Reduce Risk from Money Laundering Using Prepaid Cards
An effective AML solution should deal with risk quickly and help you stay in control of regulations.
Find Out More TodayA Guide to Anti-Money Laundering for Crypto Firms
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.
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:
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:
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.
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:
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:
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. An effective AML solution should deal with risk quickly and help you stay in control of regulations.
Reduce Risk from Money Laundering Using Prepaid Cards
Disclaimer: This is for general information only. The information presented does not constitute legal advice. ComplyAdvantage accepts no responsibility for any information contained herein and disclaims and excludes any liability in respect of the contents or for action taken based on this information.
Copyright © 2022 IVXS UK Limited (trading as ComplyAdvantage).