THE TRUTH ABOUT PREPAID CARDS AND MONEY LAUNDERING

By Julian Dixon, CEO of Napier

 

Last month it emerged that prepaid payment card provider PFS, a subsidiary of EML Payments, is being investigated by the Central Bank of Ireland after it raised concerns over PFS’ anti-money laundering and anti-financial crime governance. Unfortunately the difficulties in tracking ownership of some of these cards makes them particularly vulnerable to criminals.

In fact this isn’t the first time that prepaid cards have been connected to money laundering – they’ve been popular with criminals for decades.

A more extreme example is the devastating attacks of 2015 and 2016 in Paris and Brussels. Police subsequently discovered that the atrocities were partially funded by prepaid payment cards. As the European Commission admitted afterwards: “Prepaid cards or virtual currencies can make it easier for terrorist networks to finance their activities anonymously.”

Since then, the European Union has strictly regulated the use of such cards. In January 2020, it decreased the threshold (from 250 Euros to 150 Euros) at which prepaid card customers are obliged to verify their identities. Then in December 2020, it introduced its 6th Anti-Money Laundering Directive, which included a minimum sentence of four years for money laundering offences.

 

One of the first uses

Back in the 1990s, the Mexican drug lord El Chapo (who is currently serving a life sentence in Colorado) found prepaid cards to be very useful indeed.

Given the nature of the trade, drug traffickers deal in vast numbers of banknotes, often in small denominations. Much to his annoyance, El Chapo discovered that, even after his traffickers had sold their cocaine and converted it to cash, they were still being caught out by drug-sniffing dogs since cocaine residue had transferred from their fingers onto the cotton fibres of their banknotes.

Unsurprisingly, this wasn’t good for his nefarious business. So what was the drug lord’s solution?

He purchased thousands of prepaid debit cards, the plastic of which could be conveniently wiped clean. Once the cards had been transported past the sniffer dogs and back to Latin America, he hired people to use them to withdraw cash from bank ATMs. A case of laundering money both literally and metaphorically, you might say.

 

Not just for drug cartels

Over the years there have been countless examples of money laundering through both prepaid cards and store gift cards. Sometimes criminals use prepaid cards to transport money overseas without alerting the authorities, even using money mules to purchase and transport the cards for them.

Other times, they anonymously load store gift cards with dirty cash before using them to purchase high-value electronic goods which they later resell for clean cash.

Prepaid cards can be used to parcel large amounts of money into smaller amounts, thereby avoiding anti-money laundering alerts when the funds are paid into bank accounts. (It’s a process known as smurfing.)

Covid-19 has even seen scammers encouraging bogus charity donations via store gift cards.

One infamous gift card scam took place in Florida, a few years ago, when a criminal used stolen credit cards to buy 45,000 store gift cards for Walmart and other major retailers before re-selling the cards online to legitimate customers for a total of $9 million. Fortunately authorities became aware of the scam, searched out the IP address on the fraudster’s computer, and subsequently arrested him.

 

Preventing the problem

The worldwide popularity of prepaid cards is growing all the time. According to Allied Market Research, by 2027 the global market could garner as much as $5,510 billion in revenue.

The US, the European Commission and the UK’s Financial Conduct Authority have all attempted to crack down on the problem.

The latter has assessed the anti-money laundering controls of various authorised electronic money institutions (including some which offer prepaid cards) and found them to have “adequate controls in place to mitigate the risks of money laundering and terrorist financing”.

Tony Craddock is Director-General of the Emerging Payments Association, one of the UK’s most influential trade associations in the payments industry. He believes the abuse of prepaid cards and gift cards is more widespread in the United States than in Europe where there are stricter limits on the amounts of money that can be loaded.

 

Looking ahead

It looks as if regulations might get stricter still, which is surely good news for everyone clamping down on financial crime. Nevertheless, responsible businesses must still remain alert to fraud and money laundering. One of the most effective ways to do this is by investing in technology to keep up with evolving criminal methods. If and when prepaid cards fall out of favour for money laundering, businesses should be alert to what criminals will look to take advantage of next.

 

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