Focus on US Prepaid Vulnerabilities Overlooks Exploitation of Foreign-Issued Cards

By Colby Adams

As federal officials work to shield U.S.-origin prepaid cards from criminal abuse, foreign-issued cards have emerged as a comparatively less restrictive channel for moving funds of dubious origin into the United States anonymously.

Final rules issued by the Treasury Department’s Financial Crimes Enforcement Network, or FinCEN, in July 2011, imposed anti-money laundering requirements on American providers and sellers of certain prepaid products, including customer-identification, suspicious-activity-reporting and transaction-recordkeeping responsibilities.

But reloadable cards that customers can acquire from overseas financial institutions either in person or online constitute an immediate threat, according to a senior compliance officer at a major U.S. financial institution with ties to the prepaid industry.

“The rules are way too focused on what’s leaving the country—on bulk cash smuggling on a card,” said the compliance officer, who spoke on condition of anonymity. “The giant elephant in the room is that the regulators aren’t checking what’s coming here, and that could mean trouble sooner rather than later.”

In such a scenario, a member of a terrorist organization living in a high-risk jurisdiction could purchase a network-branded prepaid card from a non-U.S. bank with little trouble, travel to the United States, and withdraw money from any one of thousands of ATMs or receive additional funds from another foreign-issued prepaid card holder.

Foreign-issued prepaid cards differ from foreign-issued debit cards in that funds loaded on the former are held in a pooled account of all prepaid funds maintained by the issuing bank. A U.S. financial institution cannot identify the individual associated with a given prepaid transaction in the same way it could a debit card withdrawal.

“You could load a card that is in the United States from overseas, and U.S. AML program requirements don’t cover that unless the network the funds are riding on is enforcing those rules internationally,” according to the chief compliance officer of a second financial institution categorized as an “issuer” under rules finalized by FinCEN in July 2011.

Mastercard, Visa and other players in the U.S. payment industry required to implement AML controls typically vet the foreign prepaid-value issuers with whom they work.

Mastercard International noted in its 2011 annual report that membership in its payment network “is generally open to banks and other regulated and supervised financial institutions” subject to AML, due diligence and customer-risk reviews prior to admission.

In its most recently available public filing, Visa said it follows U.S. AML and counterterrorist financing regulations, and withholds membership from financial institutions domiciled in countries the U.S. officials have formally designated as state sponsors of terrorism.

But a number of companies that process international prepaid transactions have relaxed their AML standards for foreign card issuers in recent years, in part because the compliance controls have proven too costly to maintain, according to an individual with knowledge of the matter, who asked to not to be identified.

The Federal Reserve Bank of Atlanta has noted the potential vulnerabilities in the industry and recommended that financial institutions and ATM operators consider imposing stricter cash-withdrawal limits on foreign-issued, open-loop prepaid cards.

“The profit margin on these cards is very slim, and, because of this, a lot of foreign issuers don’t have the sophisticated anti-money laundering or fraud-detection tools that they apply to their debit cards,” said Sue Lynch, former vice president for security and risk management at Mastercard Worldwide.

Individuals can obtain foreign-issued branded prepaid cards anonymously over the internet with few questions asked, said Lynch, now director of the economic crime management program at Utica College in New York.

Nicosia-based Hellenic Bank, for example, offers individuals “the only anonymous prepaid card in the Cyprus mark [in] only five minutes,” according to the institution’s website. The reloadable card can hold up to €7,000 and be used anywhere that Visa Electron is accepted, according to the website.

“Because these are branded cards—and that’s where the risk is—the money can be loaded and used all over the world once it’s entered into the system with minimal know-your-customer checks,” said Lynch. “We may clamp down on the U.S. cards, but these are still open to international movement.”

U.S. officials have confiscated foreign-issued prepaid cards during investigations into child sex trafficking inside the U.S., according to a former investigator who spoke on the condition of anonymity.

Until FinCEN obligates individuals to declare prepaid value in excess of $10,000 at the border, law enforcement officials have “no occasion” to seize the cards or investigate the carrier “unless it’s for something else,” said the investigator.

Former FinCEN Director Jim Freis told in an interview last month that last year’s presidential election and an ongoing budgetary and economic impact review delayed Treasury’s efforts to subject prepaid cards holding more than $10,000 to U.S. currency declaration requirements.

Multiple sources told that in response to lobbying by Visa, officials within the department’s Financial Management Service have blocked U.S. law enforcement from deploying prepaid card readers that could identify, scan and freeze prepaid value at U.S. borders and ports of entry.

A Visa spokesperson declined to comment. Mastercard press officers did not return calls by press time.

Topics : Anti-money laundering , Human Trafficking
Source: U.S.: FinCEN
Document Date: April 5, 2013