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Money Laundering Creates Problems for Stored-value Cards


The U.S. Treasury’s U.S. Money Laundering Threat Assessment, published last December, says that many types of stored-value cards have the potential to become major avenues for money laundering, suggesting—although not saying explicitly—that stringent anti-money laundering regulations are in the offing for the card products.

Industry groups are preparing what amount to pre-emptive negotiations to keep the issue off the floor of Congress, hopefully minimizing potential regulations that could, in the view of many in the industry, cripple the business case for what bankers and other payments executives consider several promising new revenue streams. But prepaid-card executives are declining to speak publicly about the issue, hoping to keep public discussion about stored-valued cards “positive.”

That may be a mistaken posture: The Assessment is blunt about the danger stored-value cards pose to the integrity of the financial system. “Stored-value cards (sometimes referred to as prepaid cards) are an emerging cash alternative for both legitimate consumers and money launderers alike,” says the first sentence of the stored-value section of the Assessment. It then proceeds to detail the cards' many vulnerabilities to criminal use, among them that “drug dealers load cash onto prepaid cards and send the cards to their suppliers outside the country.”

Spokesmen for the Treasury and the Financial Crimes Enforcement Network (FinCEN) declined to comment on the issue. But the wonder is that it took government so long to appreciate the money laundering potential of stored-value cards. After all, in the mid-1990s, the Rand Corporation predicted that phone cards were a prime money laundering threat: All someone had to do to send money overseas, it said, was buy several thousand through proxies and mail them to their opposite number.

Other sorts of stored-value cards, says the Assessment, including those used in some of the more innovative remittance programs designed to allow relatives to withdraw money from local ATMs, “… can also be used to launder money if effective AML (anti-money laundering) policies, procedures, and controls are not in place.”

ATM-based programs are obviously vulnerable to abuse. Nobody, after all, expects criminals to use their own names when they’re breaking the law, and the programs, which have daily withdrawal limits, can nonetheless be used to create a steady stream of cash payments overseas simply by creating a series of false identities authorized to receive payments. But companies sponsoring them have typically maintained that their systems have been vetted by the government, and pose no serious money laundering issues.

Wells Fargo & Co., for instance, has a large ATM-based remittance program—with a $3,000 daily limit per account—serving India, the Philippines, Mexico, El Salvador and Guatemala. But despite the criminal potential, Daniel Ayala, the bank’s manager of cross-border payments services, told Electronic Payments Week in 2004: “The OCC (Office of the Comptroller of the Currency) has known about our product for some time. They’re aware of what we’re doing, and, as far as I know, they’re very comfortable with the progress we’ve made. I’ve heard no issues (from them).” As of last week, Wells was still operating its stored-value/ATM-based system.

Since Wells has more than 4,000 outlets for its program, and estimates that the market its program served totaled in excess of $6 billion a year, it’s clear that having to comply with the same anti-money laundering (AML) regulations that cover its regular banking lines would cut into the remittance unit’s profits. And while no allegations have been made that Wells is somehow lax in this AML area, the same can’t be said about all companies with similar programs.

The danger, then, is that in the post-9/11 regulatory environment, carefully operated programs will be tarred with the same brush as those not entirely on the up-and-up. This is probably why the American Banker’s Association is hoping to deal with the issues raised by the Assessment long before regulations to deal with them are drawn.

“We think there are existing bank controls that work well to minimize money laundering issues in this area,” says Richard Reisse, the ABA’s lead money laundering expert. “We support the government’s evaluating both the threat and the control environment before taking regulatory action. This is a new area of technology, and we’re doing our best to work with the regulators at FinCEN to make sure they understand what the industry really needs.”

Reisse says the ABA hopes to work through the Bank Secrecy Act Advisory Group to get the banking industry’s perspective heard by government as this ball goes into play, perhaps through a mid-May plenary session, although the topic isn’t currently on the agenda. “It’s something we’ve suggested as a good vehicle, because we’ve had positive experiences with [it] in the past, he says. 

If the industry is lucky, the ABA will manage to deflate the issue before it results in a new regulatory regime. If it isn’t, though, there’s a fair chance that the business case for some stored-value products, especially the ATM-based remittance products, will find itself challenged, to say the least, says Andrew Dresner, a director at Mercer, Oliver & Wyman. And that will make the world a better place for Western Union and MoneyGram International.

“Of course it (will),” he says. “The degree to which it does depends on how much (market) share they would have taken in the absence of the regulations, and how onerous to the business the regulations become.” (Contact: U.S. Treasury Department, 202-622-2015; American Banker’s Association, Richard Reisse, 202-663-5051; Mercer, Oliver & Wyman, Andrew Dresner, 646-364-8444.)