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Report to the Chairman, Permanent Subcommittee on Investigations, 

Committee on Governmental Affairs,

U.S. Senate:



July 2002:



Money Laundering:



Extent of Money Laundering through Credit Cards Is Unknown:



GAO-02-670:



Letter:



Results in Brief:



Background:



The Extent to Which Credit Cards Are Used in Money Laundering

Is Unclear:



Industry Focus Is on Fraud and Credit Risk, Not Money

Laundering:



Regulatory Oversight for Anti-Money Laundering Requirements Is Not 

Focused on Credit Card Operations:



Agency Comments and Our Evaluation:



Appendixes:



Appendix I: Scope and Methodology:



Appendix II: Demographic Information about the Credit Card Issuers, 
Acquirers, 

and Processors in Our Review:



Appendix III: Organizational Structure of the Associations in Our 
Review:



Appendix IV: Observations on Money Laundering Scenarios:



Appendix V: Review of SAR Database on Potential Money Laundering 
through

Credit Cards:



Tables :



Table 1: Key Anti-Money Laundering Provisions and the Entities in the 

Credit Card Industry to Which They Apply:



Table 2: Number and Dollar Value of Electronic Payments Transferred 

through U.S. Payment Systems in 2000:



Table 3: Selected Characteristics of the Issuers in GAOs Review (Year 

Ending 2001):



Table 4: Selected Characteristics of Acquirers in GAOs Review (Year 

Ending 2001):



Table 5: Selected Characteristics of Credit Card Processors in GAOs 

Review (Year Ending 2001):



Figures:



Figure 1: Money Laundering Stages:



Figure 2: Typical Credit Card Transaction:



Abbreviations:



AML: Anti-Money Laundering:



BSA: Bank Secrecy Act:



CTR: Currency Transaction Report:



FATF: Financial Action Task Force:



FinCEN: Financial Crimes Enforcement Network:



NCCT: Non-Cooperative Countries and Territories :



OFAC: Office of Foreign Assets Control:



SAR: Suspicious Activity Report:



Letter July 22, 2002:



The Honorable Carl Levin

Chairman, Permanent Subcommittee on Investigations

Committee on Governmental Affairs

United States Senate:



Money laundering--the process of disguising or concealing illicit funds 

to make them appear legitimate--is a serious issue, with an estimated 

$500 billion laundered annually, according to the United Nations Office 

of Drug Control and Crime Prevention. The terrorist attacks of 

September 11, 2001, heightened concerns about money laundering and 

terrorist financing and prompted the enactment of the Uniting and 

Strengthening America by Providing Appropriate Tools Required to 

Intercept and Obstruct Terrorism, (USA PATRIOT) Act of 2001 (the 

Patriot Act).[Footnote 1] The goals of the Patriot Act include 

strengthening measures to prevent the supply of terrorist funding and 

strengthening the ability of the United States to prevent, detect, and 

prosecute international money laundering. As part of the subcommittees 

efforts to combat money laundering, you asked us to review the 

vulnerabilities to money laundering that may exist in the credit card 

industry and the industrys efforts to address such vulnerabilities.



Money laundering has three stages: placement, where illicit cash is 

converted into monetary instruments or deposited into financial system 

accounts; layering, where the funds are moved to other financial 

institutions; and integration, where these funds are used to acquire 

assets or fund further activities. The credit card industry includes:



* credit card associations (associations), such as VISA and MasterCard, 

which license their member banks to issue bankcards, or authorize 

merchants to accept those cards, or both; [Footnote 2]



* issuing banks, which solicit potential customers and issue the credit 

cards;



* acquiring banks, which process transactions for merchants that accept 

credit cards; and:



* third-party processors, which contract with issuing or acquiring 

banks to provide transaction processing and other credit card-related 

services for the banks.



As agreed with your staff, the objectives of this report are to 

describe (1) vulnerabilities to money laundering that may exist in the 

credit card industry, (2) efforts by the industry to address potential 

vulnerabilities to money laundering using credit cards, and (3) 

existing regulatory mechanisms to oversee the credit card industry and 

help ensure the adequacy of required anti-money laundering (AML) 

programs.



In completing our review, we interviewed U.S. bank regulatory officials 

and representatives of the associations, major issuing and acquiring 

banks, and third-party processors. The credit card entities included in 

our review made up a significant portion of the U.S. credit card 

industry. From industry representatives, we requested documentation of 

existing AML programs--both broad AML programs and those specifically 

targeted for credit cards. However, only three institutions provided 

this documentation. The others described their AML programs but were 

unwilling to provide documentation to support their descriptions 

because of concern about the confidentiality of proprietary policies. 

Our summary of industry efforts was therefore based primarily on 

testimonial evidence. We also requested documentation from the credit 

card associations related to the reviews they conducted on offshore 

banks that were identified in a Senate Permanent Subcommittee on 

Investigations report on Correspondent Banking.[Footnote 3] We received 

documentation from one association. The other association did not 

provide any documentation, citing, among other things, confidentiality 

laws in these offshore jurisdictions as a reason for not providing us 

with the documentation. They also told us that they could not locate 

the paperwork with respect to the reviews they conducted on these 

offshore banks.



We also interviewed law enforcement officials and asked the Financial 

Crimes Enforcement Network[Footnote 4] (FinCEN) of the U.S. Department 

of the Treasury (Treasury) to analyze the governments database on 

Suspicious Activity Reports (SAR) and identify and quantify reports 

related to potential money laundering through credit cards. Appendix I 

contains more detailed information on the scope and methodology of our 

review. Appendix II provides detailed information on the entities in 

the industry that we interviewed.



Results in Brief:



The extent to which money laundering through credit cards may be 

occurring is unknown. Bank regulators, credit card industry 

representatives, and law enforcement officials we interviewed generally 

agreed that credit card accounts were not likely to be used in the 

initial stage of money laundering when illicit cash is first placed 

into the financial system, because the industry generally restricts 

cash payments. Bank regulators and credit card industry representatives 

we interviewed acknowledged that credit card accounts might be used in 

the layering or integration stages of money laundering. For example, by 

using illicit funds already placed in a bank account to pay a credit 

card bill for goods purchased, a money launderer has integrated his 

illicit funds into the financial system. Most law enforcement officials 

we met with were unable to cite any specific cases of credit card-

facilitated money laundering in U.S.-based financial institutions. 

Further, a FinCEN analysis of its database of SARs filed by U.S.-based 

financial institutions revealed very little evidence of potential money 

laundering through credit cards. However, evidence from a congressional 

investigation showed that credit card accounts accessed through banks 

in certain offshore financial secrecy jurisdictions[Footnote 5] could 

be vulnerable to money laundering. In addition to the cases described 

in the Permanent Subcommittees February 2001 report,[Footnote 6] the 

Internal Revenue Services Criminal Investigation group has 
investigated 

cases of U.S. citizens placing funds in bank accounts in these 
jurisdictions 

in order to evade U.S. taxes and accessing the funds through the use of 

credit cards.



