Prepaid cards have become increasingly popular in recent years as a flexible, customizable, and portable way to save and access money. They are used extensively by governments, corporations, and individuals for various purposes, including purchasing goods, accessing features, and utilizing technology. They provide an alternative to cash and money orders and are used for cross-border money transmission.
However, prepaid access and prepaid card schemes can pose risks of money laundering, terrorist financing, and other illegal activities, just like conventional payment instruments. Law enforcement investigations have revealed that some prepaid cardholders have used fake identities and financed their initial loads with stolen credit cards or obtained several prepaid cards under false names. Banks offering prepaid access or participating in prepaid access programs must have effective strategies, procedures, and processes in place to manage the risks associated with money laundering and terrorist financing. By implementing appropriate measures, banks can effectively mitigate the risks associated with prepaid access programs and prevent them from being used for illegal activities.
Overlook to Prepaid Cards
Prepaid cards are a form of prepaid access that is widely used for a variety of purposes, including purchasing goods, accessing features, and utilizing technology. Physical prepaid cards are now the most common method of payment and are used extensively by governments, corporations, and individuals. Branded prepaid cards must typically be issued by a payment network member bank.
Prepaid cards come in two types: open-loop and closed-loop. Open-loop prepaid cards can be used to make purchases at any retailer that accepts cards issued for use on the payment network linked with the card, as well as to withdraw cash from any ATM connected to the related ATM network. Payroll cards, general-purpose reloadable (GPR) cards, and some gift cards are examples of open-loop prepaid cards. Some prepaid cards may be reloaded, enabling the cardholder or another individual, such as an employer, to add money to the account. On the other hand, closed-loop prepaid cards can only be used to purchase products or services from the merchant who issued the card or a limited number of merchants or service providers who are members of a certain network. Examples of closed-loop prepaid cards include merchant-specific retail gift cards, mall cards, and public transit system cards. While closed-loop prepaid cards do not typically allow for cash withdrawals, they may be traded on third-party platforms for additional closed-loop cards or payment by check, ACH, or other means.
Prepaid cards are highly flexible and can be customized to meet the needs of any program. Some prepaid card systems, such as flexible spending account (FSA) or health savings account (HSA) cards, are designed for specific limited-use objectives, including the purchase of particular health-related services. State and federal government agencies use prepaid programs to distribute government benefits, such as disability, unemployment, and income tax refunds, while companies use them to issue wage and salary payments.
Like debit cards, prepaid cards offer a convenient and portable way to save and access money. They can be used for a range of purposes, including purchasing items, transferring funds to other cardholders within the prepaid program, and paying bills. They also provide an alternative to cash and money orders for people. Some prepaid card systems issue several cards per account as a way of cross-border money transmission, allowing people in other nations or jurisdictions to access funds loaded by the original cardholder via ATM withdrawals or merchant transactions. However, such schemes require risk-based consumer due diligence on the initial cardholder and transactions must be exposed to risk-based monitoring.
Prepaid access and prepaid card schemes can pose risks of money laundering, terrorist financing, and other illegal activities, just like conventional payment instruments, if appropriate controls are not implemented. Law enforcement investigations have revealed that some prepaid cardholders have used fake identities and financed their initial loads with stolen credit cards or obtained several prepaid cards under false names.
Fraudsters can load cash from unlawful sources onto prepaid access products and transfer it to collaborators inside or outside the United States during the placement phase of money laundering, as many local and foreign banks offer prepaid access services or products with international currency access via ATMs.
Investigations have also shown that both open and closed-loop prepaid cards have been used in conjunction with, or as an alternative to, bulk cash smuggling. Despite the fact that prepaid access is increasingly regulated and issued by strictly regulated institutions, third-party distributors or promoters of prepaid access programs may or may not be subject to regulatory obligations, supervision, or control, and these requirements may vary among different parties.
Risk Mitigation for Prepaid Access Programs
Banks offering prepaid access or participating in prepaid access programs must have effective strategies, procedures, and processes in place to manage the risks associated with money laundering and terrorist financing, as required by the FATF and relevant laws and regulations, as well as payment network standards.
AML risk mitigation is a crucial aspect of prepaid access programs, which involves several essential components:
- Conducting comprehensive due diligence on any third-party service provider to assess their AML compliance program and risk management practices.
- Conducting a thorough risk analysis of the prepaid access product, including its features, loading and distribution methods, and targeted customer base. This analysis should help identify potential money laundering and terrorist financing risks associated with the product.
- Implementing an effective transaction monitoring system to detect and report unusual or suspicious activity. Banks should also conduct periodic reviews of their monitoring systems to ensure that they remain effective and up to date.
- Implementing product characteristics and usage restrictions that are appropriate for the identified risks. This may include restrictions on the amount and frequency of loads, types of transactions, or customer demographics.
By implementing these measures, banks can effectively mitigate the risks associated with prepaid access programs and prevent them from being used for illegal activities.
Uncovering the Use of Prepaid Cards in Money Laundering Schemes
Criminals use prepaid cards for money laundering in various ways. One common method is to use prepaid cards to transfer funds anonymously across borders, especially to countries with less strict financial regulations. They load cash onto prepaid cards using illicit sources, such as drug sales or other illegal activities and then use the prepaid cards to transfer the funds to other individuals or accounts, either domestically or internationally. In this way, the funds are disguised as legitimate purchases or withdrawals.
Another method is to use prepaid cards to evade scrutiny by financial institutions. Criminals may use prepaid cards to deposit illicit proceeds and then withdraw the funds at various ATMs or retail locations, thereby avoiding detection by banks or law enforcement agencies. Prepaid cards can also be used to make purchases without leaving a trail of financial activity, which can make it difficult for law enforcement agencies to track the flow of illegal funds.
Criminals also exploit the anonymity and lack of regulatory oversight of some prepaid card programs. They may use prepaid cards obtained under fake names or stolen identities to launder money or to finance terrorist activities. They may also use prepaid cards to transfer funds to other individuals involved in criminal activities or to purchase goods or services that can be used in illegal activities.
Sanction scanner provides a tool that can help to detect prepaid card fraud by identifying and screening individuals and entities against various global sanctions lists, watchlists, and other high-risk databases. This tool uses artificial intelligence and machine learning to analyze large volumes of data and identify patterns and anomalies that may indicate fraudulent activity.
By integrating with prepaid card systems, Sanction Scanner can help to identify suspicious transactions, such as large transactions, frequent reloads, and transactions with high-risk countries or entities. It can also flag prepaid cards associated with individuals or entities on sanctions lists or watchlists, which may indicate an increased risk of fraud or illegal activity.
Sanction Scanner can also help to prevent money laundering and terrorist financing by identifying individuals or entities who are attempting to use prepaid cards to transfer funds anonymously across borders or to evade scrutiny of financial institutions.