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The Green Sheet Online Edition

August 13, 2012 • Issue 12:08:01

Prepaid, mobile and money laundering

sellingprepaidAs money laundering schemes facilitated with prepaid cards gain in popularity, using smart phones for the same purpose is a growing trend. Cognizant of this Bermuda Triangle of illegal interests tied to money access devices, the Financial Crimes Enforcement Network (FinCEN) is in a race to shore up the regulatory framework for financial services to combat new ways to launder ill-gotten gains.

At a June 29, 2012, U.S. House of Representatives subcommittee hearing, FinCEN Director James H. Freis Jr. said, "[T]he ease with which prepaid access can be obtained and used, combined with the potential for the relatively high velocity of money moving through accounts involving prepaid access, and the potential in some cases for anonymity, could make it particularly attractive to illicit actors."

FinCEN renamed prepaid and stored-value cards as more broadly defined "prepaid access" devices to take into account new technologies, such as virtual cards and "wallets" on mobile phones, and their potential for abuse.

Freis stated, "[W]hile prepaid access is most often associated with a card, the new regulation was designed to be technologically neutral to allow it to be adaptable to a range of products, such as a plastic card, an Internet system, a mobile phone network, and other forms of developing technology that enable the ability to introduce and realize monetary value."

Choke points galore

The addition of mobile payments has increased the complexity of how law abiding consumers, as well as money launderers, access financial services. However, that complexity may actually help law enforcement to track down illegal operations.

Freis said various financial mechanisms, such as ATMs or POS terminals, "may merge and become interwoven in the same overall mobile payments transaction." He gave as an example a customer who initiates a person-to-person (P2P) money transfer at a money services business (MSB) agent location, such as a convenience store that provides P2P payments on behalf of a money transfer specialist like The Western Union Co. or MoneyGram International, which are considered principal MSBs.

That transaction is processed over the MSB's network, with funds ending up in a prepaid account residing in the mobile wallet of the recipient; the recipient is typically notified of the money transfer through a text message. Then the recipient may withdraw those funds using a prepaid debit card at an ATM.

"This transactional overlap often provides multiple international choke points that potentially lead to each other, which may, in turn, actually pose a benefit to law enforcement in their efforts to follow the money trails and identify other accounts and transactions associated" with a given subject, Freis said.

Serving customers, not criminals

Freis provided a brief history of how FinCEN's path to industry regulation resulted in the Prepaid Access Final Rule, which was published in July 2011 and went into effect the following September.

FinCEN was working toward developing a framework for how to integrate these newer and increasingly popular financial tools into the existing Bank Secrecy Act of 1970, which requires financial institutions to detect and prevent money laundering through anti-money laundering (AML) policies that include reporting suspicious transaction activity to FinCEN.

Then, in May 2009, President Obama signed into law the Credit Card Accountability, Responsibility and Disclosure Act (the Credit Card Act). The act, which mandated FinCEN to regulate prepaid access, accelerated FinCEN's timetable. According to Freis, the most important aspects of the Final Rule are:

  • Renaming the alternative financial tools as "prepaid access"
  • Targeting high-dollar amounts transacted via prepaid access devices, as they pose heightened money laundering risks
  • Excluding cards with a dollar limit of $1,000, as well as payroll cards that:
    • Cannot be used internationally
    • Do not permit money transfers
    • Cannot be reloaded via nonbanks, such as MSB agent locations and self-service kiosks
  • Excluding closed-loop products (such as retailer-specific gift cards) that limit load amounts on the cards to $2,000 or less on any given day
  • Excluding government benefit cards, as well as health care-related cards funded by flexible spending accounts and cards designed to fund dependant care needs

Freis noted that FinCEN's final rule is designed to make money laundering more difficult by preventing large sums of money from being transferred from one place to another without leaving money trails behind. That is why FinCEN obliges MSBs to alert FinCEN of suspicious activity.

"[W]e see reflected in the AML policies of many financial service providers controls to limit the dollar value available to single individuals both through thresholds and tracking to prevent a single individual from purchasing multiple access devices to avoid the thresholds," Freis said.

He added that the agency has been encouraged by the progress it has made in bringing prepaid access into the regulatory fold and helping financial service companies "focus on serving their customers, not criminals." end of article

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