Industry representatives generally reported that they did not have AML 

policies and programs focused on credit cards because they considered 

money laundering using credit cards to be unlikely. In their view, the 

banks application screening processes, systems to monitor fraud, and 

policies restricting cash payments and prepayments[Footnote 7] made 

credit cards less vulnerable to money laundering. Industry 

representatives also described policies and programs to minimize 

financial risks of credit card fraud, which they believed to be helpful 

in detecting money laundering. For example, the major associations told 

us that they monitor card transactions for potential fraud and report 

the results of their monitoring to member banks, which may use the 

information to investigate and report activities that the banks 

consider suspicious. Association officials also told us they applied 

the same due diligence procedures for domestic and foreign issuing and 

acquiring banks. At the time of our review, this due diligence did not 

include anti-money laundering screening. Credit card-issuing and 

-acquiring institutions told us that they screen applications and 

monitor transactions through automated systems for unusual or out-of-

pattern transactions and, as a result of these efforts, may conduct 

investigations, file SARs, or work with law enforcement. The major 

third-party credit card processors in our study told us that they 

incorporated fraud prevention and detection policies and programs into 

their transaction processing systems for the issuers and acquirers. 

Although most of the industry representatives indicated that their 

fraud controls might also identify money laundering, they were unable 

to cite any cases of money laundering identified as a result of their 

fraud controls. The lack of money laundering cases identified through 

these fraud controls and the lack of indications of money laundering 

through suspicious activity reporting might be attributed to such 

factors as a lack of money laundering occurring through U.S.-based 

credit card operations or the inadequacy of current fraud-focused 

procedures and systems to identify money laundering. Treasury believes 

that the systems the industry uses to monitor fraud are a starting 

point for appropriate anti-money laundering safeguards, but alone they 

are not sufficient. Treasury believes that while AML programs should be 

built upon existing anti-fraud programs, additional factors and 

considerations specific to money laundering must be included.



At the time of our review, the primary regulatory oversight mechanism 

to help ensure the adequacy of AML programs was the Bank Secrecy Act 

(BSA) examination, which applied, in the credit card industry, to 

issuing and acquiring banks. The regulators told us that, in their 

view, the issuing banks application screening process, fraud 

monitoring systems, and policies generally restricting cash payments 

lowered the risk of money laundering through credit cards. 

Consequently, regulators focused less on credit card operations in 

conducting their BSA examination than on other areas that they 

considered at higher risk to money laundering, such as private banking 

and wire transfers. Although acquiring banks are subject to the BSA, 

the regulatory oversight of these entities has focused more on safety 

and soundness issues because regulators do not view these entities as 

being at high risk for money laundering. The associations and third-

party processors are currently subject to regulatory oversight solely 

focused on the data processing systems and internal controls of these 

entities, to ensure that these entities do not pose risks to the banks 

they service. The Patriot Act required the associations to have AML 

programs by April 24, 2002.[Footnote 8] Interim final rules issued by 

Treasury on April 24, 2002, require the associations anti-money 

laundering program to be in writing, approved by senior management, and 

to be reasonably designed to prevent the credit card system from being 

used to launder money or to finance terrorist activities. Under BSA 

regulations, the Internal Revenue Service is the regulatory body that 

will oversee the associations adherence to the new requirements, 

unless Treasury delegates this authority to another agency.



We make no recommendations in this report. We asked Treasury and two of 

its bureaus, the Office of the Comptroller of the Currency and FinCEN, 

to comment on this report. We also asked the Board of Governors of the 

Federal Reserve System and the Federal Deposit Insurance Corporation 

for their comments on it. The agencies generally agreed with the 

information presented in the report and provided us with technical 

changes or factual updates, which we have incorporated where 

appropriate.



Background:



Individuals engaged in illicit activities must eventually introduce 

their illegally gained money into the nations legitimate financial 

systems, according to FinCEN. Money laundering involves disguising 

financial assets so they can be used without detection of the illegal 

activity that produced them. Through money laundering, the criminal 

transforms the monetary proceeds derived from criminal activity into 

funds with an apparently legal source. Money laundering provides the 

fuel for drug dealers, terrorists, arms dealers, and other criminals to 

operate and expand their criminal enterprises. FinCEN notes that 

criminals are able to use financial systems in the United States and 

abroad to further a wide range of illicit activities.



Money laundering generally occurs in three stages, as shown in figure 

1. In the first, or placement, stage, cash is converted into monetary 

instruments, such as money orders or travelers checks, or deposited 

into financial institution accounts. The later stages of money 

laundering are the layering and integration stages. In the layering 

stage, the funds already placed are transferred or moved into other 

accounts or other financial institutions to further obscure their 

illicit origin. In the integration stage, the funds are used to 

purchase assets in the legitimate economy or to fund further 

activities.



Figure 1: Money Laundering Stages:



[See PDF for image]



Source: FinCEN Related Series: An Assessment of Narcotics Related Money 

Laundering, FinCEN, July 1992.



[End of figure]



AML Requirements for the Credit Card Industry:



AML requirements for financial institutions focus on mandating that the 

financial institutions keep records and file reports for certain types 

of transactions and establish programs to prevent and detect money 

laundering.[Footnote 9] Table 1 shows some of the key anti-money 

laundering requirements and the entities in the credit card industry to 

which they apply.



Table 1: Key Anti-Money Laundering Provisions and the Entities in the 

Credit Card Industry to Which They Apply:



[See PDF for Image]



[A] Regulations concerning currency transaction reports and suspicious 

activity reports are not applicable to associations.



[B] An insured bank, a commercial bank, a private banker, an agency or 

branch of a foreign bank in the United States, an insured institution 

as defined in 12 U.S.C.  1724(a), a thrift, or broker/dealer.



Source: BSA, BSA Regulations, and the Patriot Act.



[End of table]



Financial institutions are also required to abide by regulations 

developed by the Office of Foreign Assets Control (OFAC). OFAC, which 

is a division of Treasury, administers and enforces economic and trade 

sanctions against targeted foreign countries, terrorism-sponsoring 

organizations, and international narcotics traffickers. On the basis of 

U.S. foreign policy and national security goals, OFAC promulgates 

regulations and develops and administers sanctions for Treasury under 

eight statutes. In general, financial institutions are required when so 

instructed by OFAC to block the accounts and other assets of specified 

countries, entities, and individuals. OFAC has authority to impose 

civil penalties when financial institutions fail to comply.



Financial institutions are also advised by regulators to enhance their 

scrutiny of certain transactions and banking relationships in 

jurisdictions deemed by FinCEN to have serious deficiencies in their 

anti-money laundering systems. The jurisdictions identified by FinCEN 

are consistent with the Financial Action Task Forces (FATF)[Footnote 

10] list of Non-Cooperative Countries and Territories (NCCT).[Footnote 

11]



Federal banking regulators examine banks to determine whether their 

policies, procedures, and internal controls are adequate with respect 

to BSA, AML, and OFAC laws and regulations. The regulators generally 

are required to take the following steps in assessing the banks:



* Determine whether bank management has adopted and implemented 

adequate policies and procedures related to BSA, AML, and OFAC. These 

policies are expected to address the identification and reporting of 

money laundering in its different forms (that is, placement, layering, 

and integration).



