The U.S. federal regulatory agency, Financial Crimes Enforcement Network (FinCEN), is proposing amendments to the Bank Secrecy Act regulations that would regulate prepaid cards and similar devices. The proposal is in response to the proliferation of prepaid cards in the last ten years and its increasing use as a form of payment for goods and services. The first stored value/prepaid product was the gift card introduced by Blockbuster Video in 1995.
Money laundering and terrorist financing risks arise with prepaid access because of the ability to transfer significant funds without the transaction being subject to many of the reporting requirements that would apply to comparable transactions using cash or involving an ordinary demand deposit account at a bank. Law enforcement agencies in Texas have reported instances where prepaid access is used routinely for gang payments and purchases.
Prepaid products tend to be branded with an association (such as American Express, Discover) or unbranded. Branded product transactions are settled through the association and are open-looped and can be used anywhere the brand is accepted. Unbranded products are not settled through an association and are most often closed looped cards that can only be used at certain stores.
Branded open-loop prepaid products can be reloaded with value and there are AML risks that arise with prepaid products that have cash access, particularly when reloadability and cash access are unlimited.
The amendments announced by FinCEN will introduce legislation to regulate the use of plastic cards, mobile phones, electronic serial numbers, key fobs and mechanisms that provide a portal to funds that have been paid for in advance and are retrievable and transferable.
There are four key changes contemplated by the proposed regulations as follows:
- Prepaid or stored value card programs would be defined as “prepaid access” and the definition of money services businesses would be amended to include prepaid access businesses;
- The terms “issuer” and “redeemer” of stored value would be replaced with the terms “provider” and “seller”. A provider is any person with “principal oversight and control” over one or more prepaid programs. A seller is “any person that receives funds or the value of funds in exchanging for providing prepaid access as part of a prepaid program directly to the person that provided the funds or value, or to a third party as directed by that person;”
- Non-bank providers of prepaid access would be subject to comprehensive Bank Secrecy Act regulations similar to depository institutions. Providers would be required to register with FinCEN and establish an AML program, file suspicious activity reports, establish customer identification procedures, and comply with record retention requirements. Sellers would be required to establish an AML program, file suspicious activity reports, and implement customer identification procedures. They do not have to register with FinCEN or provide transaction reports to FinCEN; and
- Certain types of prepaid access products and services that pose a lower money laundering or terrorist financing risk would be exempt. They include cards purchased for employment benefits, government benefits or health care benefits, are of limited value (US$1,000 or less), or are limited to a closed-loop prepaid access, and do not allow value to be transmitted internationally or transfers between users.
If the amendments are implemented in the U.S., Canada will likely follow suit.