Key Judgments
Prepaid stored value cards--a product experiencing explosive
growth--provide an ideal money laundering instrument to anonymously move monies
associated with all types of illicit activity, without fear of documentation,
identification, law enforcement suspicion, or seizure. Therefore, it is very
likely that drug traffickers and criminals alike are exploiting and will
increasingly exploit the convenience and anonymity of prepaid stored value cards
to launder and move funds associated with their illicit enterprises.
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Prepaid stored value cards cannot be seized for Report of
International Transportation of Currency or Monetary Instrument (CMIR)
violations; are loosely regulated; function as remittance cards; frequently
provide cardholder anonymity when individuals are obtaining cards or adding
value to cards; often have liberal daily limits on total card value,
reloading, withdrawal, and spending of funds; and feature fees that are
generally consistent with or lower than the normal "cost" of laundering money.
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Prepaid stored value cards are, in many ways, superior to
established methods of money laundering and money movement--specifically, the
use of money transmitters and bulk cash smuggling--and may replace these
methods under certain conditions.
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Drug traffickers and other criminals will most likely use
prepaid stored value cards in lieu of electronic money transfers because the
fund-transfer processes are similar and use of the cards provides additional
benefits.
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Prepaid stored value cards are an advantageous alternative to
bulk cash smuggling via package delivery services or couriers on board
commercial conveyances (airplanes, buses, trains)--methods that carry a
significant risk of detection by law enforcement.
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It is much less likely that prepaid stored value cards will
replace traditional bulk cash smuggling by private or commercial
vehicle--methods that currently appear to be adequate to fulfill traffickers'
needs.
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U.S. regulatory action alone will not be sufficient to
suppress the money laundering threat posed by prepaid cards, since cards
issued by non-U.S. banks or other institutions can be used domestically to
transfer funds, make purchases, or access cash at automated teller machines
(ATMs).
Prepaid stored value cards provide drug traffickers with a unique and
simplistic money laundering method, which can be used to smuggle profits from
the United States to other countries or to send instant cross-border
remittances. The techniques made possible by prepaid stored value cards are,
in many ways, superior to the use of money transmitters and bulk cash smuggling,
methods commonly used to move a portion of the estimated $13.6 billion to $47.7
billion of wholesale illicit drug proceeds transferred to foreign destinations
annually.1 Under the proper conditions,
prepaid stored value cards may emerge as a substitute for these methods.
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Several types of stored value cards--open system, semi-open
system, closed system, and semi-closed system--are widely available in the
United States. Open system cards operate on major credit card networks and
can be used anywhere that the network brand is accepted, frequently including
worldwide ATMs. These cards are similar in appearance to traditional debit cards
and are embossed with the cardholder's name. Semi-open system cards generally
have the same features and limitations as open system cards but cannot be used
to access cash at ATMs. Closed system cards, such as store gift cards, operate
on merchants' internal networks and can be used only to conduct transactions
within the specific payment system(s) for which they were intended. Semi-closed
system cards may operate on major credit card networks and carry a major credit
card network brand. Closed and semi-closed system cards are generally anonymous,
are issued in preset dollar amounts, and are not reloadable. All prepaid stored
value cards draw value from funds provided to the program manager or a designee
prior to use.
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Typical Infrastructure of Network-Branded,
Prepaid Stored Value Card Programs
A program manager is the owner of a prepaid stored value
card program. Typically, program managers are responsible for establishing
relationships with processors, banks, payments networks, and distributors and
for establishing pooled account(s) at banks.
A processor facilitates payment transactions for prepaid
stored value card programs and tracks and distributes funds in pooled accounts.
Although this function is generally outsourced, program managers may choose to
function as their own processors.
A bank maintains pooled accounts, settles payments, and
issues Visa- and MasterCard-branded prepaid stored value cards. Banks may also
function as program managers and/or distributors.
A payments network provides the connection between
processor and retailer, ATM, etc., for authorization of payment transactions and
issues American Express- and Discover- branded prepaid stored value cards.
A distributor sells prepaid stored value cards.
Source: Federal Reserve Board;
Network Branded Prepaid Card Association.
