Business Essentials for Professionals


Industry Push Back Forced Stalling of Money Laundering Rule on Prepaid Cards

Industry Push Back Forced Stalling of Money Laundering Rule on Prepaid Cards
A loophole in the banking system that authorities said allows drug cartels to move bulk cash across borders on gift and other prepaid cards, was tried to be plugged in 2011 by the U.S. Treasury Department amid a crackdown on international money laundering.
Money stored on these cards count toward a U.S. requirement to report cross-border movement of cash of $10,000 or more, proposed the department's Financial Crimes Enforcement Network (FinCEN).
However, according to law enforcement sources, after pushback from the prepaid card industry, FinCEN later withdrew its proposed rule. The move has not been previously reported.
The rule was being reworked and would be resubmitted, possibly by 2017, FinCEN spokesman Stephen Hudak said in response to questions from Reuters. "It's not dead," Hudak said.
Law enforcement officials said cross-border crime, including drug trafficking and money laundering have been difficult to contain due to the lack of a rule. Up to $24 billion in cash is smuggled into Mexico each year, some of it on prepaid cards, estimates the U.S. Department of Justice in 2009.
In recent years, there has been a rise in the use of cards. According to data from the Massachusetts-based Mercator Advisory Group, in the United States in 2015, more than $623 billion was loaded on gift cards and other types of prepaid cards.
Claiming that it would have discouraged people from using the cards, the prepaid card industry opposed the rule.
"Implementing onerous requirements on reloadable prepaid cards could disproportionately harm vulnerable consumers, who rely on these products as their sole means of access to the financial services system,” said Brad Fauss, President and CEO of the Network Branded Prepaid Card Association.
There are number of forms of prepaid cards. While "closed loop" cards are gift cards that can be used at specific outlets, the so-called "open loop" cards carry credit card company logos and are re-loadable.
Since they require vendors to collect purchasers' identification, unlike cash, open loop cards can’t be used anonymously, said Fauss, president of the prepaid card association.
Law enforcement officials said that the rule would have shed light on how often the cards are crossing borders since they have little information about how often the cards are used for illicit transfers.
Since border agents would need card scanners, which are expensive and invade customer privacy, it would be difficult to implement, the industry said. Since card companies already have implemented load limits and other controls, cross-border tracking was unnecessary, it said.
The rule could unfairly affect the poor, the industry also argued. For workers without bank accounts, prepaid cards can be used for U.S. government benefits and payrolls.
"The proposed rule could result in bank-issued prepaid cards being stigmatized as second-class financial products in comparison to debit cards and credit cards," wrote Alex Miller, Visa's then-associate General Counsel in one of the 2011 comment letters.
"The long delays in finalizing regulations to crack down on this practice are frustrating to those of us who want to stop this way of laundering criminal proceeds," said Senator Chuck Grassley, a Republican from Iowa in an emailed statement.
Since large cash transactions come under greater scrutiny¸ the cards can be used to pay couriers smuggling money, drugs or other merchandise, said John Tobon, deputy special agent in charge of Homeland Security Investigations in Miami.
"The regulations are absolutely still necessary," Tobon said.


Christopher J. Mitchell

Markets | Companies | M&A | Innovation | People | Management | Lifestyle | World | Misc