Little-Noted, Prepaid Rules Would Cover Non-Banks As Well As Banks

With the growing popularity of prepaid cards and other stored-value devices over the past few years, law-enforcement agencies and regulators have voiced concerns that payment devices intended for consumer convenience could become tools for money launderers, terrorists, and other illicit players.

To address those concerns, the U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCen) in June proposed new rules that have received little notice in the payments industry so far but would subject non-bank owned or operated providers of so-called prepaid access—such as retailers or proprietary reloadable prepaid card networks—to the same Bank Secrecy Act regulations imposed on banks and other depository institutions. Prepaid cards issued by banks already fall under the BSA regulations.

The proposed rules, mandated under the Credit Card Accountability, Responsibility and Disclosure Act of 2009, covers prepaid devices such as plastic cards, mobile phones, electronic serial numbers, key fobs and/or mechanisms that provide access to funds that have been paid for in advance and are retrievable and transferable. FinCen is accepting public comment on the proposed rules through Aug. 27.

FinCen is addressing concerns that because prepaid cards and similar devices can be easily obtained and are anonymous, they are attractive for money laundering, terrorist financing, and other illegal activities. Under the rules, providers of prepaid access would be required to meet the same registration, suspicious-activity reporting, customer-information recordkeeping, and new transactional record keeping requirements as banks.

“The idea here is FinCen wants to close up some of the holes that they feel are still in the whole prepaid market in terms of who’s responsible for reporting what, and when are they required to actually say something to law enforcement,” says Ben Jackson, senior analyst of prepaid cards for Boston-based Mercator Advisory Group.

Under FinCen’s proposal, the entity within a prepaid access transaction chain with predominant oversight and control would be obliged to monitor and report any meaningful information—information that might suggest illegal activity—to regulators and law enforcement. Other major changes include:

• Renaming “stored value” as “prepaid access” without intending to broaden or narrow the term and defining the term to allow for future changes in technology and prepaid devices;
• Deleting the terms “issuer” and “redeemer” of stored value and adding the terms “provider” and “seller.”

The proposed rules exempt certain categories of prepaid access products and services, such as payroll cards, that pose lower risks of being used for money laundering and terrorist financing.

As proposed, the FinCen rules “are more about just putting people on notice—it’s the old ‘if you see something, say something’ but instead of being public transit, it’s now on prepaid card folks,” Jackson says.

The current version of the rules “isn’t going to make a big difference to a lot of the market,” he says.
Retailers that sell gift cards that potentially can be used in more than one country would have additional reporting requirements under the rules, but few U.S. retailers have that capability, Jackson says.

“Usually if you buy a gift card in the U.S., you’re not going to take it with you and shop in Europe anyway,” he says. “If a company is multinational and trying to integrate their gift card program across borders, then they will have to adapt to these new rules.”

The proposed rules also could affect retailers that sell general-purpose reloadable cards. “Some of them may have to set up formal programs of their own for anti-money laundering where they previously may have relied on bank rules,” Jackson says. “Depending on the volume that they’re selling and the size that they’re selling of these cards, then they may need to keep identifying information about the cardholders for up to five years. And that could be a pain in the neck.”

But while the initial rules may have limited impact on the prepaid card market in the U.S., they “open up the door to future regulations, which could change things,” Jackson says.

“FinCen in its rulemaking notice in the Federal Register said this is not its last rulemaking on this,” he says. “They will come back and look at other issues, and will be thinking about what other kinds of things they need to do so that no one can use gift cards or prepaid cards in general for money laundering. So it’s not done yet.”