A final rule the Financial Crimes Enforcement Network established July 26 to prevent prepaid products from being used to launder money appears to have struck a balance between the concerns of retailers, program providers and law-enforcement officials.
The agency adopted what it calls a “targeted approach” to regulating sellers of prepaid products and will focus on the sale of cards that contain features or high-dollar amounts that may pose money-laundering risks.
Various retailers considered an earlier version of the rule flawed and said they would shelve prepaid cards if the rule as propsed were to pass (
“We had to strike a balance between what law-enforcement [officials] needed and, of course, what the retailers and [prepaid] providers want to deliver in terms of customer service and the ability to continue to innovate,” a bureau spokesperson tells PaymentsSource.
The new rule amends the Bank Secrecy Act, which Congress passed in 1970 and requires financial institutions to assist government agencies with issues pertaining to money laundering. Changes to the law were a requirement of the Credit Card Accountability, Responsibility and Disclosure Act of 2009.
Opponents of the proposals were concerned primarily with a rule that would require retailers to collect identifying information when selling prepaid cards to customers. The final rule, however, outlines several exemptions.
Retailers that sell open-loop prepaid cards to consumers in any amount exceeding $1,000 in a single visit must collect such personal information as name and address to establish a paper trail for law-enforcement officials to follow in case a card is used for illicit activities.
But the exemption applies only if consumers cannot use the cards outside the U.S., the issuer does not allow funds transfers among users and the cards cannot be reloaded from a nondepository source.
Prepaid card distributors who provide gift card malls to retailers might need to change their offerings because of the open-loop rule, observes Ben Jackson, senior analyst at Mercator Advisory Group.
“If retailers are concerned about having to collect and store a lot of information, it wouldn’t shock me if they told the gift card mall distributors they didn’t want open-loop cards,” he says.
Open-loop card sales might face some risk if distribution channels restrict their offerings, Jackson adds.
Retailers collecting consumer information also might present a business concern in addition to adhering to regulatory requirements, Jackson says. They might ask themselves, “Do I want to have to go through the process of gathering and storing all this data when I’m trying to move customers through my line quickly?” he says.
Businesses such as The Western Union Co. and MoneyGram International Inc. are more experienced with collecting customer information because of the nature of funds transfers, Jackson says.
Also exempt from the rule are any closed-loop cards sold in amounts of $2,000 or less.
“We tried to keep these thresholds high because we don’t want to interfere with the market,” the bureau spokesperson says. “We’re making it harder for criminals to use the financial system to conduct illicit business.”
Government-funded cards, prepaid debit cards linked to health care savings and flexible spending accounts and dependent care-funded cards also are exempt from the rule.
The Network Branded Prepaid Card Association expressed concern over the initial proposals regarding prepaid sellers but tells PaymentsSource in a statement that it is still analyzing the final rule.
“It appears that, while the final rule still imposes certain obligations upon sellers of prepaid access, FinCEN made modifications to those obligations, and we are still assessing the potential impact of the rule,” Kirsten Trusko, president and executive director of the organization, said in an email.
FinCEN also renamed “store value” in the law to “prepaid access” because it believes the new phrasing better describes what the products offer. Prepaid access covers plastic cards, mobile phones, electronic serial numbers, key fobs or other mechanisms that provide a portal to funds stored in advance and that are retrievable and transferable, the agency said in a press release.
Prepaid providers will be required to register with FinCEN. Retailers that sell prepaid cards are not required to register but must maintain an anti-money-laundering program if they offer products that fall under the rules or that can be activated at a later time without customer identification.
Jackson is unsure how often crooks use prepaid products for money-laundering activities. Law-enforcement officials usually are evasive in providing concrete numbers to support their claims, he says.
“Nobody wants to promote crime, but I’m not sure that the use of prepaid for these type of activities is undoubtedly proven and widespread,” Jackson says.
No one questions crooks have used the cards to commit crimes because they contain cash, he says. But it remains unclear as to what extent, Jackson adds.
What do you think about this? Send us your feedback.