* Ensure that these policies cover all products and units in the bank, 

including credit cards.



* Verify that the banks board has approved a written compliance 

program that ensures compliance with all reporting and record-keeping 

requirements of the BSA, including SAR requirements. This includes 

independent testing for compliance, designation of a qualified 

individual or individuals for coordinating and monitoring day-to-day 

compliance, and training for appropriate personnel.



* Determine the effectiveness of the banks processes in identifying 

risk. The regulators expect that banks will conduct a risk assessment 

of their customer base to determine the appropriate level of necessary 

due diligence. The regulators also determine whether a bank 1) has 

filed the required BSA reports; 2) has maintained the required BSA 

records; 3) can detect structuring; and 4) has an effective overall 

system to monitor, identify, review, and report suspicious activity.



The Credit Card Industry Is Composed of Various Entities:



The credit card industry is composed of the following four types of 

entities:



* Associations, which are jointly owned by member financial 

institutions, provide the computer systems that transfer data between 

member institutions. The associations also establish the operating 

standards that define the policies, roles, and responsibilities of 

their member institutions. Most member institutions issue credit cards, 

or sign up merchants to accept credit cards, or both. Providing direct 

services to consumers and merchants is the responsibility of the member 

institutions rather than of the associations. The major associations 

are VISA and MasterCard. Appendix III provides more information on the 

organizational structure of VISA and MasterCard. Although not an 

association, American Express has arrangements in some overseas markets 

for licensing foreign banks to issue American Express cards. This 

creates relationships similar to those that VISA and MasterCard have 

with their issuing card member banks.



* Issuing banks solicit potential customers and issue the credit cards. 

These banks carry the credit card loan and set policies for matters 

such as credit limits for cardholders and treatment of delinquent 

cardholders. These banks maintain all account information on the 

cardholder. In many respects, American Express and Discover Card act as 

issuing banks. That is, they issue their own brand cards. They also 

sign up the cardholder, settle the transactions, and maintain all 

account information on the cardholder.



* Acquiring banks, also known as merchant banks, sign up merchants to 

accept credit cards. These banks settle the credit card transactions 

and maintain all account information on their merchant clients. 

American Express and Discover Card also perform many merchant bank 

functions. For the most part, they sign up merchants directly, settle 

accounts, and maintain all account information on their merchants.



* Third-party credit card processors process credit card transactions 

for the issuing or acquiring banks that contract with them to perform 

these services. These processors also perform a range of other 

functions for issuing and acquiring banks, including embossing cards 

for issuing banks or soliciting merchants for acquiring banks. Third-

party processors are usually able to perform these functions for 

issuing or acquiring banks at lower cost than the banks because they 

have reached economies of scale. A specialized group of third-party 

processors, known as independent sales organizations, mainly solicit 

merchants on behalf of acquiring banks.



Each of the various types of entities plays a role in each credit card 

transaction, as shown in figure 2.



Figure 2: Typical Credit Card Transaction:



[See PDF for image]



Source: VISA.



[End of figure]



Average Dollar Value of Credit Card Transactions Very Small Compared 

with Other Forms of U.S. Electronic Payments:



In 2000, the credit card industry processed a large number of 

relatively small, average dollar-value transactions as compared with 

other forms of electronic payments, as shown in table 2. During the 

year, 20 billion of the 72.5 billion (28 percent) electronic payments 

transferred through U.S. payment systems were made up of credit card 

transactions. However, the average dollar value of credit card 

transactions was very small as compared with other forms of electronic 

payments. For example, the average value of a credit card transaction 

was $70, which was very small as compared with the average value of 

transactions for other forms of electronic payments, such as Fedwire 

and the Clearinghouse Interbank Payment System, which were $3.5 million 

and $4.9 million, respectively.



Table 2: Number and Dollar Value of Electronic Payments Transferred 

through U.S. Payment Systems in 2000:



[See PDF for Image]



[A] Includes both on-line and off-line transactions.



[B] Estimated from annual data by assuming 250 business days per year.



Source: Federal Reserve Board of Governors, New York Clearing House, 

and National Automated Clearing House Association.



[End of table]



The Extent to Which Credit Cards Are Used in Money Laundering Is 

Unclear:



The consensus from industry, bank regulatory, and law enforcement 

officials we interviewed was that credit card accounts were not likely 

to be used in the initial stage of money laundering when illicit cash 

is first placed in the financial system, primarily because of 

restrictions on cash payments. Some credit card industry 

representatives and bank regulators we interviewed acknowledged that 

credit cards could be used in the layering or integration stages of 

money laundering; however, the extent to which this may be occurring is 

unknown. These officials, as well as most law enforcement officials we 

spoke with, were not aware of any cases of money laundering through 

credit cards in U.S.-based institutions. An analysis of FinCENs SAR 

database also did not identify any instances in which the suspicious 

activity reported by financial institutions developed into an actual 

case of money laundering. However, we received information from one law 

enforcement agency that individuals have used credit cards to access 

illicit funds held in banks or trusts established in certain offshore 

jurisdictions.



Credit Cards Are Unlikely to Be Used in Placement Stage, but Their Use 

in the Later Stages of Money Laundering Is Unknown:



Credit cards are not likely to be used to place illicit funds in the 

U.S. financial system because of restrictions on cash payments, 

according to industry, bank regulatory, and law enforcement officials 

we interviewed. For example, most issuers and acquirers told us that 

they did not accept cash payments for credit card accounts and 

generally restricted payments to checks. Some industry and regulatory 

officials indicated that credit cards would be an ineffective way to 

launder money because each transaction creates a paper trail. They also 

indicated that credit cards would be an inefficient way to launder 

funds because of the limits on access to cash.



Nevertheless, some of these officials acknowledged that credit cards 

could be used at the layering and integration stages of money 

laundering; however, the extent to which this may be occurring is 

unknown. They indicated that once money launderers had placed their 

illicit funds in the financial system, they could layer and integrate 

the funds using credit card accounts. These officials provided us with 

examples of how this could occur:



* The money launderer prepays his credit card using funds already in 

the banking system, creating a credit balance on the account. The 

launderer then requests a credit refund, which enables him to further 

obscure the origin of the funds, which is layering.



* The money launderer uses the illicit funds that are already in the 

banking system to pay his credit card bill for goods purchased, which 

is an example of integration.



Officials from one bank told us that once its bank receives a check 

payment for a credit card account, it has no way of knowing how the 

funds were put into the system, let alone the origin of funds. 

Officials from another bank stated that if a money launderer were able 

to deposit funds into another institution, they could easily obtain a 

credit card. Appendix IV contains information on six money-laundering 

scenarios that we discussed with industry and regulatory officials.



