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October 29, 2012
Crossing the Border: More Reason to Check Your Pockets
It's no secret that cross-border travel has involved a lot more restrictions since 9-11. Declaration of assets and physical inspection of luggage and other items are expected, as well as tedious and unpleasant, aspects of a vacation or business trip. That could change soon and not for the better, under a new rule proposed October 2011 by the Department of the Treasury's Financial Crimes Enforcement Network (FinCEN). The new rule would require travelers to add the balances of prepaid cards to declaration reports.
While issuing such a rule sounds reasonable in theory, enforcement is likely to be another matter. Unlike checking the content of physical items, digital value stored in or accessed by a plastic card or a mobile phone is difficult to measure. How can you tell how much money is loaded on the prepaid card to validate the declared value? In fact, how will enforcement officials even distinguish prepaid cards from credit and debit?
FinCEN's proposed rulemaking expected to be final soon
FinCEN's Notice of Proposed Rule Making (NPRM), expanding the scope of its cross-border reporting requirements to include "tangible prepaid access devices," is poised to assume its final form, some expect as soon as the end of the year. Currently, travelers have to report aggregated cash and other monetary instruments exceeding $10,000. The premise behind this requirement is that it prevents money laundering and criminal-terrorist financing by enabling the traceability of currency and its equivalents, and hopefully eliminating anonymous flows of money into and out of the United States.
Previously, FinCEN issued a rule recognizing the advanced innovations in prepaid payment methods and the subsequent need to expand the definition to include all form factors backed by prepaid value, in addition to cards. That rule also changed the payment method definition from "stored value"—implying value stored digitally within the form factor—to "prepaid access," a term that more accurately describes the process for electronic retrieval of prepaid funds maintained by the payment provider.
Handheld readers at borders and airports?
According to comments published in response to the NPRM, the Department of Homeland Security is working on a "handheld reader with features that will, among other things, allow law enforcement to quickly and accurately differentiate between a traveler's debit, credit, and prepaid products…in a manner which imposes minimal to no inconvenience to individuals and complies with U.S. laws, regulations, and procedures." Furthermore, according to the comments, the enforcement challenge is not new, nor is the concept of a device or document that can be used to access value. The current challenges are similar to those presented in the past with other monetary instruments such as checks, money orders, and traveler checks.
Still keeping an eye on bulk cash
A recent study conducted by U.S. and Mexican officials reported that stored-value and prepaid cards are "potentially powerful means for both transporting and laundering money," but still found that the majority of illicit funds movement across the U.S. and Mexican border takes place in the form of bulk cash. In fact, most of the criminal movement of funds does not involve laundering, which is typically accomplished by first depositing illicit funds into a bank or business before moving it. This is particularly important in addressing criminal terrorist financing that may only involve transport. It will be important for regulators to strike a balance between proactive enforcement in addressing crime in electronic channels and effective management of more basic schemes involving the transport of cash across borders.
Many questions still remain
Many commenters to the NPRM have expressed opposition to the premise that prepaid access devices should be classified as monetary instruments since they merely access funds held at a bank or financial institution. When law enforcement takes possession of a cash or monetary instrument at the border, they are effectively holding the funds, but not so with a prepaid card or other device. Holding the card does not provide access to the underlying funds. Furthermore, the legislation is easy to evade. According to a comment from the Network Branded Prepaid Card Association, "a card can truthfully be reported as having just $1,000 on it; and then two hours later, the card can be loaded with funds from another location and have $15,000 on it."
Commenters also suggested alternatives that would focus the final-rule decision making on more effective measures, such as carrying a large number of cards, particularly if the cards are not embossed with the cardholder's name. For example, a person carrying more than 20 nonpersonalized cards would have to declare the aggregated value and be prepared to address questions by border patrol agents. Such a measure could avoid the need for high-cost readers and the potential privacy issues that may ensue if the final rule is issued as proposed.
By Cynthia Merritt, assistant director of the Retail Payments Risk Forum
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- account takeovers
- ATM fraud
- bank supervision
- banks and banking
- card networks
- check fraud
- consumer fraud
- consumer protection
- cross-border wires
- data security
- debit cards
- emerging payments
- financial services
- identity theft
- law enforcement
- mobile banking
- mobile money transfer
- mobile network operator (MNO)
- mobile payments
- money laundering
- money services business (MSB)
- online banking fraud
- payments risk
- payments study
- payments systems
- phone fraud
- remotely created checks
- risk management
- Section 1073
- social networks
- third-party service provider
- trusted service manager
- Unfair and Deceptive Acts and Practices (UDAP)
- wire transfer fraud
- workplace fraud