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Money laundering activity can be facilitated by each type of
prepaid stored value card; however, open system cards have the greatest utility
for money laundering related to wholesale-level drug trafficking. Open
system cards function as a secure, compact, and inconspicuous vehicle for the
physical transportation of funds. These cards also can be used to electronically
transmit funds by the addition of funds to the card in one location and
withdrawal of funds via ATM in another. Front companies can exploit payroll
cards--a type of open system card used to pay employees who prefer not to use
traditional bank accounts--by loading unlimited amounts of funds onto the cards
of fictitious employees. Additionally, funds loaded on open, semi-open, and
semi-closed system cards can be removed from cards via "purchases" made at front
companies. Further, Black Market Peso Exchange (BMPE)2
activity could be facilitated by all types of prepaid stored value cards because
the cards can be used to purchase goods within the BMPE system. However, closed
and semi-closed system cards are poor methods of moving large amounts of money,
because they generally cannot be converted to cash without the resale of the
card, often at a loss. Nonetheless, these cards can be sold in an increasing
number of Internet venues, including web sites devoted exclusively to trading
these cards and Internet auction sites that allow limited sales of the cards.
These examples represent only a limited number of ways that prepaid stored value
cards can be exploited by money launderers.
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Prepaid stored value cards have several characteristics that
contribute to the considerable utility, efficiency, and accessibility of this
money laundering method.
Prepaid stored value cards cannot be seized for failure to file
a CMIR and may therefore be openly carried or shipped across U.S. borders
without fear of seizure. According to the U.S. Department of the Treasury
and the U.S. Department of Justice Asset Forfeiture and Money Laundering Section
(AFMLS), CMIRs are not applicable to the cards, because they are not considered
to be monetary instruments under 31 USC 5316. Thus, the cards are easier to
transport across U.S. borders than illicit bulk cash--which, in amounts greater
than $10,000, must be concealed to prevent discovery and seizure--and the cards
occupy less physical space as well. Additionally, it is often difficult to
distinguish open system cards from traditional debit cards.
Prepaid stored value cards are loosely regulated in comparison
to many other types of financial products, because it is unclear whether
existing federal laws designed to regulate other financial products also apply
to prepaid stored value cards and because the cards are specifically exempt from
some Bank Secrecy Act (BSA)3 requirements.
The only applicable federal reporting requirement to providers of stored value
is the Currency Transaction Report (CTR)4
rule. While banks that maintain pooled accounts for program managers are clearly
responsible for conducting program manager due diligence, it is unclear whether
either party--the bank or the program manager--is required to verify the
identities of individual cardholders; the USA PATRIOT Act requires financial
institutions to verify the identities of customers for whom they have opened
accounts.5 Although the BSA definition of
money services businesses (MSBs) includes issuers, sellers, and redeemers of
stored value, these businesses--unlike other MSBs--are not required to register
with Financial Crimes Enforcement Network (FinCEN), retain customer
identification information or transaction records, or file Suspicious Activity
Reports by MSBs (SAR-MSBs).6 The only MSB
BSA requirement applicable to providers of stored value is an obligation to
maintain anti-money laundering (AML) programs. Conversely, money
transmitters--also included in the BSA definition of an MSB--are required to
maintain AML programs; to verify, record, and retain customer identification
information on all transactions greater than $3,000; and to file SAR-MSBs on all
suspicious transactions in excess of $2,000.
Open system cards that offer global ATM access without a bank
account function as remittance cards, allowing traffickers to move funds
electronically in a manner that approximates money transfers. By allowing
cross-border remittances without the services of a bank or money transmitter,
traffickers (through the use of the cards) can send remittances that are exempt
from BSA requirements, including reporting requirements and verification of the
cardholder's (and recipient's) identity. The cards are the ideal instrument for
large-scale drug trafficking and money laundering operations because some of
these programs have no limit on the amount of cash that can be accessed outside
the host country. Moreover, many cards that are marketed as remittance cards are
specifically designed to transport funds to Mexico because of legitimate demand;
however, Mexico is the destination for a significant amount of wholesale drug
proceeds. Cards that are not marketed as remittance cards can function as such
if the provider offers multiple cards per account. Further, transactions are
sometimes conducted without the cardholder's presentation of the card (by using
the account number only). This situation enables cardholders in numerous
locations to add or withdraw funds or make purchases.
Because prepaid stored value cards can be obtained without
securing a traditional banking relationship, they often can be obtained and
reloaded anonymously or without photo verification of cardholder identity.
