce platform and use these accounts to buy and sell items between themselves in order to make it look like legitimate transactions are occurring. That’s why e-commerce platforms, such as Vinted, have safety teams that work on banning scammers with multiple accounts. 

In addition to individuals, companies can also carry out e-commerce money. Such entities use their online marketplaces as a front to disguise illegal funds. Criminal organizations often use these e-commerce platforms to fund their operations, including for human trafficking or terrorism financing.

AML process is necessary to comply with local and international regulations set by regulating authorities.

Signs Indicating E-Commerce Fraud

Several red flags can indicate fraud in e-commerce transactions. First, be wary of any sellers who demand payment through non-traceable methods such as wire transfers, gift cards, or cryptocurrency. These methods make it difficult to track the transaction and can be a red flag for fraud.

Second, be careful when bumping into sellers offering goods at prices significantly lower than market value. This can be a sign that the product is counterfeit or that the seller is attempting to scam the buyer by taking their money without delivering the product.

Third, check the reviews and feedback. If they have a high number of negative reviews, this may be a sign that they aren’t a legitimate seller and that the buyer is likely to encounter issues with the transaction.

Finally, if the seller is unresponsive or refuses to provide information about the product or shipping, this can be a sign of fraudulent activity. Legitimate sellers will happily answer any questions or at least provide additional details about the item and the transaction.

The Consequences of Ignoring E-Commerce Fraud for Your Business

Allowing fraudsters and bad actors to operate on your e-commerce platform can cause lasting damage to your legitimate users and your business, including a loss of revenue, competitive advantage, and potential legal and regulatory consequences.

For buyers, that means lost trust, including:

  • Abandoning your platform and switching to a competitor
  • Refraining from referring friends or new users
  • Hesitating to make future purchases
  • Limiting purchases to inexpensive or low-risk items
  • Leaving negative reviews on social media

Sellers can also begin to doubt the credibility of your e-commerce platform if they encounter fraud. If this occurs, they may question whether it is worthwhile to continue using your platform. Ultimately, losing the trust of buyers and sellers can have a significant impact on your business, making it more challenging to regain trust. 

How Does AML Compliance Apply to E-Commerce?

Anti-Money Laundering (AML) compliance refers to a series of rules and processes designed to prevent financial crime. These measures are mandatory for implementation within governmental and financial institutions, large corporations, and other entities, such as e-commerce businesses.

The primary goal of AML is to monitor and prevent fraudulent activities while complying with strict regulations.

Ensuring that customers, suppliers, and partners aren’t involved in criminal activities such as money laundering or terrorism financing is essential for any business, including those in the e-commerce industry. Failing to do so can result in:

  • Non-compliance with AML regulations
  • Canceled orders
  • Major fines and reputational harm

E-commerce businesses are particularly vulnerable to financial crimes due to the digital nature of customer and supplier identification processes. This makes it even more crucial for e-commerce platforms to be vigilant and implement effective AML compliance measures to prevent financial crimes.

There are two main compliance measures you need to know in the e-commerce industry: 

KYC or Know Your Customer, which is the procedure of verifying customers’ identities.
KYB or Know Your Business, which is the procedure of reviewing the identities of the Ultimate Beneficial Owners (UBOs) of the partners and suppliers.

Both KYC  and KYB are essentially a series of standards and regulations designed to verify and confirm the legitimacy of all parties associated with a particular business.

Infographic on AML regulations to prevent e-commerce fraud in Europe, US, Canada and UK.

How to Prevent E-Commerce Fraud and Stay Compliant?

Thankfully, there are multiple measures that you can adopt to maintain and safeguard your e-commerce marketplace from fraudulent activities. These measures may include:

Identity Verification

Identity verification involves confirming an individual’s personal details and identity. It enables e-commerce companies to verify the authenticity of their clients and prevent fraud while remaining compliant with KYC and AML regulations. 

This process acts as a first layer of defense for all users. Consequently, by conducting identity verification during customer onboarding, you can prevent malicious actors from infiltrating your e-commerce platform. 

ID verification measures can vary. Here are some examples of how e-commerce platforms verify their customers: 

Identity verification can prove to be particularly beneficial in reducing duplicate accounts, making it challenging for malicious actors to engage in fraudulent activities, such as chargeback fraud or account takeover (ATO) fraud. 

Customer Reauthentication

Customer reauthentication involves verifying the identity of an individual who has already been verified on your e-commerce platform. Re-verification serves various purposes and becomes crucial when users engage in high-value transactions, or their activities raise suspicion. 

An example of a possibly high-risk situation is when a buyer or seller attempts to change their account data, such as payment details. It might be a legitimate request or a possible sign of ATO fraud. In general, users may also require reauthentication before completing a transaction to confirm their legitimacy and prevent fraudsters from taking control of their accounts.

Screening and Ongoing Monitoring

Screening and ongoing monitoring can significantly aid e-commerce platforms in mitigating risks and preventing fraudulent activities in real-time. By regularly checking customer behavior, platforms can detect and flag suspicious users and automatically detect unusual patterns or high-risk customers.

This enables e-commerce marketplaces to take action and deter fraud easier, no matter the stage of the relationship with the customer. Additionally, ongoing screening and monitoring can help e-commerce platforms maintain compliance with AML and other regulatory requirements, thus helping minimize legal risks and reputational damage.

Simplifying Fraud Prevention With Automated Tools Build For E-Commerce

Instead of hiring internal Trust and Safety teams and hassling around different compliance officers, E-commerce platforms tend to use automated tools to complete their fraud prevention systems. This gives the benefit of scale, speed, and overall effective risk management, reducing the risk of fraud or financial loss.

iDenfy’s automated fraud prevention tools process vast amounts of data quickly and efficiently, making it easier to detect and prevent fraud. We offer both identity verification and Business verification tools for e-commerce merchants, including the handling of personal information for you.

On top of KYC and KYB solutions, iDenfy’s AI-powered fraud prevention platform has all the needed tools in one place, including PoA verification, Face Authentication, Selfie Verification, and more.

Get started today! Or book a demo to learn more.

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