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The Green Sheet Online Edition

December 27, 2010 • Issue 10:12:02

GAO on why prepaid needs regulation

sellingprepaidIn October 2010, the U.S. Government Accountability Office issued a report that provides guidance on efforts by the Financial Crimes Enforcement Network (FinCEN) to close gaps in banking regulations created by the emergence of prepaid cards as a popular money laundering instrument.

The GAO report, entitled Moving Illegal Proceeds: Challenges Exist in the Federal Government's Effort to Stem Cross-Border Currency Smuggling, concluded that illegal proceeds smuggled across the United States' southern border via prepaid cards represent a significant threat to national security since that money funds illegal drug activity and potential terrorism.

Among its recommendations, the GAO advises FinCEN to develop an efficient management plan for instituting anti-money laundering (AML) policies and procedures on prepaid card providers; such a plan would help expedite the complicated rulemaking process that FinCEN is currently undergoing.

Examples of prepaid fraud

The GAO said an estimated $18 billion to $39 billion is annually smuggled from the United States into Mexico. According to the GAO, it is unknown how much of that money is tied to prepaid cards, but evidence suggests the cards are being employed.

For example, the GAO reported that U.S. Immigration and Enforcement officers uncovered at a border crossing one passenger who possessed over 1,000 stolen credit card numbers. It was subsequently discovered that the passenger was part of a credit card fraud ring and was paid for his services with gift cards, which he used to purchase phone cards that he smuggled into Mexico and sold at profit.

Another example involved Connecticut Drug Enforcement Administration agents who, upon investigating a narcotics and money laundering organization, determined that illicit proceeds were loaded onto prepaid cards and shipped to Colombia, where co-conspirators withdrew the money from ATMs. It was established that over a five-month period, $7 million was withdrawn from prepaid cards at one Medellin, Colombia, ATM location, the GAO said.

Questions remain

FinCen is mandated by The Credit Card Accountability, Responsibility and Disclosure Act of 2009 to update the Bank Secrecy Act regulations to include stored-value (prepaid) cards in its reporting requirements. The GAO outlined that FinCEN proposes to have money services businesses (MSBs) register with FinCEN, develop customer identification programs, and submit suspicious activity reports (SARs) to FinCEN.

As for how to address the problem of regulating the cross-border transportation of prepaid cards, FinCEN is undecided, the GAO said. The nature of the cards presents challenges to law enforcement. For example, smugglers can load cards with large amounts and yet easily conceal them, unlike bulk cash.

Additionally, if travelers are asked how much cash they are carrying, they may not know how much is loaded on any prepaid card in their possession, as that amount can only be determined by swiping it through a card reader or accessing a cardholder's account information.

Further, the seizure of funds is problematic. Law enforcement would need to identify at which financial institution prepaid card funds are being held, freeze those funds, then obtain a warrant to seize the funds. The GAO pointed out that by the time law enforcement obtained a warrant, those funds could have been transferred off that prepaid card and into another account.

Other challenges include monitoring AML reporting compliance, overcoming software limitations in tracking reports on an SAR database, and developing a complete MSB database, the GAO said. The agency added it is unclear when FinCEN will issue final regulations.

A significant reminder

But to illustrate why MSB reporting is important, the GAO quoted a U.S. Department of the Treasury statement concerning the 9/11 hijackers. The evidence the hijackers left behind (U.S. bank account and wire transfer records, not to mention face-to-face interactions with bank employees), helped identify them and trace them back to terror cells and fellow terrorists abroad.

"Had the 9/11 terrorists used prepaid [stored-value] cards to cover their expenses, none of these financial footprints would have been available," the Treasury Department said.

To read the full report, go to www.gao.gov/new.items/d1173.pdf. end of article

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