What is a Payment Gateway?
Exchanging money has become extremely simple in today’s world of online payments, UPI (United Payment Interface) transactions, and net banking. Gone are the days of writing and sending cheques or standing in long ATM lines to withdraw enough cash for the month’s expenses. Spending money has become as easy as the press of a button, and anyone with a bank account and mobile can make purchases and transfer money without the hassle of visiting their bank in person. Hence there are high possibilities for Money Laundering through Payment Gateways.
If you regularly make online payments, then you must be no stranger to the payment gateway. The payment gateway can be compared to a middleman of sorts. It relays your- the customer’s- data to the business that you are purchasing products or services from and verifies your bank account details by reading sensitive credit card details or UPI ID. It ensures that the transaction takes place safely and securely and that your money is promptly returned to your account in case you enter incorrect details or there are any server errors.
To explain it in simple terms- the payment gateway plays the role of the point-of-sales system or card swipe machine that the customer would use to make their purchase in a physical setting. The payment gateway also verifies that the card details actually belong to the person making the purchase (either through a mobile-linked OTP or CVV number at the back of the card), that the card is not expired and that the linked account has sufficient balance- which helps protect the business from fraudsters and scammers. Hence, payment gateways are beneficial to both parties partaking in online purchases.
How Scammers were able to exploit Payment Gateways
As established above, payment gateways are an integral part of online purchases that help to verify the credibility of the buyer’s credentials. The customer enters their details into the payment gateways, which sends the details to the card company, which verifies it and passes it back so that the gateway can approve or deny the payment.
However, some of these payment gateway companies seem to be in trouble for flouting the rules, as the Enforcement Directorate of India recently found several of them to be negligent towards due diligence guidelines.
Any payments made through an online wallet must be routed through a payment gateway. And with UPI wallets taking over the country, transferring money via apps like PayTM, Google Pay, and PhonePe has become the new normal. However, it has also made it easier to people to spend money on Chinese micro-loan apps and betting apps that have recently infiltrated the Indian market with the promise of get-rich-quick schemes and easy availing of loans.
Many of these applications were associated with shell companies, which acted as fronts for money laundering operations. The ED booked the payment gateways for not conducting adequate due diligence measures on the payments being made towards these illegal apps and questioned how the payment destinations did not trigger any red flags for the gateway companies or prompt them to investigate further. According to the ED, the payment gateway companies violated the 2002 Prevention of Money Laundering Act (PMLA) by allowing customers to go ahead with transactions with suspicious companies.
Payment gateway companies like PayTM, Bill Desk, and Cashfree have come under fire for working with Chinese betting companies, be it knowingly or unknowingly. Questions have arisen on if the payment gateways knowingly approved suspicious transactions and bypassed due diligence requirements because of ties with Chinese scammers and if they were benefitting by receiving cuts from the proceeds.
Out of the accused gateway providers, companies Cashfree and Infibeam denied all claims, stating that they complied with all due diligence rules and guidelines under the Foreign Exchange Management Act (FEMA) and conducted rigorous merchant verification before authorizing payments. Upon investigation by ED authorities, both companies were found to be compliant with necessary due-diligence measures, which brought the question of possible corruption among the company’s employees and not the companies as a whole.
Buy Now Pay Later (BNPL) scams
The recent Covid-19 pandemic spelt financial troubles for many, as lockdowns led to major layoffs and loss of jobs and income. Many Chinese scammers were able to take advantage of the growing financial crisis in India and scam people out of their money by posing as microloan apps and infiltrating the Indian app store.
A similar scam that emerged during the pandemic was the Buy Now Pay Later scam. The concept of BNPL was introduced to encourage purchases to sustain the slowing economy by providing customers with a way to fund their purchases later or through installments. However, fraudsters were able to exploit the BNPL method in many ways-
- By using stolen credit cards or bank information by phishing or hacking.
- Stealing people’s identities and using them to open accounts and make large purchases which then falls on the account holder to repay.
- Undisclosed businesses taking advantage of the reduced quality of due diligence, posing a larger money laundering risk by using verified credentials to make transactions for illicit actors.
- Making false claims to claim chargebacks, i.e., the return of money to their account, creating chargeback and processing frees for the provider.
- Creating fake accounts using legitimate details, i.e., using details such as Aadhar Card numbers and bank account details but mixing up these credentials with fake names to create new identities that are difficult to verify or track. This is called Synthetic Identity Fraud. BNPL providers don’t have the best KYC checks, making such exploitation a relatively easy task.
Conclusion
The advent of the Covid-19 pandemic threw India’s economy into chaos and caused many people to lose their jobs and, in many cases, their only course of income. Chinese scammers were able to take advantage of this by flooding the market with legitimate-looking micro-loan apps and betting apps, both of which encouraged Indians to invest money for higher returns and financial security.
However, these apps turned out to be scandalous and robbed thousands of users of their hard-earned money. Many payment gateway companies faced the heat, as their due-diligence methods were questioned for allowing customers to successfully make these transactions towards fraudulent merchants in the first place. The ED booked several payment gateway companies and conducted in-depth investigations to check whether these companies were knowingly working with scammers to earn money or if they were simply negligent in their background checks- both of which violate the 2002 PMLA.
