August 17, 2021
Financial institutions need to account for the risks that prepaid debit cards introduce as they relate to money laundering in their anti-money laundering and CFT compliance models.
As prepaid debit cards become increasingly popular, the risk of their use for money laundering also grows.
Research suggests that by next year, the global prepaid card market will be worth $3.1 trillion. The convenience and availability of prepaid cards, while appealing to consumers, also present opportunities for criminals looking to exploit the anonymity associated with their use to perpetrate money laundering and fraud.
Financial institutions need to account for the money laundering-related risks that prepaid debit cards introduce in their anti-money laundering and CFT compliance models.
Prepaid cards are cards that enable pre-loading and, in some cases, reloading of monetary value. They can be issued by a financial institution, or purchased at a retailer with pre-loaded funds. These cards can be used for purchases using standard payment-processing networks, and some provide access to ATMs for cash withdrawals.
With prepaid cards, there is no credit check on the cardholder, and the cardholder doesn’t need to have an account as is the case with standard credit or debit cards.
The two types of prepaid cards:
Criminals can easily purchase prepaid cards due to the availability and accessibility. They can then use them to both move and transform illegal funds and also use them at the various stages of money laundering:
Placement: In this scenario, prepaid cards are purchased by criminals in bulk using illegal funds and then moved cross-border to less-regulated countries, or the value is converted into legal tender. These individuals often hire people to purchase and transport cards for them.
Layering: The prepaid cards bought with illegal funds can be spent on merchandise (high-value items) that is then resold or transported abroad or may also use prepaid cards as currency, reselling them to beneficiaries.
Integration: These cards may be used by the criminals personally to fund illicit and legitimate activities and transactions.
Prepaid cards are such a popular tool for money laundering because of these characteristics:
Financial institutions must be vigilant for specific red flag indicators and ensure their identity verification mechanisms are able to spot potential criminal activities related to the money laundering risks of prepaid cards.
The following are some of the red flags that prepaid cards are being used for money laundering:
In response to money laundering risks, many jurisdictions are tightening their prepaid card AML / CFT regulations. Firms may consider a range of practical measures to control and manage their prepaid card risk including:
Firms should review their identity verification and transaction monitoring solutions to ensure they are able to report and detect money laundering using prepaid cards efficiently and accurately and are operating in compliance with anti-money laundering regulations.