Why do AML and CTF rules apply to merchant onboarding?
Anti-money laundering (AML) and counter-terrorist financing (CTF) rules apply because acquirers and payment institutions are obliged entities: they must know who receives the money they settle. A fake or front merchant can turn criminal funds into card sales. KYB, UBO checks and transaction monitoring during merchant onboarding close that door.
In detail
AML and CTF rules apply to merchant onboarding because acquirers, payment institutions and e-money institutions are obliged entities under anti-money laundering law. They move money to merchants, so they must know who those merchants are and whether their activity is real.
The risk being managed
- Transaction laundering: a front business processes card payments for another, hidden activity.
- Shell merchants: a company created only to receive and move funds.
- Sanctions exposure: paying out to a sanctioned person or company.
What the rules require
The FATF Recommendations, the EU AMLR and US customer due diligence rules all ask for the same building blocks: identify the business, identify its beneficial owners, understand the purpose of the relationship and monitor it over time. Card schemes add their own merchant monitoring programs on top.
For a PayFac, these duties are passed down by the acquirer in the contract. Read KYC vs KYB and multi-acquirer merchant onboarding.