Money Laundering Using Prepaid Cards

Money Laundering Using Prepaid Cards

Although prepaid credit cards have been available since the 1990s, their popularity grew significantly in the late 2000s and continued to do so over the following decade. By 2022, research suggests that the global prepaid card market will be worth $3.1 trillion. While prepaid cards are popular with consumers and service providers because of their convenience and availability, those benefits also present opportunities for criminals seeking to exploit the anonymity associated with their use to perpetrate fraud and money laundering. 

To protect financial systems and ensure legislative compliance, banks and financial institutions must be aware of the money laundering risks posed by prepaid cards and how to address that risk in their AML/CFT compliance solution. 

What are prepaid cards?

Prepaid cards are stores of value that can be used to pay for goods and services as part of existing card payment processing networks. Issued by banks and other financial services firms, prepaid cards can be pre-loaded and reloaded with funds and can be purchased on behalf of others. Unlike credit and debit cards, prepaid cards do not require an evaluation of the cardholder’s creditworthiness or the existence of a payment account. Some prepaid cards can be used to withdraw money from ATMs.

There are two types of prepaid card: 

• Closed: Also known as non-reloadable or closed-loop, closed prepaid cards are typically issued as gift cards. This category of prepaid card restricts purchases to a single merchant or to a small network of merchants and may not be used to access ATM networks. 
• Open: Also known as reloadable or open-loop, open prepaid cards are issued as real, payment network-branded cards and linked to an account containing preloaded funds. Open prepaid cards can be used for transactions with any merchant or provider linked to their payment network.

Prepaid Cards as a Tool for Money Laundering

The accessibility and availability of prepaid cards mean that criminals can purchase them from numerous outlets and use them to both move and transform illegal funds. Prepaid cards can be used at the placement, layering and integration stages of money laundering:

Placement: Criminals may, for example, use their illegal funds to purchase large numbers of prepaid cards and then introduce their stored value into the legitimate financial system or transport the cards overseas to avoid the scrutiny of authorities. The criminals may even hire money mules to purchase and transport the cards for them.

Layering: Funds stored on prepaid cards can be spent on or redeemed for merchandise (such as computers or other high-value electronics) that is then resold or transported abroad. Criminals may also use prepaid cards as currency, reselling them to beneficiaries meaning that layering AML needs to be considered.

Integration: Criminals may use prepaid cards themselves as a form of payment for legitimate goods and services, such as component chemicals for drug manufacturing, real estate deals or life insurance products.  

The specific AML/CFT risks associated with prepaid cards, and that make them such a popular tool for money launderers, include:

• Anonymity: Prepaid cards can be purchased without the same customer due diligence (CDD) identification and verification measures associated with other payment cards. 
• Global reach: Many open prepaid cards can be used on global payment networks and so enable money laundering across borders by facilitating funding in one country and cash withdrawals in another.
• Portability and transport: Prepaid cards physically resemble normal credit cards and can be transported discreetly in many environments as an alternative to large volumes of cash. 
• Funding methods: The origin of funds loaded onto prepaid cards, and their transaction history, can be obscured. Funds may be loaded onto open cards via a variety of services, including phone and online mediums. 

Service complexity: The large number of service providers involved in the prepaid card industry makes AML/CFT efforts administratively challenging. Typically, the provision of a prepaid card involves a program manager, issuer, acquirer, payment network, distributor and vendor.

ML/CFT Responses to Money Laundering Using Prepaid Cards

The money laundering risks of prepaid cards mean that financial institutions must be vigilant for specific red flag indicators and ensure their customer due diligence mechanisms are able to spot potential criminal activities. Red flag indicators of money laundering using prepaid cards include:

• Clients attempting to obstruct CDD processes or asking suspicious questions about their prepaid cards. 
• Customers purchasing large volumes of prepaid cards or making an unusually large number of prepaid card transactions not commensurate with stated business activities. 
• Individual customers holding several prepaid card accounts with a single provider.
• Frequent cash loading onto prepaid cards by a third party rather than the cardholder.
• Patterns of cash loading in amounts just under reporting thresholds. In the United States, for example, the reporting threshold is $10,000. 
• Funds transferred out of prepaid card accounts immediately after loading. 
• Withdrawal of funds at different ATMs, often in different countries. 
• Unusual purchasing patterns: for example, a customer paying for a high-value item (such as a laptop) with several prepaid cards. 
• Prepaid cards being sent to recipients through the mail or being discovered on travellers who have an inconsistent connection to stated business activities. 
• Prepaid card accounts used only for cash withdrawals rather than purchases.

Many jurisdictions are tightening their prepaid card AML/CFT regulations in response to money laundering risks. In the EU, for example, the 5th Anti-Money Laundering Directive lowered the transaction limit on prepaid cards and prohibited the use of cards issued in high-risk countries. From a practical perspective, firms may consider a range of measures to manage and control their prepaid card risk, including:

• Limits on funding, purchasing and reloading
• Spending limits
• Stricter controls on cash access
• Geographical constraints 

Given the risks, firms should review their customer due diligence and transaction monitoring solutions to ensure they are operating in compliance with relevant AML/CFT legislation and are able to detect and report money laundering using prepaid cards accurately and efficiently.