Although industry and regulatory officials acknowledged that credit 

cards could be used in the layering or integration stages of money 

laundering, they, along with most law enforcement officials we 

interviewed, were unaware of actual cases in which credit cards were 

used to launder money through U.S.-based financial institutions. An 

analysis of FinCENs database of SARs filed by U.S.-based financial 

institutions also did not identify any instances in which the 

suspicious activity reported by the financial institution developed 

into actual cases, but it provided some insights about possible money 

laundering linked to the use of credit cards. The database analysis 

FinCEN conducted in response to our request found that some banks had 

filed SARs pertaining to possible money laundering/ BSA/structuring 

violations and credit, debit,[Footnote 12] or ATM cards.[Footnote 13] 

FinCEN conducted an analysis of the database and found that between 

October 1, 1999, and September 30, 2001, banks had filed 499 SARs 

related to credit, debit, or ATM cards and potential money laundering. 

This represents a significantly small percentage of the total of all 

SARs filed in this period: about one-tenth of 1 percent. FinCENs 

analysis identified some examples of the type of suspicious activity 

banks reported that related to the layering and integration stages of 

money laundering:



* Fifteen of the 499 SARs related to customers overpaying their credit 

cards and subsequently asking for refund checks. FinCEN noted that 

overpaying a credit card could be used as a means to launder money 

because it provides a simple means to convert criminal or suspicious 

funds to a bank instrument with minimal or no questions as to the 

origin of the funds.



* One hundred fifteen of the 499 SARs related to customers trying to 

structure deposits--that is, making multiple deposits below the $10,000 

threshold that would trigger a banks filing a Currency Transaction 

Report (CTR). Most of these SARs related to cash transactions wherein 

the customer asked to deposit funds into various accounts, pay down 

loans, purchase cashiers checks, and make credit card payments. FinCEN 

noted that the total payments on the credit cards were typically well 

over $5,000 and often exceeded $10,000.



FinCEN noted that the activity reported in virtually all of the SARs 

was considered an isolated incidence by the reporting banks. The only 

exception involved six SARs filed in early 2001 by the same bank, which 

reflects some kind of organized or criminal activity involving credit 

cards. Specifically, this bank filed SARs on four suspects. The bank 

reported that check payments credited to the four suspects credit card 

accounts were made by a fifth individual. The individual making the 

payments on these accounts had earlier been indicted on money 

laundering, contraband, cigarette smuggling, and visa/immigration 

fraud charges.



Of the 499 SARs that FinCEN identified, 70 were referred directly to 

law enforcement by the financial institution, in addition to being 

filed with FinCEN. FinCEN was unable to tell us if any of them resulted 

in money laundering cases. Appendix V contains more details on the 

FinCEN analysis of the SAR database.



Credit Card-Accessed Accounts in Offshore Banks Create Vulnerabilities 

to Money Laundering:



One U.S. law enforcement agency has found instances of the use of 

credit cards associated with bank accounts in offshore jurisdictions to 

launder money, but the extent of this activity is unknown. For example, 

the Internal Revenue Services Criminal Investigation group has found 

that U.S. citizens have placed funds intended to evade U.S. taxes in 

accounts at banks or trusts in certain offshore jurisdictions and then 

accessed these funds using credit and debit cards associated with the 

offshore account. In other instances, individuals generating cash from 

illegal activities have smuggled the cash out of the United States into 

an offshore jurisdiction with lax regulatory oversight, placed the cash 

in offshore banks, and--again--accessed the illicit funds using credit 

or debit cards. The credit or debit card provides a money launderer 

access to the cash received through the criminal activity without 

having to be concerned about a CTR or SAR being filed, according to 

this law enforcement agency. A United Nations report on offshore 

jurisdictions[Footnote 14] reported that credit cards are a common and 

nontraceable means by which individuals access their funds in these 

offshore jurisdictions. The report indicated that banks assure 

cardholders that their account information will be protected by strict 

bank secrecy laws in these jurisdictions.



The Senate Permanent Subcommittee on Investigations report on 

Correspondent Banking describes two cases in which offshore banks 

engaged in money laundering, provided their clients with credit or 

debit cards to access their illicit funds. Guardian Bank and Trust 

(Cayman) Ltd., was an offshore bank licensed in the Cayman Islands. Its 

owner, who pleaded guilty to money laundering, tax evasion, and fraud, 

described how the bank allowed U.S. citizens to establish accounts with 

the bank for the purpose of evading taxes. The owner promoted the use 

of credit or debit cards so that his clients could covertly access 

funds stored in the Cayman Islands. He stated that these techniques 

were promoted and used to evade U.S. taxation. Caribbean American Bank, 

which was licensed in Antigua and Barbuda, was involved in a major 

fraud scheme. Through its relationship with another bank, it was able 

to offer its clients credit cards to charge purchases. The balance on 

the card was paid out of the illicit proceeds the clients had on 

deposit at Caribbean American Bank.



Industry Focus Is on Fraud and Credit Risk, Not Money Laundering:



Industry representatives of most of the entities we reviewed told us 

that they did not have AML policies and programs specifically focused 

on the issuance and use of credit cards because they considered money 

laundering through the use of credit cards to be unlikely. They 

indicated that issuing and acquiring banks application screening 

processes, systems to monitor fraud, and policies restricting cash 

payments and prepayments made credit cards less vulnerable to money 

laundering. The credit card industry had a variety of policies and 

programs aimed at reducing the industrys losses from fraud and credit 

risk, which are the major financial risks in the credit card 

industry.[Footnote 15] For example, credit card-issuing and

-acquiring institutions told us that they screen applications and 

monitor transactions through automated systems for unusual or out-of-

pattern transactions and, as a result of these efforts, may conduct 

investigations, file SARs, or work with law enforcement. Industry 

representatives and some regulatory and law enforcement officials we 

interviewed believed these policies and programs could also help 

identify possible money laundering through credit cards; however, none 

of them had evidence that the fraud systems identified money 

laundering. The lack of evidence of money laundering identified through 

the fraud systems could be attributed to such factors as a lack of 

money laundering occurring through U.S.-based credit card operations or 

the inadequacy of current fraud-focused procedures and systems to 

identify money laundering. Treasury believes that the systems the 

industry used to monitor fraud are a good starting point for AML 

safeguards, but the industry must also include additional factors and 

considerations specific to money laundering.



Credit Card Associations Are Required to Have Anti-Money Laundering 

Programs as a Result of the Patriot Act:



The associations approaches to addressing AML issues have changed 

significantly as a result of the Patriot Act, according to association 

officials. At the start of our review, the provisions of the Patriot 

Act requiring all financial institutions to have AML programs in place 

were not yet in effect, and Treasury had not issued regulations 

requiring credit card associations to have in place AML policies and 

programs. Representatives of the two major credit card associations we 

interviewed at that time did not view credit cards as being at high 

risk for money laundering. They also did not regard the establishment 

of AML policies and programs as the responsibility of their respective 

associations. Nevertheless, the association officials believed that 

their due diligence procedures for membership in the associations for 

domestic and foreign issuing and acquiring banks, as well as their 

fraud controls, were useful in identifying suspicious activity. 

