Money Laundering: A Growing Concern

  Take $10,000 in cash out of the country, and U.S. law says you have to declare it. But if a customs agent sees prepaid cards instead, there is no way to know how much value is loaded on them. So it is no surprise that law enforcement and some card-industry experts are concerned about the potential use of prepaid cards to launder money.
  A report released in January by nine federal financial and law-enforcement agencies included stored-value cards among traditional and emerging payments that offer significant opportunities for money laundering. The agencies and industry watchdogs say all participants in the prepaid chain should do more to ensure that as the cards gain popularity and increased functionality, they do not also become more useful to those trying to cover their financial tracks.
  The more universally accepted and reloadable a card, the easier it can be used to transfer dirty money as well as legitimate funds. But even closed-loop, nonreloadable gift cards present opportunities to launder money, experts say.
  "We've been concerned about the potential of these for money laundering for at least 18 months," a U.S. Department of the Treasury spokesperson says. "There is anecdotal evidence from law enforcement [officials] that they have seen these cards used for money laundering, particularly for illicit drug activity."
  Don Semesky, chief of the U.S. Drug Enforcement Agency's Office of Financial Operations, says that cash remains by far the favored tender of drug-money launderers, but prepaid cards are starting to get their attention. "We're seeing it in different areas," he says, declining to be more specific.
  Some early pilots of reloadable prepaid cards led to suspicious activity, Semesky says. "The [issuing] bank's cards were being sold by subagents, meaning banks in other countries," he says. "The amounts that were being sold per customer and the amount that was being drawn at one time led to the belief that it was drug money." He would not identify the issuer or type of card.
  While it often is unclear how existing anti-laundering rules for banking and wire transfers apply to prepaid cards, regulators, legislators and industry members are discussing ways to make the cards more secure. "The process of developing regulations is a dialog," the Treasury spokesperson says. "It starts informal and moves to formal. We're at the informal stage."
  Semesky says representatives of the drug-enforcement agency, the FBI and other agencies have been working informally with issuers to close security gaps as they are discovered.
  "We have found a willingness to enhance their security to keep their cards from being abused," he says. "We talk to them about identification, about limits on the cards and electronic monitoring of use of the cards, and loading of the cards. There has been a lot of self-policing."
  But Eric Zahren, a spokesperson for the U.S. Secret Service, says issuer policies are not always followed at points of sale. "If there's any requirement to ask for ID, it's not very well verified," he says.
  When the Treasury Department has investigated cards that were used to launder money, some issuers did not understand the cards' potential for illegal use. "Where we have seen cards used for money-laundering purposes, when we've followed up with the card issuer, more often than not it's been a matter of ignorance on where the risks are," the spokesperson says. He recommends limiting the functionality of a card to its intended market.
  Simple Tactics
  Issuers, for example, could limit the number of times their travel cards could be reloaded and limit the load amount for cards designed for teens and young adults," the spokesperson says. "But we don't have to damage the viability of the product," he says.
  Many closed-loop merchant gift cards, regardless of whether they are reloadable, present money-laundering opportunities because they are perceived as less of a laundering risk and, therefore, require little or no identity verification when purchased.
  "Right now, in the gift card arena, there's very little capture of data about the buyer," says Carol R. Van Cleef, a money-laundering expert at Bryan Cave LLC, a law firm that specializes in prepaid card legal issues. "There's a perception that money laundering doesn't really occur in that marketplace."
  Van Cleef says that she has heard anecdotal evidence of prepaid cards being used to launder money in recent years that causes her concern. After Van Cleef spoke at a law-enforcement meeting a couple of years ago, for example, a woman who worked for the U.S. Customs Department told her that the department was seeing more travelers leave the country with suspicious numbers of prepaid cards. But the department did not have readers or policies to address the situation.
  The Bank Secrecy Act requires that anyone trying to transfer $10,000 or more-or to carry such funds across the U.S. border-must answer certain questions and provide adequate identification. But the law only clearly covers established currencies and transactions.
  "If you take $10,000 in cash across the border, there's a report that needs to be filed," Van Cleef says. "If you take $10,000 across the border on gift cards, you don't have to fill out a form."
  If a retailer sells gift cards in one country that can be used to purchase goods at its stores in another, money launderers could use them to buy products in another country and sell them to regain part of the funds loaded on the cards. "So if you're a drug runner, you can take your $500 and buy a gift card and send it back to your supplier in Mexico," Van Cleef says.
  Transaction Scans
  Another way money launderers can transfer funds is by reselling gift cards online, Van Cleef says. "They go online and say, 'I can give you a $100 Starbucks Card for $90," she says. "They may take a discount of 5 cents per dollar, but they're accustomed to paying 10% or 20% [to exchange funds]."
  PayPal and other online sales sites set daily limits on the number of cards individuals can sell or trade, as well as the dollar amount loaded on each. A PayPal spokesperson says the company monitors its site for evidence of illegal activity, but he would not elaborate.
  Van Cleef says that, like most crime prevention, the work of protecting stored-value cards from money laundering will be a continuous challenge. "When you start thinking like the crooks, you start realizing how [prepaid cards] can be used," she says. "For all the time we're thinking about how to protect [prepaid cards], [crooks are] thinking about how they can use them."
  Money laundering with prepaid cards may not represent big money at this point in time. But crime-prevention experts say all participants in the issuance, distribution and acceptance of prepaid cards should not wait to develop smart security rules and to make sure those rules are followed and updated as crooks find new ways to cheat.
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