Cardholder anonymity is a marketed characteristic of some prepaid stored value
products; while other cards require identity verification, several factors make
it easy to falsify identification. Many cards that are purchased at agent
locations, online, or by fax do not require photo identification; in these
cases, identification is often accomplished by verifying that the cardholder's
reported name, address, and social security number correspond according to a
credit reporting service. This situation enables cardholders to secure multiple
anonymous accounts by using stolen identities. The anonymity associated with
obtaining prepaid stored value cards is maintained throughout the process of
adding value to the cards, which also can be done without face-to-face
interaction or identification. Most brands of such cards allow cash to be loaded
anonymously at ATMs and at program managers' or agents' locations, making it
difficult to determine the origins of funds and the identity of the funding
individual or entity. Cards can also be loaded with varying degrees of anonymity
via mail, Internet, or ATMs using various payment methods, including checks,
bank credit, account-to-account transfers, Internet fund transfers, and
electronic transfers of wages. Law enforcement agents participating in the El
Dorado Task Force in New York found that they could use false identification to
obtain prepaid cards and could have the cards sent to a post office box, further
insulating illicit activity. U.S. Secret Service (USSS) investigations revealed
that some prepaid card applicants not only use false identification but also
fund their initial deposits with stolen credit cards. In addition, vending
machines designed to add value to prepaid stored value cards are being used in
Japan; the use of these machines will quite likely spread to the United States
as the domestic popularity of these cards increases.
Many program managers offer liberal limits on daily total card
value and on daily reloading, withdrawal, and spending of funds; some domestic
program managers permit cardholders to load cards with an unlimited total value.
Offshore banks also offer prepaid stored value cards with unlimited reloading;
these cards are marketed specifically to allow cardholders to move money
anonymously. Cards with liberal limits on total value are ideal for large-scale
drug trafficking and money laundering operations; such cards make it easier for
traffickers to manipulate larger amounts of money using fewer transactions. The
network brands of most domestically issued prepaid stored value cards have
suggested caps on card reloading, but the limits are not binding on issuers.
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Internal Anti-Money Laundering Guidelines
for Network-Branded Prepaid Stored Value Cards
MasterCard International and Visa USA have established internal
AML guidelines for network-branded, prepaid stored value cards in response to
growing concerns about their potential utility for money laundering. Both
branders suggest that companies carrying their brands administer programs
regarding account limits and identity verification; however, neither
organization is actively policing program managers to ensure compliance with
these programs. MasterCard has proposed a card balance limit of $2,500; however,
the limit is not binding on issuers.
Source: U.S. Department of the Treasury.
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Although consumer advocacy groups allege that fees charged for
use of prepaid stored value cards are high in relation to legitimate consumer
activity, the fees are generally consistent with or lower than the normal "cost"
of laundering money. Depending on the manner in which the cardholder
conducts activity and on the fees charged by the company, the total fees for the
use of prepaid stored value cards can be similar to those charged by money
transmitters and are significantly lower than the costs associated with bulk
cash smuggling (i.e., the cost of maintaining vehicles, building traps in
vehicles, purchasing gasoline, paying couriers, etc.). Card fees vary by
provider and may or may not be charged for a variety of activities, including,
but not limited to, account setup; loading, spending, and cash withdrawal of
funds; monthly maintenance; balance inquiries; and overdrafts.
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Scope of the Industry
The rapid growth of the prepaid stored value market--which is
quickly replacing a variety of paper payment products such as checks, traveler's
checks, and gift certificates--and the resulting legitimate competition between
institutions that offer such services will provide drug traffickers and other
criminals with more service options; the increasing number of transactions will
make illicit transactions more difficult to detect. The Mercator Advisory
Group, a research and advisory firm focused on the payments industry, reports
that from 2003 to 2004, spending on all types of prepaid cards, including store
gift cards, payroll cards, and government benefits cards, grew by almost 21
percent ($110.7 billion to $133.9 billion). During that time the open system
prepaid card market itself grew by 91.6 percent. The Aite Group, a research and
advisory firm focused on issues related to the financial services industry,
estimates that prepaid debit card spending will increase from $12.8 billion in
2004 to $150 billion by 2009. As of January 2005 roughly 7 million Visa and
MasterCard brand prepaid debit cards were in circulation, issued by more than
2,000 programs. According to a report issued by the Aite Group in 2005, the
number of U.S.-issued Visa- and MasterCard-branded money remittance cards will
increase from 400,000 in 2005 to more than one million in 2006. Currently,
network-branded prepaid stored value cards carry the logos of American Express,
MasterCard International, and Visa USA. Discover Financial Services, in
partnership with Morgan Beaumont, is working to develop prepaid stored value
cards.
