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March 21, 2011
FinCEN proposed new rule addresses money-laundering risks in prepaid products
While prepaid payment products still represent a small percentage of today's electronic payments, their use is rapidly growing. According to the 2010 Federal Reserve Payments Study, the number of prepaid card transactions increased 21.5 percent each year from 2006 to 2009. Most prepaid payments are enabled by plastic cards, but today's technology can enable the same payment functionality in other form factors, including mobile phones.
As the market for these prepaid products continues to develop and grow, the Financial Crimes Enforcement Network (FinCEN) has been watchful of their potential money-laundering risk exposure and issued a proposed rule addressing various kinds of prepaid access devices. In its proposed rulemaking notice, FinCEN announced that the rule would cover not only cards but also such access devices as mobile phones, key fobs, and any other device that can serve as a portal to funds paid for in advance and allow a consumer to retrieve or transfer these funds.
Prepaid access devices and money laundering risks
Many of the same factors that make prepaid access devices attractive to consumers can make them vulnerable to criminal activity. For instance, the ease with which these devices can be obtained along with the potential for anonymity—which is the case with nonreloadable open-loop cards, for example—as well as the ease with which money can be loaded onto them can make them potential money-laundering vehicles.
To help identify potential risks related to prepaid access devices, FinCEN formed a subcommittee within their Bank Secrecy Act Advisory Group (BSAAG). The subcommittee has identified numerous risks, such as funding with cash from stolen credit cards and virtual money cards that allow individuals without a bank account to access illicit cash via ATMs globally. Some high-profile criminal activities have also surfaced, exposing some of these potential risks.
Because some products are perceived to be less likely than others to be used for money laundering, FinCEN has excluded certain prepaid access devices from its rulemaking, including payroll cards, government benefit cards, heath care access cards, closed-loop cards, and products that allow access amounts less than $1,000.
Disrupting, detecting, and deterring the illicit flow of funds
Disrupting the flow of funds can create a less-than-ideal environment for criminals attempting to conceal the sources of their illicit funds. FinCEN's proposed rule is one way to accomplish this disruption. By implementing additional systemic safeguards and filling gaps in the prepaid environment with stronger regulatory controls, the agency hopes to make it more difficult for criminals to use prepaid payments products for illicit purposes.
Ultimately, the goal of the proposed rule is to enhance the regulatory framework for prepaid access devices while finding ways to promote development and growth in the prepaid industry and discourage wrongdoers from misusing prepaid products. For now, FinCEN's final rule is pending release, but if it is adopted as proposed, it would expand Bank Secrecy Act compliance obligations to prepaid access devices beyond plastic prepaid cards to include emerging prepaid products.
By Ana Cavazos-Wright, senior payments risk analyst in the Retail Payments Risk Forum at the Atlanta Fed
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