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Prepaid Cards: Fraud and Money Laundering Risks

AML Compliance Prepaid Cards & Wallets Knowledge & Training

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 2027, research suggests that the prepaid cards global market will be worth $3tn, creating an increased risk of fraud and money laundering using prepaid cards.

While prepaid cards and wallets 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. Gift cards are easily transferable and hard to track, and it is difficult to recover funds once spent. 

Banks and financial institutions must be aware of the risks of fraud and money laundering using prepaid cards and how to address that risk in their AML/CFT compliance solution to protect financial systems and ensure legislative compliance. 

What are Prepaid Cards?

Prepaid cards don’t require a bank account and can be used to pay for goods and services.¬† Issued by banks and other financial services firms, prepaid cards are 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.

Fraud and money laundering using prepaid cards can be carried out using one of two types of cards: 

  • 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 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

How are Prepaid Cards Used in Money Laundering Schemes?

The accessibility and availability of prepaid cards mean criminals can purchase them from numerous outlets and use them to move and transform illegal funds. Money laundering using prepaid cards can happen at any of the 3 stages of money laundering ‚Äď placement, layering, or integration:¬†

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.

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

Integration: Money laundering using prepaid cards can be carried out when criminals use them as a form of payment for legitimate goods and services, such as component chemicals for drug manufacturing, real estate deals, or life insurance products.

Why Do Money Launderers Use Prepaid Cards?

The specific financial abuses and risks of money laundering using prepaid cards, and what makes 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 using prepaid cards 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 transaction monitoring¬†administratively challenging. Typically, the provision of a prepaid card involves a program manager, issuer, acquirer, payment network, distributor, and vendor

Prepaid Cards as a Tool for Fraud 

Prepaid card fraud happens when stolen prepaid card information is used to make a purchase or when a fraudster buys a prepaid card with stolen payment information.

Because prepaid cards are often not tied to specific identities, they can also be purchased with stolen funds and are often used to make untraceable purchases.

Fraudulent use of prepaid cards might include:

  • Gift card fraud
  • Account takeover¬†
  • Stolen account data
  • Phony balance checks
  • Loyalty points and rewards
  • Tax fraud
  • Cloned or swapped cards

In 2022, the US Justice Department highlighted a case in which two men tricked hundreds of people across the US into giving them Walmart gift cards. The fraudsters used an app to obtain gift card numbers from sources in China gained from victims across the US. New gift cards were then bought and sent back to China.

Victims of the scam were tricked out of the gift cards in various ways, including threats of arrest, finance schemes, and romance scams. According to the Federal Trade Commission, older people are more susceptible to different types of fraud loss.

AML/CFT Responses to Prepaid Card Fraud and Money Laundering

In the US, while chargeback rules apply to most payment cards under the Fair Credit Billing Act, this does not include prepaid cards. Branded prepaid cards from card networks such as Visa and Mastercard offer less risk, with the brands providing fraud protection and customer dispute options.

The Financial Actions Task Force (FATF) has issued guidance regarding fraud and money laundering using prepaid cards. Red flags to look out for include:

  • Discrepancies between the information submitted by the customer and information detected by monitoring systems
  • Individuals who hold an unusual volume of prepaid card accounts with the same provider
  • A large and diverse source of funds used to fund the same prepaid cards
  • Multiple reference bank accounts in various cities used to support the same cards
  • Loading or funding of accounts always done by third parties
  • Numerous cash loading, just under the reporting threshold of $10,000, of the same prepaid card(s), conducted by the same individual(s) on several occasions
  • Multiple third-party funding, followed by the immediate transfer of funds to an unrelated bank account(s)
  • Clients attempting to obstruct CDD processes or asking suspicious questions about their prepaid cards¬†
  • Funds are transferred out of prepaid card accounts immediately after loading¬†
  • Withdrawal of funds at different ATMs, often in other 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 travelers who have an inconsistent connection to stated business activities¬†
  • Prepaid card accounts used only for cash withdrawals rather than purchases
  • Credit balance accumulation resulting in refunds (CBRs) should be monitored as they can be used as part of a scheme to launder funds
  • Unusual purchase of goods or services in countries with a heightened risk for money laundering
  • Excessive payments on private label credit cards via gift card from the merchant
  • Merchant credits without offsetting merchant transactions
  • Excessive customer service calls
  • Abnormal customer contact behavior (e.g., frequent changes of address)

The US Federal Trade Commission offers advice on gift card scams. It warns consumers that ‚Äúno real business or government agency will ever insist you pay them with a gift card. Anyone who demands to be paid with a gift card is a scammer‚ÄĚ.

It lists common gift card scams and schemes, including:

  • Callers saying they are from the government¬†‚ÄĒ possibly the IRS or Social Security Administration ‚Äď asking for payment of taxes or a fine
  • Someone calling from¬†tech support ‚Äď maybe from Apple or Microsoft ‚Äď saying payment is needed to fix computer problems¬†
  • Someone on a dating website saying they need money and asking for help
  • Someone pretending to be a friend or family member in an¬†emergency,¬†needing money sent to them right away
  • The caller says¬†a prize has been won, but first fees or other charges need to be paid with a gift card¬†
  • A caller claiming to be from a power or utility company, threatening to cut off service unless payment is made immediately

Many jurisdictions are tightening their prepaid card AML/CFT regulations to combat the risks of money laundering using prepaid cards. In the EU, for example, the 5th Anti-Money Laundering Directive lowered the transaction limit on prepaid cards and prohibited using cards issued in high-risk countries. From a practical perspective, firms may consider a range of measures to manage and control risks of fraud and money laundering using prepaid cards, 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 comply with relevant AML regulations and can detect and report money laundering using prepaid cards accurately and efficiently. 

Firms should also consider real-time transaction fraud detection solutions to help increase protection against fraud and money laundering using prepaid cards.

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Originally published 15 April 2020, updated 23 May 2023

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.

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