Thursday, March 15, 2007

Pre-Paid Cards & Anti-Money Laundering: Hype or Reality

Judie Rinearson, co-chair of the Electronic Financial Services Subcommittee, kicked off her group's presentation on payment cards and the risks inherent in offering such services and products. A stellar cast of panelists was on board, including representatives from industry and government. In fact, this was split up as two different panels -- The government panel and the industry panel. Judie promised that no rumble would ensue, and we crossed out fingers accordingly.

The initiation of a seemingly simple activity like issuing the electronic gift cards tends to open one up to a panoply of federal and state obligations. Fortunately, many of those obligations are limited to entities that are banks. But, many non-bank issuers are still going to follow the same rules, either because they volunteer to them OR because the banks they are using as a service provider insist on it. Thus, we do not avoid having to learn about this simply because we are not representing a bank. And, the trend is towards more regulation.

The government panel started first. Courtney Linn from the Justice Department opened (and, as always, noted that he speaks only for himself and not as a representative of the U.S. Government). He pointed out that the burgeoning cash card phenomenon has quickly been seen as a potential alternative method for carrying cash for contraband transactions. The recent Drug Trafficking Assessment stated as much, and offered evidence that this is not merely a hypothetical. Courtney related that many of the existing statutes involving banking, bank secrecy, money transmitting and the like are now being applied to stored value cards. However, there are some shortcomings in the current structure, particularly when looking at powers given to the federal regulators versus the states.

On the other hand, Donald Semesky, speaking on his own behalf and not his employer the DEA, noted that he had no hard evidence that the serious traffickers are actually used stored value cards. There is some anecdotal evidence of cards being used in street-level transactions. There is evidence of it being used in banking fraud cases (where the resulting cash is deposited into a stored value card). He notes that the methods used for cards to be used as a money laundering device tend to increase how much the drug trafficker is noticed. Cash is collected, and the traffickers want to keep it simple and simply move the cash around rather than transform it into the banking system (let alone pre-paid cards). Don noted that the cell phone industry is going to create the next real wave of money transfer, and that his group is probably more concerned about the cell phone money-transfer system than it is the pre-paid card system. That said -- He does believe there is ultimately motivation for the traffickers to want to move to a non-cash system, and that in time they may move towards the systems that so far are more hypothesis than reality.

The industry panel picked up the discussion and continued the theme -- Is there really a problem out there? Are there mechanisms in place in the existing system that should mitigate the chance of pre-paid cards becoming a serious source of contraband funds transfer? Retailers, representatives of national banks, and others more or less concluded that this is not a system that is ripe for use as a serious money laundering facility. While there are certainly going to be examples of small-time fraudulent use, the industry folks certainly did not believe that there was ever going to be a big problem here.

In all - There appeared to be some degree of agreement between the two factions, at least to the extent that the problem has actually appeared in the wild. The disagreement if there was one is more in the matter of how likely this is to happen tomorrow, and even there we didn't exactly here a sky is falling statement from anybody. Certainly, caution is called for by all, but this listener came to the conclusion that 'hype' is the answer (if we're asked to answer).

Query -- Our (exceedingly cutting edge) gang has already been pondering yet another twist -- Money laundering by way of virtual economies that allow one to transfer 'value' out of 'real' money, into virtual money, and back out to 'real' money. Will we see Second Life as a new form of banking?

UPDATE: Committee member Stephen Middlebrook's own blog has just been updated with yet more interesting information on the subject of payment cards and money laundering -- Take a glance.

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