Officials from one of the associations indicated that its fraud 

controls could possibly identify money laundering, while officials from 

the other association indicated that its fraud controls were developed 

strictly to identify fraud, not money laundering. Treasury acknowledges 

that the associations fraud monitoring is sophisticated but is not 

convinced that it can easily detect money laundering.



The association officials told us that they generally applied the same 

due diligence procedures for domestic and foreign issuing and acquiring 

banks. These procedures included:



* obtaining documentation showing that the bank is licensed and subject 

to bank supervision and regulation in the jurisdiction where it is 

licensed;



* applying underwriting procedures to ensure that the bank is 

financially sound and can meet its financial obligations; and:



* obtaining assurances that the bank will abide by the associations 

rules and regulations and comply with applicable host country laws.



The association officials told us that the associations did not apply 

separate due diligence procedures to verify the AML policies and 

programs of their domestic and foreign issuing and acquiring banks, 

including banks in NCCT countries. Association officials told us that 

they relied on host country regulators to ensure that issuing and 

acquiring banks were not engaged in money laundering activity. As 

discussed below, the associations due diligence procedures for 

reviewing their member banks AML programs will change as a result of 

the Patriot Act.



Association officials told us that although the associations did not 

have formal AML policies or programs before the Patriot Act, they have 

had longstanding in-house systems to monitor abnormal or unusual card 

transactions in terms of dollar amounts, locations of purchases, and 

frequency of charges. The associations monitor these transactions as 

they pass through the associations networks and related fraud screens. 

The monitoring systems have helped member banks, some of which must be 

subscribers to the associations fraud services, to identify and 

investigate suspicious activity. The associations reported the results 

of this monitoring to member banks and, if requested by member banks, 

have helped them report cases of fraud to the appropriate law 

enforcement agencies. Officials of one of the associations indicated 

that this monitoring may also help identify possible money laundering, 

but they could not cite any cases where money laundering had been 

identified by their monitoring system.



The Patriot Act required the associations to have AML programs by April 

24, 2002. Treasury has promulgated interim final rules to provide 

guidance to associations concerning the requirements for the AML 

programs. Treasury requires that by July 24, 2002, associations have 

AML programs with certain specified minimum standards. More 

specifically, associations are required to have policies, procedures, 

and controls to mitigate the risk for money laundering and terrorist 

financing; these policies, procedures, and controls are to be focused 

on the process of authorizing and maintaining authorization for issuing 

and acquiring banks. Treasury expects the associations to focus their 

efforts on those banks considered as being at high risk for money 

laundering. For example, Treasury considers offshore banks in 

jurisdictions with lax money laundering controls to be high-risk 

entities.



We met with officials of the associations after the enactment of the 

Patriot Act. At that time, officials of one of the associations told us 

that as part of their effort to meet the goals of the Patriot Act, they 

were augmenting their procedures for reviewing all of their member 

banks to ensure that the association was not at risk for being used for 

money laundering by one of its member banks. The officials indicated 

that they would review their entire member base but focus on those 

members in jurisdictions that are considered to be at high risk for 

money laundering. For example, they would first focus their efforts on 

those jurisdictions identified as NCCT by the FATF. Officials from the 

other association did not provide us with any descriptions of how they 

might change their procedures for reviewing their member banks, and 

indicated that they were waiting for Treasury to provide guidance on 

how they should review these banks. These officials indicated, however, 

that they would be in compliance with the Patriot Act by the required 

dates.



Issuers Believe Fraud-Focused Policies and Controls and Restrictions on 

Cash and Prepayments May Help Counter Money Laundering:



In the view of the issuers we interviewed, their fraud-focused policies 

and controls, as well as their restrictions on cash payments and 

prepayments, can serve to help prevent and detect money laundering via 

credit cards. However, Treasury believes that while these fraud-focused 

policies and controls are a starting point for appropriate anti-money 

laundering safeguards, the industry must also consider additional 

factors and considerations specific to money laundering. Most of the 

issuers we spoke with had broad AML programs, but only three of the 

nine in our review had AML policies and programs specifically 

addressing credit card operations. Nevertheless, all of the issuers 

told us that they applied fraud and credit risk policies and controls 

to screen credit card applications and monitored the card transactions 

of approved cardholders. In addition, issuers told us that they placed 

restrictions on cash and prepayment transactions.



The issuers told us that they had application screening procedures to 

authenticate the applicant and review the applicant for purposes of 

identifying potential fraud. The issuers said that they authenticate 

applicants by verifying employment, address, social security number, or 

other application information against external sources such as public, 

credit bureau, or employer records. To review the applicant for 

potential fraud, some issuers said that they try to match the 

applicants name and other identifying information against names and 

information on public records and industry lists, or negative lists-

-lists containing names and addresses associated with fraudulent 

activity. Three issuers also said that they declined to process 

applications with foreign addresses. Most of the issuers, furthermore, 

told us that they matched the applicants name and address against the 

OFAC list of prohibited individuals or entities. The issuers believe 

that their application screening process, as a whole, enables them to 

identify and reject applicants who have been associated with fraudulent 

activity or show a potential for fraud or other criminal activity, 

including money laundering. However, since the issuers rely on public 

records or lists of names and addresses known for fraud, the issuers 

screening process may not capture all fraudulent or criminal activity. 

For example, applicants who have no negative credit or criminal history 

would be able to avoid scrutiny and detection under their screening 

process, according to the issuers.



The issuers told us that they also monitor the card transactions of 

approved cardholders for fraud and changes in credit status. The 

issuers believed that their automated monitoring aids in reducing the 

risk of fraud or potential cases of money laundering via credit cards; 

however, they were unable to cite any cases of money laundering 

identified as a result of their fraud controls. The issuers used fraud 

risk scoring models[Footnote 16] to monitor transactions by frequency, 

type, dollar size, and location and determine whether the transaction 

is unusual, out of pattern, or potentially fraudulent. Several of the 

issuers said that if their automated monitoring identifies card 

transactions that significantly deviate from a cardholders expected 

spending pattern, the transaction is flagged and their system alerts 

them, giving them the flexibility to exercise several options. These 

options include:



* denying authorization for the credit purchase;



* concluding that the transaction is suspicious and investigating it;



* cuing the issuers system to collect additional information;



* filing a SAR about the transaction to FinCEN and, if urgent, 

notifying law enforcement directly;



* canceling the cardholders account; and:



* referring the cardholders name to an industry negative list.



Issuers indicated that they defer to law enforcement to determine 

whether their reports of suspicious activities involve money 

laundering.



With respect to prepayments, issuers said they monitor prepayments and 

the large credit balances that prepayments generate. Some issuers 

asserted that their monitoring effort creates a transaction trail 

that exposes possible money launderers and money laundering activities, 

and thereby makes credit cards a tool disfavored by money launderers.



