Prepaid Debit Cards and Money Laundering: Risks and Detection
As prepaid debit cards become increasingly popular, the risk of their use for money laundering also grows.
Research suggests the global prepaid card market will reach $6.87 trillion by 2030. 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 must account for the money laundering-related risks that prepaid debit cards introduce in their anti-money laundering and CFT compliance models.
What are Prepaid Cards?
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:
- Closed: Closed prepaid cards are typically issued as gift cards and are also known as non-reloadable or closed-loop cards. These prepaid cards cannot be used at ATMs, nor at any retailer. Usage is limited to one or a few associated merchants.
- Open: Open (aka reloadable or open-loop) prepaid cards are standard payment-processor-branded cards that are tied to an account with pre-loaded funds.
Prepaid Cards: a Tool for Money Laundering
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:
- Anonymity: Prepaid cards don’t require the same identity verification measures associated in order to purchase like necessary when purchasing other payment cards.
- Global reach: Many open prepaid cards can be used for money laundering across borders by facilitating funding in one country and cash withdrawals in another through the use of them on global payment networks .
- Portability and transport: Prepaid cards can be transported discreetly in many environments as an alternative to large volumes of cash, because of their resemblance to credit cards.
- Funding methods: Criminals can obscure the origin of funds loaded onto prepaid cards, and their transaction history. With open cards, Funds may be loaded through phone and online mediums, as well as other services.
- Service complexity: Compliance is administratively challenging due to the large number of service providers involved in the prepaid card industry.
For example, bad actors can purchase prepaid debit cards with illicit cash proceeds and use them to make purchases or withdraw funds from ATMs. They can also load the cards with funds from one country and withdraw them in another, making it difficult to trace the source and destination of the funds.
AML / CFT Responses and Prepaid Cards
Financial institutions must be vigilant for specific red flag indicators—including monetary and non-monetary—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:
- Clients asking suspicious questions about their prepaid cards or attempting to obstruct identity verification processes.
- Customers making an unusually large number of prepaid card transactions not commensurate with stated business activities or purchasing large volumes of prepaid cards.
- Several prepaid card accounts held by an individual customer with a single provider.
- Frequent third-party (rather than by the cardholder) cash loading onto prepaid cards.
- Cash loading patterns in amounts just under reporting thresholds such as the $10,000 reporting threshold in the United States.
- Immediately transferred funds out of prepaid card accounts after loading.
- The use of different ATMs, often in different countries, to withdrawal money.
- Strange purchasing patterns: for example, the use of several prepaid cards to buy a high-value item such as a laptop.
- Travelers carrying prepaid cards who have been flagged for inconsistencies related to the purpose of their travel or business activities.
- Large quantities of prepaid cards mailed to a single address.
- Prepaid card accounts not used for purchases that are only for cash withdrawals.
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:
- Limits on purchasing, funding, and reloading
- Limits on spending
- Stricter controls on cash access
- Constraints geographically
Prepaid Cards and Money Laundering: Closing Thoughts
We know that prepaid debit cards can be used for money laundering due to their anonymity and ease of use. Since prepaid cards can be purchased without a credit check, identification, or even a bank account, this makes it challenging to trace the source of the funds loaded onto the card. Money launderers can use prepaid debit cards to move funds anonymously and avoid detection by law enforcement.
However, it's worth noting that prepaid debit cards are not inherently linked to money laundering. They can also be a convenient and legitimate way for people to manage their money, particularly those who may not have access to traditional banking services. Nonetheless, due to the potential for abuse, prepaid debit cards are closely monitored by regulators and financial institutions to prevent money laundering and other financial crimes.
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.
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