Feb 13, 2023
4 min read

Fraud and Money Laundering in E-commerce: How Proper Identity Verification Can Prevent It (Guide 2024)

Learn about the most frequent types of crime in e-commerce, and how a good KYC and transaction monitoring solution can save money and reputation.

The e-commerce market is already huge, but it has been growing even faster since the pandemic. According to Statista, retail e-commerce sales amounted to $5.2 trillion worldwide in 2021, and are forecast to grow by 56% over the next few years, reaching about $8.1 trillion by 2026.

With the growth of e-commerce comes an increase in fraud and money-laundering through internet purchases. According to the e-commerce reports, the industry loss in 2022 was estimated at $41 billion, and this amount is expected to grow further to $48 billion by 2023. 

The leading fraud type in e-commerce is identity theft, a constant headache for customers and merchants who lose millions to it yearly.

In this article, we’ll look into client/merchant verification, and why “Know Your Client” (KYC), “Know Your Transaction” (KYT) and “Know Your Business” (KYB) solutions are the best friends of any online store.

Fraud in e-commerce

Criminals use a variety of methods to target e-commerce sites, including:

  1. Identity theft.

Criminals often buy products from e-commerce websites using stolen accounts. They use a variety of methods to do this.  Some schemes include phishing, purchasing stolen passwords and security codes. Once a criminal acquires a client’s account information, they can gain access to the user’s sensitive data, such as their home address and, in some cases, even bank card details.

Customers who have fallen victim to identity theft lose trust in their service providers, so merchants should pay special attention to their choice of KYC provider.

  1. Friendly fraud, or chargeback fraud.

This is a kind of fraud when a client makes a purchase online with a credit card, and then contacts their bank to dispute the charge claiming the transaction was invalid. Therefore, it is important to monitor customers’ behavioral patterns to recognize this kind of fraud.

A reliable and flexible transaction monitoring tool (KYT) will allow clients to adjust settings and triggers, so that it could be possible to detect multiple purchases made by a client simultaneously from different countries, unusually large transactions (above the AML threshold) and high-risk countries.

  1. Card testing.

Card testing is when a criminal checks if a stolen card is functional by making small purchases. If a small purchase is successful, the criminal makes larger purchases until the card issuer blocks the card. If these purchases turn into chargebacks, it could mean thousands in lost revenue and fees for merchants. Therefore, it is crucial to find a proper transaction monitoring tool to detect card testing in time.

  1. Credit card fraud, or payment fraud.

Credit card fraud occurs when a criminal makes an online purchase with a card which doesn’t belong to them. In order to steal credit card information, criminals use a variety of methods—from phishing attacks to contacting their victims by phone pretending to be a reputable company or a government agency. Stolen card information is also sold on the dark web.

Online stores that do not fight back against credit card fraud risk losing money to chargebacks.

Case study: italki Onboards Users Within 54 Seconds and Keeps Fraudsters Away with Sumsub

Money laundering in e-commerce

E-commerce money laundering, or transaction laundering, is using an online store to create fictitious transactions that appear legitimate. Recently, ISIS used eBay to send money to the US through fake transactions.

E-commerce money laundering may also be performed by companies which appear to sell legitimate goods. This can include funnel accounts (typically used by criminal organizations to fund criminal activities, such as human trafficking or terrorism financing) in which payment processors may mix legitimate and illegitimate transactions.

In short, money laundering in e-commerce can involve:

  • Selling of fake or contraband goods
  • Overinflated transactions
  • Non-existing transactions—a scheme called ghost laundering.

At the moment, there is no unified approach to combat money laundering and terrorist financing in e-commerce. In the United States, for example, online retailers can be required to be licensed as money services businesses, which oblige them to comply with local AML regulations. In other countries, online marketplaces are obliged to submit suspicious activity reports.

Global online marketplaces, like Farfetch, have to comply with the laws of the countries in which they operate. Jurisdictions with strong AML frameworks base their regulations on the Recommendations of the Financial Action Task Force (FATF)—a global AML watchdog—which, among other things, recommends businesses to verify their clients and partners before establishing business relations as part of the due diligence process.

Customer verification in marketplaces

Customer identity verification is the process of validating an individual’s information and identity. It allows companies to determine if their clients are who they say they are, prevent identity-related crimes, and stay compliant with regulations. The process is crucial for preventing fraud, money laundering, and terrorism financing.

The measures used to verify clients in e-commerce vary depending on the country/company. However, there are some common methods retailers can use to verify customer identity and safeguard their business:

  1. Biometric identity verification
  2. Video identification
  3. Address verification
  4. Multi-factor authentication (MFA)
  5. ID verification
  6. Age verification

Check out this guide to learn more about KYC and how it can keep your business from fraud and regulatory fines:

KYC Guide 2023—What’s KYC and Why is It Important?

Merchant verification in marketplaces

A merchant is a company or individual that offers a product or service online. Merchant verification is a complicated subject to tackle, as there’s no universal formula for conducting these checks, though they may be prescribed by law. According to the EU’s Payment Service Directive (PSD2), marketplaces can be identified as payment service providers, therefore having to implement security requirements for merchants, such as strong customer authentication when processing electronic payments.

In short, merchant transaction monitoring, as well as merchant due diligence (including KYC, KYB and AML processes), have to be made routine practices in all marketplaces. 


  • What is customer identity verification?

    Customer identity verification is the process of validating an individual’s personal information.

  • How do I verify my customer’s identity online?

    A reliable KYC provider can verify customer identities in seconds. The easiest and most common methods include ID verification or 1click verification, which only require an ID number.

  • How do I verify a merchant account?

    You can use KYC and KYB solutions to verify a merchant’s account.

  • What is the best e-commerce KYC platform?

    The optimal solution for verifying merchants and customers on an e-commerce platform would be a full-cycle verification platform. This platform should integrate user and business verification, transaction monitoring, fraud prevention, and case management solutions into a single dashboard, combating fraud throughout the entire user journey, and eliminating the need for multiple service providers.

E-commerceFraud PreventionIdentity TheftKYBKYCMoney LaunderingTransaction Monitoring