Drug traffickers, narcoterrorists, and other criminals will
increasingly rely upon prepaid stored value cards as a method to launder and
move funds, in part because the cards provide the means for a unique and
simplistic money laundering method that can be used to send instant cross-border
remittances or to smuggle profits from the United States to other countries.
The cards are superior to established methods of money laundering and money
movement--specifically, the use of money transmitters and some bulk cash
smuggling techniques--because the cards can be utilized without fear of
documentation, identification, law enforcement suspicion, or seizure.
Open system prepaid stored value cards may emerge as a
substitute for use of money transmitters because the process of obtaining the
cards is very similar to the process of making money transfers, including the
use of "smurfs"7 to place
illicit funds. As such, the use of prepaid stored value cards in lieu of
money transfers will require very little change in those traffickers'
operational activities, and any changes made will ultimately benefit the
traffickers.
Under certain conditions, open system prepaid stored value cards
may be used in lieu of bulk cash smuggling; however, this use depends on the
particular bulk smuggling method. Use of these cards as a substitute for any
such method will require significant operational changes, including the use of
smurfs to structure and place funds. It is likely that the cards will emerge in
lieu of bulk cash smuggling via package delivery services or couriers onboard
commercial conveyances (airplanes, buses, trains) because it is more likely that
bulk cash smuggled by these methods could be detected by law enforcement. It is
less likely that bulk cash smuggling operations conducted via private and
commercial vehicles--one of the primary money movement methods used by Mexican
drug trafficking organizations (DTOs)--will be replaced by the use of prepaid
stored value cards. A considerable amount of the estimated $8.3 billion to $24.2
billion in Mexican and Colombian wholesale drug proceeds generated annually in
the United States quite likely is moved into Mexico via bulk cash smuggling by
vehicles. The use of bulk cash smuggling via vehicles is likely adequate to
fulfill the traffickers' current needs; in addition, there would be no need to
transport the cards long distances by vehicles, since the cards can be sent to a
final destination expeditiously via package delivery services or commercial
conveyances. However, if the movement of bulk cash were severely hindered by
dramatically increased law enforcement interdictions in the Southwest Border
area, the chances that these cards would be used in lieu of smuggling via
vehicles would increase.
The U.S. Department of the Treasury has acknowledged the need to
modify and clarify existing regulations related to the prepaid stored value card
industry; in fact, FinCEN recently announced that it will issue new regulations
designed to clarify the roles and obligations of issuers of prepaid cards.
Although it is not yet clear what actions will be taken, there is an obvious
need to implement several changes to existing regulations. In order to enable
seizure of prepaid stored value cards with a monetary value of more than
$10,000, stored value should be included in the definition of monetary
instruments for CMIR purposes. Because it is often difficult to distinguish
between traditional debit cards and network-branded prepaid stored value cards,
a requirement designed to distinguish the appearance of open and semi-open
system prepaid stored value cards would enable law enforcement agencies to
better identify suspicious cards. Due diligence procedures required of financial
institutions under the USA PATRIOT Act--such as identity verification and
comparison of customers' identities against names of known terrorists--should be
applied to prepaid stored value cards because open and semi-open system prepaid
stored value cards are used in a manner that approximates a traditional checking
account. Additionally, the imposition of compliance programs such as those that
apply to money transmitters--including customer identification, recordkeeping,
and SAR-MSB reporting requirements--would empower law enforcement investigations
by allowing agencies to access information such as cardholders' identities, to
track transactions, and to identify patterns of suspicious activity. Procedures
such as identity verification, recordkeeping, and SAR-MSB reporting requirements
will most likely become the responsibility of the program manager in conjunction
with the processor, rather than the responsibility of the bank, because the
bank's role in the prepaid card process prevents it from having access to
information necessary to completing those processes. Various risks are
associated with different types of cards; therefore, it is also likely that
those cards will be regulated in different ways. For example, there may not be a
need to treat closed or semi-closed cards--which are issued in small preset
amounts and cannot be reloaded or used at ATMs--with the same AML procedures as
open system cards. Because prepaid stored value cards have demonstrated unique
and substantial economic benefits, any regulations applied to these products
should be balanced in order to protect consumers and combat money laundering
without inhibiting the growth of the industry.
