Prepaid cards: Tools for terrorists?
The cards' features make them attractive to those who want to move large sums of money without detection.
This post comes from Brian O'Connell at partner site MainStreet.
There's one area of the credit card market that is growing by leaps and bounds -- prepaid cards -- and federal law enforcement officials say it's a troubling trend that can be accounted for, at least in part, by criminals. Post continues after video.
According to the Network Branded Prepaid Card Association, American consumers spent $37 billion on prepaid cards in 2010, about twice as much as 2009.
At the same time, the Federal Reserve Bank has been looking at the issue of prepaid cards and money laundering, which in 2007 led the Federal Reserve Bank of Philadelphia to release a report (.pdf file) on the topic entitled "Prepaid Credit Cards: Vulnerable to Money Laundering?"
"A number of observers have also emphasized the potential that prepaid card applications have for more efficiently and effectively delivering financial services to the unbanked and underserved segments of society," the paper states. "Unfortunately, many of the same features that make prepaid cards such a positive payment innovation have also attracted criminals interested in exploiting this new payment form to facilitate money laundering."
In 2005 a group of government agencies collectively released a report called "Money Laundering Threat Assessment" (MLTA) that explained how "stored value cards" create a huge loophole in the cross-border cash transport laws that enable terrorists and drug dealers to bring large amounts of cash into the country without detection.
Normally, people entering the U.S. have to declare any cash amount over $10,000. But prepaid cards enable criminals to bypass that restriction, usually by repeatedly "reloading" the card in $9,900 increments on a moment's notice, and allow them much wider latitude in creating further, potentially more serious crimes.
"The MLTA emphasizes that the money laundering risk associated with prepaid cards lies in their easy transportability and the relative ease of moving and potentially accessing monetary value anonymously," the Federal Reserve said about the investigation. "The report further notes that prepaid card programs that do not require customer identification or that do not include rigorous monitoring of suspicious activity are most at risk for money laundering abuse."
No financial footprint
Just ask the law enforcement officials who tracked the 9/11 al-Qaida terrorists how prepaid cards have changed the crime-fighting battlefield. U.S. authorities were more easily able to catch the moneymen behind the 9/11 attacks -- in large part because of their transparency in moving money into the U.S.
According to a 2005 report from the Treasury Department, "The 9/11 hijackers opened U.S. bank accounts, had face-to-face dealings with bank employees, signed signature cards and received wire transfers, all of which left financial footprints. Law enforcement was able to follow the trail, identify the hijackers and trace them back to their terror cells and confederates abroad."
"Had the 9/11 terrorists used prepaid ... cards to cover their expenses," the report continues, "none of these financial footprints would have been available."
New rules
Today, the federal government is bringing the hammer down on prepaid card use, especially those "reloadable" cards that make it easy for criminals to keep pouring cash into the card without detection. In a word, federal authorities are now asking prepaid card providers to keep a running record of how each consumer uses the card, and how many transactions the consumer makes during a five-year period.
It's way too early to say how effective the new rules will be, and how much of a burden it puts on an otherwise thriving industry (a rarity in this economy), but Uncle Sam has taken a cold, hard look at the gaping loopholes exploited by criminals and terrorists using prepaid cards, and he doesn't like what he sees.
That means prepaid card users with illegal intent have a big, fat target on their backs, which won't go away anytime soon.
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Prepaid cards are financial tools relied up by millions to pay their bills and make purchases without the risk of expensive overdraft charges or credit card debt. All prepaid card issuers and program managers are highly concerned with fraud and illegal activity and spend millions each year to combat it. We must ensure that the conversation we have about safeguards to prevent such illicit activities is accurate and does not impose restrictions that won’t deter criminals but make the products harder to purchase be used by laws abiding citizens that rely on them. Here are the facts.
Network branded prepaid cards are highly regulated. They are issued by regulated banking institutions or by other highly regulated financial organizations. Issuers of prepaid cards are subject to examination, review and supervision by state banking or other departmental regulators, federal banking regulators, the Internal Revenue Service or a combination of all of these agencies. Card issuers, sellers and redeemers are legally required by the USA PATRIOT Act and the Bank Secrecy Act (BSA) to have an effective anti-money laundering (AML) compliance program that addresses customer due diligence, suspicious activity monitoring, and other screening, reporting screening and recordkeeping requirements. No matter where the card in sold in the US – at a retail location, banks or convenience store these rules apply.
In addition, cards cannot be “anonymous” where the identity of the holder in unknown. Other than for small-dollar, non-reloadable prepaid cards which do not provide cash access (e.g., gift cards), prepaid card issuers require cardholder identification and verification, as well as screening, before the cards can be activated, used or reloaded. Even though a cardholder may purchase a reloadable prepaid card “anonymously” in a retail location, an activation process is usually required before a cardholder can reload the card or use the card to access cash. The typical activation process is as follows: the cardholder telephones or logs into the Website of the card issuing financial institution (or a specialized third party service provider with which the issuer has contracted to provide such services) and provides personal identification, including name, address, Social Security Number and/or date of birth. The financial institution then uses a third party authentication system, such as Experian, Lexis-Nexis, or Equifax, to verify the information provided. If the cardholder does not clear this process, the card is either not useable or not reloadable.
Furthermore, the vast majority of open loop prepaid cards are already subject to mandatory suspicious activity report filings and they work with law enforcement to report any suspicious activity with the cards.
Jennifer Tramontana (NBPCA)
Obviously the author of the article and people quoted in the article did not take the time to research their information. Their story sounded fishy to me, so I checked all prepaid cards available for issue in the US (which is all our government can regulate). Only one card allowed for total anonymous use. That card limited you to $2500 per day of funding (cash) for the card and only $500 withdrawals per day from ATMs. Funding through any other means besides cash requires compliance with the Patriot Act. Not big money by any means.
The other cards allowed initial purchases of the card up to $500, but to add more you had to comply with the Patriot Act. If you want to refill any of the cards, you must comply with the Patriot Act.
So, where are these cards that you can fund anonymously with $9,900 (to escape IRS notification)? Not in the US, so why would they worry about the $9,900.
This is another case of the press failing to do their job and report responsibly.
The question should be is why does the government want to monitor these cards?
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