Smuggling rule for prepaid cards is elusive

By Brett Wolf

ST. LOUIS, April 1 (Complinet) – The Treasury Department is struggling to write anti-money laundering rules for the prepaid money-card industry, which is resisting more regulation while a group of senators presses for quick action and strong controls.

The prepaid, or “stored-value,” card industry emerged a decade ago and has grown into a multibillion dollar business primarily by serving millions of Americans who do not use traditional bank accounts. The Treasury Department had hesitated to tightly regulate the fledgling industry to avoid stifling its growth.

The cards, which include so-called “network-branded” cards that carry a Visa Inc or MasterCard logo, can be loaded with cash at banks8, kiosks, check-cashing stores and other retail outlets.

However, the Credit Card Accountability Responsibility and Disclosure Act of 2009 obliged Treasury to write anti-money laundering rules for the prepaid industry. This task fell upon the department’s Financial Crimes Enforcement Network (FinCEN), which has faltered. The CARD Act’s deadline for the issuing a final rule came and went more than a year ago.

Three members of the U.S. Senate Caucus on International Narcotics Control are tired of waiting. Senators Dianne Feinstein, Chuck Grassley and Sheldon Whitehouse wrote to Treasury Secretary Timothy Geithner last month and demanded action.

The senators want the rule to include a provision that people who move prepaid cards loaded with more than $10,000 across a U.S. border must file a customs report. The senators’ letter suggested “under current law, a criminal, drug trafficker, or terrorist with hundreds of thousands of dollars on prepaid cards could literally walk across the U.S.-Mexico border without penalty.”

SERIOUS CRIME

Some experts agree that prepaid cards could be abused.

Others say there have been few documented abuses. They say industry-imposed limits on cash loads and overseas withdrawals make such misuse unlikely. They add that moving drug money out of the country, whether on prepaid cards or otherwise, is already a serious crime – international money laundering.

The CARD Act stated that the prepaid rules “may include” a cross-border reporting requirement, but did not mandate it, leaving the matter to FinCEN’s discretion.

Crystal Wright, a spokeswoman for the trade group known as the Network Branded Prepaid Card Association, said it would prefer FinCEN not issue binding rules “without knowing what the real facts are.”

She said there is “a lot of perception” that prepaid cards are misused, but added that the evidence does not bear it out.

The U.S. government believes drug cartels move tens of billions of dollars across the U.S.-Mexico border each year, principally in cash. The fear is that the cartels will stop smuggling bulk cash and instead load currency onto prepaid cards that are less bulky and lack the smell of cash, and therefore easier to slip past U.S. Customs.

CARTEL USE

However, questions remain regarding the degree to which the cartels have actually used the cards. The Government Accountability Office said last October that federal agencies were concerned about the nature and extent of currency smuggling using stored-value cards, but that the “nature and extent” of the practice was unknown.

Anecdotal evidence suggests drug traffickers have on occasion used the cards.

In 2008, a Texas prepaid card company called Virtual Money Inc and its president, who remains a fugitive, were indicted. The case is unresolved, but court documents state that Colombian money launderers arranged for millions of dollars in drug proceeds to be delivered to agents of Virtual Money who then loaded the cash onto cards in 2006. They add that Colombia-based accomplices later used the cards to withdraw pesos from automatic teller machines in Medellin, Colombia.

Paul Campo, chief of the Drug Enforcement Administration’s office of financial investigations, told Complinet there is “no question” drug traffickers have used prepaid cards both to fund U.S. operations and move funds overseas. He also said that DEA has launched an initiative aimed at rooting-out such abuses, but declined to elaborate.

Some experts say the cartels are unlikely to use prepaid cards en masse because doing so would be costly and create an electronic trail for investigators. They also point out that U.S. authorities intercept a just tiny fraction of cash smuggled across the border, and suggest the cartels therefore have no need for the new technology.

GAUGING THE SCOPE

In June 2010, FinCEN proposed a rule aimed at ensuring that all players in the prepaid industry have anti-money laundering measures. It included an obligation to report suspicious activity. It did not act on cross-border reporting, but solicited more information on risks posed by prepaid cards.

Gauging the scope of the problem, however, is hard even to top experts. Campo said he was unable to offer an estimate of the sums laundered via prepaid cards. “I don’t think anyone could quantify it,” he said.

Not everyone is convinced that prepaid cards have been a boon to drug traffickers.

One veteran federal investigator told Complinet he has “seen no evidence that would prove that the cards are definitely a problem.” He also pointed out that the Virtual Money indictment suggested that it was blatant corruption, not a lack of anti-money laundering controls, which fueled the purported scheme.

“The only way that a cartel could use this technique to launder tens or hundreds of millions of dollars would be to control (a prepaid card firm) so they could buy and load cards in bulk, or have cards with very high limits,” the investigator said.

Wright, from the prepaid card association, said the group wants the GAO to conduct a comprehensive study to unearth “hardcore facts.”

GAO spokesman Chuck Young said the agency has no plans for further study, but added “the Senate Drug Caucus remains concerned about the issue and could seek further information.”

FinCEN spokesman Steve Hudak said the issuance of a final rule is the agency’s “highest priority.” He could not say, however, when it will be issued or if a requirement to report cross-border transportation of prepaid cards will be included.

“Many issues are being considered,” he said.

(Editing by Randall Mikkelsen)

(This article was first published in Complinet (www.complinet.com). Complinet, part of ThomsonReuters, is a leading provider of connected risk and compliance information and on-line solutions to the global financial services community.)

Smuggling rule for prepaid cards is elusive