Factoring

In the context of payment processing, "factoring" refers to a type of fraud that involves the unauthorized use of someone else's merchant account to process credit card transactions. This illicit practice is also known colloquially as "credit card laundering" or "merchant laundering." Factoring occurs when a business without a merchant account, or one that cannot obtain one due to high risk or previous violations, processes its transactions through another merchant's account.

Here’s how it typically works:

Factoring is considered illegal because it deceives the acquiring bank and payment processors. The bank and processor are led to believe that the transactions being processed are for the goods and services approved for the legitimate merchant, rather than for a third party. This can expose the bank and processor to unforeseen risks, including chargebacks and disputes, and violates the terms of service of most payment processing agreements.

Authorities and financial institutions monitor for signs of factoring due to its potential association with more serious criminal activities, including money laundering and fraud. Businesses found engaging in factoring can face severe penalties, including fines, loss of merchant accounts, and criminal charges.