The issuers varied in how they monitored prepayments and credit 

balances. For example, a few said that they flagged and tracked all 

credit balances. Others said that they tracked them by size of 

prepayment, giving more scrutiny to large prepayments in terms of 

absolute dollars or as a proportion of a customers credit line. Other 

characteristics that issuers said they tracked include credit balance 

size and discernable suspicious pattern. The issuers also stated that 

they limited the amounts that a cardholder carrying a credit balance 

could withdraw from the card, and they monitored the reduction of 

credit balances by type and location of reductions. For example, when 

the cardholder wished to reduce the credit balance by obtaining cash 

advances, quasi-cash (such as gambling chips), or credit purchases, the 

issuers monitored these transactions and limited the amounts the 

cardholder could access.



Several of the issuers further stated that if cardholders with large 

credit balances asked for refunds, the issuers tracked these 

transactions and did not automatically give the refunds. Some issuers 

told us that they first reviewed or investigated the request for a 

refund, or required the cardholder to submit a written request for the 

refund, as provided by Regulation Z.[Footnote 17] For example, an 

issuer told us that in mid-September 2001, their system flagged a large 

credit balance, and the cardholder, who was staying at a major hotel in 

Boston, requested an immediate refund through wire transfer to a 

checking account. The cardholder reportedly wanted to leave the United 

States and travel via private plane to a Middle Eastern country. The 

issuer told us that it initially denied the refund after explaining its 

policy requiring written requests for refunds; the issuer was able to 

contact law enforcement before authorizing release of the funds.



Acquirers Use Fraud and Credit-Risk Policies and Controls That They 

Believe Address Money Laundering among Merchants:



Most of the acquirers in our review told us that they did not have AML 

policies and programs targeted at the activities of merchants who agree 

to take their credit cards. Like issuers, however, the acquirers 

believed their fraud and credit risk policies and controls enabled them 

to help combat money laundering through credit cards, and yet they were 

also unable to cite instances of money laundering detected through 

their fraud controls. As discussed earlier, Treasury believes that the 

systems the industry uses to monitor fraud alone are not sufficient and 

that the industry must consider additional factors and considerations 

specific to money laundering. The acquirers believed that through these 

policies and controls they were able to identify and reject most 

merchants who had engaged in or could potentially engage in fraud, 

including possible money laundering. Similarly to the issuers, the 

acquirers applied fraud and credit risk policies and controls to screen 

and monitor merchants for potential fraud or money laundering.



The acquirers told us that their screening process included:



* verifying the merchants application against external sources of 

information such as the Better Business Bureau or Dunn and Bradstreet;



* performing some on-site visits to the merchants facility to 

determine the legitimacy of the merchants operations; and:



* matching the merchants name against industry negative lists.



Some acquirers further stated that their screening was also used to 

enforce prohibitions against accepting certain types of merchants, such 

as those engaged in gambling or selling pornography. Most of the 

acquirers said that they denied approval to merchants who were not 

creditworthy or were found on industry negative lists. A few of the 

acquirers acknowledged that questionable merchants who had no prior 

record of criminal activity and who had not appeared on industry 

negative lists could escape the scrutiny of their screening procedures.



The acquirers said that they monitored approved merchants, and they 

believed that their monitoring revealed most instances of possible 

fraud, money laundering, or other acts of misconduct that are capable 

of being detected; moreover, their monitoring enabled them to take 

timely and appropriate action against merchants, they said. To monitor 

the merchants, some acquirers told us that they initially developed a 

profile of the merchant, based on information from the screening 

process. The profile includes key information on the merchant, such as 

the merchants type of business, expected credit sales, sales volume, 

average dollar amount of sale, and chargebacks.[Footnote 18] The 

profile might also involve classifying the merchants business as low 

risk or high risk depending, for instance, on whether card transactions 

are conducted in the presence of the cardholder (such as in a 

restaurant) or not (such as in Internet sales). The acquirers explained 

that if a merchants transactions were out of pattern, unusual, or 

suspicious, the acquirers automated monitoring systems would flag 

these transactions, allowing the acquirers to take appropriate actions. 

All of the acquirers said that, if warranted, they would terminate 

relationships with merchants for fraud or misconduct. Some acquirers 

also said that they might freeze the merchants account, file a SAR, 

and put the merchants name on an industry negative list.



Major Card Processors Use Fraud-Focused Policies and Programs to 

Support Clients AML Efforts:



None of the three credit card processors we spoke with required their 

clients to have AML policies and programs, and all relied on U.S. 

banking regulators or host country regulators to ensure that their 

clients had AML policies and programs. One of the three processors said 

it did not perform due diligence on the financial institutions referred 

to it but, instead, relied on the credit card associations for this, 

particularly to perform due diligence on financial institutions from 

foreign countries. The other two processors said that they performed 

due diligence on their clients but focused on the operations and 

finances of the issuer-clients or on the credit and fraud management 

processes of the acquirer-clients. Nevertheless, one of these 

processors said that it conducted OFAC screening on all agent bank 

clients,[Footnote 19] many of whom are located in foreign countries. 

Neither of the processors currently conducts business in any country 

that FATF has designated as an NCCT.



The three credit card processors we spoke with provided their issuer-

and acquirer-clients with card processing and fraud detection and 

prevention services. Officials from these processors told us that even 

though they performed card processing functions for their clients, 

their clients retained responsibility for certain aspects of card 

processing, such as issuing cards, developing fraud and AML policies 

and programs, establishing the controls over card transactions, and 

making decisions concerning the results of card transactions, such as 

canceling accounts. The processors nevertheless believed that the range 

of services they provided contributed to their clients efforts to 

identify cases of possible money laundering and enabled their clients 

to take appropriate action.



Some of the services that the processors identified as key among those 

they provided the issuer-clients included application processing, card 

activation, and fraud-and risk-scoring. In providing application 

processing services, officials of one of the processors stated that 

their company verified the applicants identity and credit history by 

matching application information against external information sources, 

such as credit bureau records or public records, and industry negative 

lists known for fraud. Officials from this processor said that their 

companys application processing services provided the client-issuers 

with the means to accept or decline an application based on known or 

potential problems with fraud or creditworthiness. Two of the 

processors told us that they performed card activation services; this 

requires verification of the cardholders identity by phone or point of 

sale before the card is activated.



All three processors told us that they provided fraud-and risk-scoring 

services, which entail monitoring cardholder or merchant transactions. 

The processors said that these services involve developing or applying 

the scoring products to identify and report potentially fraudulent or 

financially risky cardholder behavior or activity. According to a 

processor, the clients rely on the reports and, as a result, are able 

to select strategies and take appropriate actions, such as conducting 

further investigation, declining authorization, or canceling accounts. 

Additionally, two of the processors--who provided services as acquirers 

or on behalf of acquirer-clients[Footnote 20]--said that the acquiring 

services they provided their clients were focused on potential merchant 

fraud and credit losses. These processors said the services included 

significant due diligence and verification procedures in connection 

with the opening of merchant accounts. They also performed ongoing risk 

management or fraud monitoring of established merchant accounts.