U.S. regulatory action alone will not be sufficient to suppress
the money laundering threat posed by prepaid cards. Even if clear and
consistent regulatory measures are imposed, cards issued by non-U.S. banks or
other institutions--which are not subject to the BSA--can be used in the United
States to make purchases or access cash at ATMs. Limited international oversight
of these cards is possible through a recommendation of the Financial Action Task
Force on Money Laundering (FATF), which has publicly stated the need to monitor
the growth of and implement AML controls for this industry; however, FATF
recommendations will have little effect on nonmember countries and
noncooperative countries or territories (NCCTs). Legislation of regulatory
controls that would allow the U.S. government to prevent foreign cards from
being used in the United States will be difficult. In order to limit illicit use
of foreign-issued cards in the United States, cooperation from card branders
will be necessary.
Card readers should be made available to law enforcement
agencies throughout the United States, particularly those located at or near
ports of entry (POEs), in order to determine the value of cards--seizures of
funds on cards might be possible if it could be proven that the card was funded
with the proceeds of a specified unlawful activity (SUA).8 If law enforcement
officers who encounter suspicious cards, i.e., one (or more) high-value card or
numerous low-value cards that have no credible purpose, there may be a separate
basis on which to seize the cards under 18 USC 1956, Laundering of Monetary
Instruments, or 18 USC 1960, Prohibition of Unlicensed Money Transmitting
Businesses. Law enforcement officers may be able to assemble evidence
regarding the cards--specifically, information regarding how much money is
loaded on the cards; how the funds were generated; where the cards are being
taken and for what purpose; and, if the cards are being carried by a courier,
what that person is being paid and the number of previous trips he or she has
made. During this process it is important that law enforcement officers avoid
alerting the suspect to their suspicions regarding the source of the funds in
order to ensure that the funds are not removed from the cards by the suspect or
a coconspirator.
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National
U.S. Department of Justice
Criminal Division
Asset Forfeiture and
Money Laundering Section
Drug Enforcement Administration
Federal Bureau of Investigation
U.S. Department of the Treasury
Financial Crimes Enforcement Network
Open Sources
American Banker
Financial Action Task Force
Mercator Advisory Group
Money Laundering Alert
Rand Corporation
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End Notes
1. National Drug
Intelligence Center (NDIC) estimates indicate that drug trafficking
organizations (DTOs) generate, remove, and launder from $13.6 billion to
$47.7 billion in wholesale distribution proceeds annually. These figures
were derived by multiplying the total quantity of foreign-produced drugs
available at the wholesale level in the United States by wholesale prices
for those drugs.
2. The Black Market Peso Exchange
(BMPE) is a system in which Colombian traffickers receive Colombian pesos
in Colombia in exchange for U.S. dollars located in the United States.
Peso brokers facilitate this process by selling Colombian trafficker-owned
U.S. dollars located in the United States at a discount to Colombian
merchants who use the funds to purchase U.S. goods.
3. The Bank Secrecy Act of 1970
was designed to do the following: deter money laundering and the use of
secret foreign bank accounts; create an investigative paper trail for
large currency transactions by establishing regulatory reporting standards
and requirements; impose civil and criminal penalties for noncompliance
with its reporting requirements; and impose detection and investigation of
criminal, tax, and regulatory violations.
4. Currency Transaction Reports (CTRs)
must be filed for all cash transactions greater than $10,000.
5. The USA PATRIOT Act defines
"account" as "a formal banking or business relationship established to
provide regular services."
6. Issuers, sellers, and
redeemers of stored value cards may file Suspicious Activity Reports by
MSBs (SAR-MSBs) voluntarily.
7. "Smurfs" are teams of persons
who, acting in conjunction with or on behalf of other persons, structure
financial transactions by conducting or attempting to conduct one or more
transaction in currency, in any amount, at one or more financial
institutions, on one or more days, in any manner, for the purpose of
evading the reporting requirements under Title 31. "In any manner"
includes but is not limited to the breaking down of a single sum of
currency exceeding $10,000 into smaller sums, including sums at or below
$10,000. The transaction or transactions need not exceed the $10,000
reporting threshold at any single financial institution on any single day
in order to constitute structuring within the meaning of this definition.
8. Specified Unlawful Activity (SUA)
is defined under 18 USC 1956 (c) (7).
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