As James McGrath emphasized in his paper, prepaid cards are a significant payment innovation that can provide real value to businesses, financial institutions, and consumers. While the business case for these products is still developing, so is an understanding of the risks and the strategies for mitigating them. Some people have suggested that one risk for prepaid cards is that they may provide criminals with a new and attractive means to facilitate money laundering.
To learn more about this topic, the Payment Cards Center invited Patrice Motz, executive vice president, Premier Compliance Solutions,* and Paul Silverstein, executive vice president, Epoch Data Inc., to lead a PCC workshop. Since then, Payment Cards Center Senior Manager Stan Sienkiewicz has combined highlights from the workshop with his own research to produce a Discussion Paper entitled “Prepaid Cards: Vulnerable to Money Laundering?” The paper investigates the techniques used to launder money, the ways prepaid cards could be used to facilitate this process, and the public and private responses to this threat.
Sienkiewicz argues that many features of prepaid cards can make them attractive for both legitimate and illicit uses. For example, reloadable prepaid cards can provide unbanked consumers with services previously available only to those with traditional banking accounts. At the same time, if unmonitored, reloadability could facilitate the movement of large quantities of illicit money. Thus, Sienkiewicz concludes that prepaid card products and features are neither inherently good nor bad they are a financial services innovation with multiple possible applications. The question is: how can we promote the beneficial uses of these cards while mitigating the risk that they may be used for money laundering?
In examining this challenge, the paper compares the differences between combating traditional credit card fraud and the abuse of prepaid cards for money laundering. The fundamental difference is that traditional credit card fraud carries an observable financial loss that does not occur when prepaid cards are used for money laundering. In fact, the very purpose of money laundering is to use common payment vehicles to complete what look like legitimate transactions. As Motz and Silverstein emphasized, such transactions are difficult to detect and require different risk mitigation strategies than those used to combat credit card fraud.
This basic difference also reveals a critical problem. Issuing banks have a natural incentive to invest in efforts to reduce losses from credit card fraud. However, in a nonregulated market, neither the issuing bank nor its customers directly incur costs from processing money laundering transactions. Bankcard issuers not only face more complex detection challenges but also have fewer natural incentives to invest in efforts to reduce the risk. Because the direct costs associated with money laundering are borne by society, various laws and banking regulations have been enacted that impose penalties, and damage to an institution’s reputation may result if it does not obey anti-money laundering laws. This paper traces the evolution of legal and regulatory responses to this challenge, including recent guidance proposed by bank regulators.
Sienkiewicz also details the industry’s efforts to develop best practices and procedures aimed at mitigating prepaid cards’ potential risk for use in money laundering. Given their central role in network-branded prepaid cards, VISA, MasterCard, and other network providers have established rules related to load limits, customer identification requirements, and other mitigation strategies to limit their card programs’ vulnerability to money laundering.
At the card-issuing and program management level, businesses and banks are developing strategies to monitor card usage to detect patterns that indicate high-risk situations. These new technologies differ from traditional processes by identifying suspicious patterns, such as unusually frequent reloads or ATM use, behavior patterns not generally revealed by traditional fraud monitoring tools.
In the end, Sienkiewicz notes, there is no magic cure to completely eliminate the fraudulent use of prepaid cards for money laundering. At the same time, he concludes that federal regulation combined with industry efforts is going a long way toward reducing criminal activity and promoting a robust market for legitimate prepaid card programs.