Regulatory Oversight for Anti-Money Laundering Requirements Is Not 

Focused on Credit Card Operations:



We found during our review of the credit card industry that issuing 

banks were the only entities in the industry that were subject to 

regulatory oversight for AML requirements. Bank regulators told us, 

however, that since credit cards were considered a low risk to money 

laundering, they limited the resources expended on overseeing bank 

credit card operations for adherence to AML requirements. We also found 

that while acquiring banks were subject to AML requirements, the 

regulatory oversight of these entities was focused on safety-and-

soundness issues. The associations and third-party processors are 

currently subject to regulatory oversight solely covering their data 

processing systems and internal controls. The Patriot Act required the 

associations to establish AML programs by April 24, 2002. It is too 

early to tell how effective the Patriot Act requirements will be 

regarding the associations AML programs.



Regulatory Oversight of Issuing and Acquiring Banks Credit Card 

Operations Is Focused Less on AML Requirements because of Lower 

Perceived Risk:



The regulators we interviewed told us that although they examined 

issuing banks for adherence to the BSA and other AML requirements, they 

spent less of their examination resources on the credit card operations 

of these banks than on other operations. The regulators told us that 

during their AML reviews of issuing banks,[Footnote 21] they must 

confirm, among other things, that the banks have the following in 

place:



* written BSA/AML policies and programs;



* senior management involvement in the process;



* mechanisms for suspicious activity reporting and large currency-

transaction reporting;



* BSA/AML training programs for employees; and:



* internal audit reviews of the BSA/AML policies and programs.



Some regulators told us that they also performed reviews more specific 

to credit cards. For example, they determined whether or not the bank 

could identify unusual transactions with respect to credit cards, such 

as prepayments. They also reviewed the account-opening and fraud-

monitoring programs of these banks.



While regulators examined issuing banks for adherence to AML 

requirements, they expended less of their resources on the credit card 

operations of the bank than on other areas considered at higher risk to 

money laundering. Regulatory officials told us that, in their view, 

credit cards were considered a low risk to money laundering because the 

banks application screening process, systems for monitoring fraud, and 

policies restricting cash payments and prepayments made credit cards 

less vulnerable to money laundering than other areas of the bank.



Consequently, regulators told us that most of their AML examination 

resources were dedicated to higher-risk areas of the bank, such as 

private banking, correspondent banking, or wire transfers.



The regulators told us that while the acquiring banks were subject to 

the BSA and AML requirements, their examinations of these entities 

focused on safety and soundness because these entities were not viewed 

as being at high risk for money laundering. We found that two of the 

acquiring banks we met with had not been subject to any BSA/AML 

examination by the regulators. In one case, the acquirer was created as 

a Joint Venture in which a bank and a nonbank third party credit card 

processor each held 50 percent interests in the venture. The 

transaction processing services for the Joint Venture were performed by 

the non-bank third party credit card processor. Officials speaking on 

behalf of the Joint Venture noted that while the bank that held a 50 

percent interest in the venture was subject to regulatory oversight 

(including oversight with respect to the BSA), it was less clear to 

what extent the Joint Venture itself (or the services provided by the 

nonbank third party credit card processor) was subject to the same 

oversight. The officials indicated that no regulatory examination of 

the Joint Venture had taken place. Nevertheless, these officials stated 

that the Joint Venture had decided to develop procedures to voluntarily 

file SARs. The other bank had a very small acquiring operation. 

Regulators told us that because the acquiring business accounted for 

only a small percentage of the overall business of the bank and because 

they applied a risked-based approach to their oversight of the bank, 

they did not examine this business. They did, however, review the 

examination of the acquiring business conducted by the banks internal 

auditors.



Associations and Third-Party Processors Have Not Been Subject to AML-

Related Requirements or Oversight:



The associations and third-party processors[Footnote 22] are currently 

subject to regulatory oversight by an interagency group of federal 

banking regulators under the auspices of the Federal Financial 

Institutions Examination Council.[Footnote 23] The purpose of the 

oversight is to ensure that these entities pose little or no risk to 

the banks they service. The actual examination of these entities 

focuses on the integrity of the data processing systems and internal 

controls of the entity.



Associations Now Required to Have AML Programs:



The Patriot Act required financial institutions, including operators of 

a credit card system or associations, to establish AML programs by 

April 24, 2002. The programs must include, at a minimum:



* the development of internal policies, procedures, and controls;



* a compliance officer;



* an ongoing employee training program; and:



* an independent audit function to test the programs.



Under BSA regulations, the Internal Revenue Service is the regulatory 

body that will oversee the associations adherence to the new 

requirements, unless Treasury delegates this authority to another 

agency.



As authorized by the Patriot Act, Treasury developed interim final 

rules prescribing minimum standards for the AML programs that 

associations are required to have in place pursuant to the Patriot Act. 

The interim final rules provide a definition for an operator of a 

credit card system, which includes associations, and provide guidance 

in complying with AML program requirements. The rules require, among 

other things, that by July 24, 2002, the associations:



* develop and implement a written anti-money laundering program, 

approved by senior management, that is reasonably designed to prevent 

the operator of a credit card system from being used to facilitate 

money laundering and the financing of terrorist activities. At a 

minimum, the program must incorporate policies, procedures, and 

internal controls designed to ensure that:



* the association does not authorize or maintain authorization for any 

person to serve as an issuing or acquiring institution without the 

associations taking steps based upon a risk assessment analysis to 

guard against the use of the credit card system for money laundering or 

for the financing of terrorist activities;



* for purposes of making the risk assessment, the rule lists entities 

that are presumed to pose a heightened risk of money laundering or 

terrorist financing. An example is a foreign shell bank that is not a 

regulated affiliate.



* designate a compliance officer who will be responsible for ensuring 

that the AML program is implemented effectively and updated as 

necessary to reflect changes in risk factors, and that appropriate 

personnel are trained;



* provide for education and training of appropriate personnel 

concerning their responsibilities under the program; and:



* provide for an independent audit to monitor and maintain an adequate 

program.



The requirement to assess money laundering and terrorist financing 

risks applies to both prospective and existing issuing or acquiring 

institutions. However, Treasury expects those institutions that pose a 

higher risk to money laundering to be reviewed by the associations with 

greater frequency.



The third-party processors who are not financial institutions are not 

covered directly under the Patriot Act, according to Treasury 

officials. However, these officials indicated that the processors would 

have obligations under the Patriot Act if they conduct banking 

functions for banking clients.



