Portals and Rails

June 21, 2010

Will the migration to mobile payments be tempered by potential money laundering risks?

Generally, mechanisms that hold value, store it, and transfer it anonymously create a potential money laundering risk. The mobile phone in the United States today is slowly beginning to function as a conduit for payments while possibly providing users a certain degree of anonymity. Researchers predict that almost half of all mobile phone users worldwide will migrate to mobile payments by 2014.

Mobile phones serve as a means for accessing financial services, and, in some parts of the globe, mobile payments are providing access to financial services where traditional banks could not. Arguably, monitoring the movement of money via mobile transactions, particularly with a prepaid mobile, can be challenging. According to a senior trial attorney with the Department of Justice, users who provide false identification at the time of purchase or service providers who maintain poor records thwart the mechanisms that could track the origination or transfer of funds, making the mobile payments channel vulnerable to use by money launderers. In fact, the Bureau of International Narcotics and Law Enforcement Affairs of the U.S. Department of State released an article identifying the potential for mobile payments to be used as vehicles for money laundering.

But how much do we know about the money laundering risks potentially associated with mobile payments?

Emerging payments technology: Smurfing goes digital
Money laundering is generally described as having three sequential elements: placement, layering, and integration. However, not all money laundering transactions involve all three elements. Keeping up with shrewd money launderers who look for ways to exploit the payments system can be challenging. Smurfing is one basic technique of money laundering. Essentially, criminals move large sums of money by breaking the funds down into smaller amounts to avoid triggering currency reporting requirements and thereby lessen the risk of detection by authorities. Smurfing requires some ingenuity, but mostly it requires a small army of people, or smurfs, willing to go from one bank to the next to make the small, daily deposits.

In recent years, a variation of smurfing known as digital value smurfing (DVS) has emerged. DVS also involves the breakdown of large sums of money into smaller sums, but the money launderer moves the money electronically. DVS is considered the next generation of smurfing because as the shift from paper to electronic payments grows, digital smurfers can exchange cash for digital value in the form of stored value cards or possibly stored value on the mobile phone. Unlike traditional smurfing, which requires multiple smurfs to move numerous sums of money between financial institutions, a single smurf can do all the work by operating with multiple accounts, including mobile payment bank accounts, prepaid mobile phone accounts, or Internet payment accounts.

If smurfers are able to transfer stored value funds from one mobile phone to another or to other devices without using a bank for the transfer, they would bypass financial reporting requirements. They could also seriously hamper law enforcement's and the banks' monitoring and detection efforts. Could this convergence of financial services and telecommunications impede anti-money laundering efforts?

Making mobile payments more secure
Responding to the global growth in mobile payments, some vendors are providing improved security solutions for mobile money transfers, while other service providers have set limits on the number and amounts of mobile payment transactions and sources of funding and have employed comprehensive "know your customer" programs. Money laundering detection and prevention is an ongoing and difficult undertaking, one that must keep pace with advances in technology that promote fast and efficient movement of funds.

The rapid global growth of mobile payments presents ostensible opportunities for the adoption and enforcement of anti-money laundering compliance requirements in the mobile space. On May 26, 2010, a bill was introduced that would institute an identification requirement for the purchase of prepaid mobile devices, closing the anonymity gap and enhancing the monitoring and detection of potential payments activities. Examining the potential for money laundering risks in mobile payments is the best way to ensure that this new payments channel is not abused, all the while permitting its continued growth and adoption.

By Ana Cavazos-Wright, senior payments risk analyst in the Retail Payments Risk Forum at the Atlanta Fed

June 21, 2010 in mobile payments, prepaid | Permalink

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February 01, 2010

New prepaid card functionality: Card-to-card funds transfer

Innovators now have developed a new prepaid card feature that facilitates a seamless transfer of funds from one card to another, providing a more efficient person-to-person (P2P) payment process that includes remittances. Prepaid cards, also known as stored value cards, are another alternative to paper-based P2P payments and have been a boon to underbanked consumers, allowing them to participate in the electronic economy.

The question is, will this enhanced convenience help drive the adoption of prepaid payment card products?

Prepaid cards were first introduced in 1994 by retailers as proprietary gift cards that could be used only at the stores of the issuing merchant. These are referred to as "closed system" cards and include the popular "loyalty" cards typically issued by one or a group of merchants. Other early uses of stored value cards in the United States included prepaid telephone calling cards, mass transit cards, public benefits payments, and even child support payments. In contrast, "open system" cards are typically issued by a bank under branding of the major card networks and functional wherever they are accepted.

Popularity growing but still lagging traditional debit and credit
Today pre-paid cards are increasing in popularity, but a recently released survey conducted by the Boston Fed shows most consumers still prefer credit or debit cards over prepaid cards.

ENLARGE

However, changes in fee and interest programs among banks issuing credit cards may change consumer preferences. As card legislation limits the interest and fees that card companies can impose on borrowers, many banks have started to implement across-the-board increases in interest charges and eliminating loyalty programs for borrowers with higher credit quality.

State of adoption
Prepaid card users can now transfer funds from one card to another through the Internet or by phone. MetaBank is a major U.S. issuer of prepaid open-loop products licensed through the major card networks. Many of these products are marketed to underbanked communities. Also, many of these products may be used for cross-border remittances in addition to domestic person-to-person transfers. Prepaid card products in other markets throughout the world are offering this feature as well. For example, this service is offered in India free of charge to bank customers of DBC (Development Credit Bank Ltd.). Visa Europe offers cards with this feature, allowing recipients to receive funds in all major currencies directly to their Visa card using the global Visa network. If the recipient does not have a Visa card, he or she can collect the cash from a nominated bank branch. In all, Visa Europe’s money transfer operates as card-to-card, card-to-card via email, and card-to-cash.

Convenience as a driver
In a final analysis, technology is driving the development of myriad alternatives in the P2P space, as with other retail payments. How prepaid instruments evolve, in whatever physical form they take — be it a plastic card, a fob, or a cell phone — will ultimately depend on consumer preference. Expanding the functionality of the prepaid instrument for money transfer could be a driver of a new type of prepaid product.

By Ana Cavazos-Wright, payments risk analyst, and Cindy Merritt, assistant director in the Retail Payments Risk Forum at the Atlanta Fed

February 1, 2010 in prepaid | Permalink

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