Agency Comments and Our Evaluation:



We provided copies of a draft of this report to the Department of the 

Treasury and two of its bureaus, the Office of the Comptroller of the 

Currency and FinCEN; and to the Board of Governors of the Federal 

Reserve System and to the Federal Deposit Insurance Corporation. The 

agencies provided us with oral comments in which they generally 

concurred with the substance of the draft report. The Federal Reserve 

and Federal Deposit Insurance Corporation, however, noted that there 

was no evidence to suggest that credit cards were at a high risk for 

being used for money laundering. The Federal Reserve believed that it 

was correct in allocating its bank examination resources to other areas 

at higher risk for being used for money laundering, such as private 

banking and wire transfers. Treasury believes that the lack of detected 

instances of money laundering does not compel the conclusion that no 

money laundering risks exist. Treasury will continue to work with law 

enforcement, the regulators, and industry to identify both money 

laundering risks in the credit card industry and possible improvements 

that should be made in detection and prevention. The agencies also 

provided us with technical changes or factual updates, which we 

incorporated in this report as appropriate.



As agreed with your office, unless you publicly release its contents 

earlier, we plan no further distribution of this report until 30 days 

from its issuance date. At that time, we will send copies of this 

report to the Secretary of the Treasury, the Chairman of the Federal 

Reserve Board, the Comptroller of the Currency, and the Chairman of the 

Federal Deposit Insurance Corporation. Copies will also be made 

available to others upon request. In addition, the report will be 

available at no charge on the GAO Web site at http://www.gao.gov.



Key contributors to this report were Jos R. Pea, Elizabeth Olivarez, 

Sindy Udell, and Desiree Whipple. If you have any questions, please 

call me at (202) 512-5431 or Barbara I. Keller, Assistant Director, at 

(202) 512-9624.



Sincerely yours,



Davi M. DAgostino, Director

Financial Markets and Community Investment:



Signed by Davi M. DAgostino:



[End of section]



Appendix I: Scope and Methodology:



To develop information on the vulnerabilities to money laundering in 

the credit card industry, we obtained views of and requested 

documentation from representatives of the credit card industry, bank 

regulatory officials, money laundering experts from the banking 

industry and academia, and law enforcement officials. We asked law 

enforcement officials from the U.S. Department of the Treasury 

(Treasury) and the U.S. Department of Justice for information about any 

cases they were aware of pertaining to credit cards and money 

laundering. At Treasury, we queried officials from the Internal Revenue 

Service, the U.S. Secret Service, and the U.S. Customs Service. At the 

Department of Justice, we queried officials from the U.S. Attorneys 

Office; however, they did not respond to our query. We requested that 

Treasurys Financial Crimes Enforcement Network (FinCEN) analyze the 

Suspicious Activity Report (SAR) database to determine the extent of 

SARs that pertained to credit cards and potential money laundering. We 

also reviewed news articles related to money laundering, and reviewed 

court summonses (provided by the Internal Revenue Service) related to 

the use of credit cards in offshore accounts. We requested 

documentation of existing AML programs--both broad AML programs and 

those specific to credit cards--from industry representatives. However, 

only three institutions provided this documentation. The others 

described their AML programs but were unwilling to provide 

documentation to support their descriptions because of concern about 

the confidentiality of proprietary policies. We also requested 

documentation from the credit card associations related to the reviews 

they conducted on offshore banks that were identified in a Senate 

Permanent Subcommittee on Investigations report on Correspondent 

Banking. We received documentation from one association. The other 

association did not provide any documentation, citing, among other 

things, confidentiality laws in these offshore jurisdictions as a 

reason for not providing us with the documentation. They also told us 

that they could not locate the paperwork with respect to the reviews 

they conducted on these offshore banks.



To obtain an understanding of industry efforts to address the potential 

vulnerability of credit cards to money laundering, we reviewed 20 major 

U.S. entities engaged in key aspects of the credit card process: 2 

credit card associations, 9 credit card issuing banks, 6 acquiring 

banks, and 3 third-party processors. The criteria we used to select the 

entities for our review included responsibility for significant credit 

card activity in domestic and foreign markets and oversight by the 

various federal banking regulators. We conducted structured interviews 

of the entities we selected for our review. The 2 credit card 

associations we selected are the largest associations in the United 

States and internationally. The 9 credit card issuing banks we selected 

ranked among the top 11 issuers in the United States and were 

responsible for about 74 percent of the outstanding receivables in the 

credit card industry. The acquiring banks we selected were affiliated 

with the issuing banks we reviewed. Of the 6 acquiring banks we 

selected for our review, 3 reportedly ranked among the top 10 acquirers 

in the United States. The 6 acquirers were responsible for 57 percent 

of the total sales volume of merchant transactions in the U.S. for 

2001. In general, we selected credit card processors that provided 

services for the issuers in our review. Two of the 3 card processors we 

selected told us that they ranked as the 2 top U.S. card processors. 

These 2 card processors provided services to 5 of the issuers in our 

review. Finally, 2 of the 3 processors we reviewed provided services 

for issuers and acquirers in foreign countries.



To determine the existing regulatory mechanisms to oversee the credit 

card industry for adherence to anti-money laundering (AML) 

requirements, we interviewed officials from the Board of Governors of 

the Federal Reserve System (Federal Reserve Board), the Office of the 

Comptroller of the Currency (OCC), and the Federal Deposit Insurance 

Corporation (FDIC). We also conducted structured interviews of 

examiners from the OCC and the Federal Reserve System (Federal Reserve) 

who had responsibility for examining the issuing banks and some 

acquiring banks that we reviewed. We reviewed documentation of 

examination procedures for the Bank Secrecy Act (BSA) and related AML 

requirements, which we obtained from the Federal Reserve Board, FDIC, 

and OCC. We also reviewed documentation related to oversight of the 

associations and third-party processors, which we obtained from the 

Federal Reserve Board. We also discussed the new AML program 

requirements of the Patriot Act with Treasury officials, and the impact 

of the requirements with officials of the 2 associations.



We performed our work in Washington, D.C.; New York, New York; and San 

Francisco, California, between August 2001 and May 2002, in accordance 

with generally accepted government auditing standards.



[End of section]



Appendix II: Demographic Information about the Credit Card Issuers, 

Acquirers, and Processors in Our Review:



To study the industry, we reviewed 9 credit card issuing banks, 6 

credit card acquirers, and 3 third-party credit card processors. This 

appendix presents information about these entities for the year ending 

2001.



Table 3 provides demographic information about the 9 credit card 

issuing banks that we selected for our review. As detailed in table 3, 

the 9 issuing banks were reported as being among the top 11 credit card 

issuers in the United States in terms of outstanding receivables and 

active credit card accounts. As of the year ending 2001, the combined 

total of accounts receivable of the 9 issuers (about $457.6 billion) 

represented about 74 percent of the total of accounts receivable 

throughout the industry ($622.5 billion), based on information from The 

Nilson Report.[Footnote 24] The 9 issuers accounted for about 67 

percent of active credit card accounts throughout the industry (181 

million of an estimated 269.2 million cards). Seven of the issuers are 

engaged in diverse activities, offering products such as checking, 

savings, credit card or investment accounts. The other 2 issuers are 

monoline businesses, deriving their income primarily from credit cards. 

Six of the 9 issuers also provided acquiring services.



Table 3: Selected Characteristics of the Issuers in GAOs Review (Year 

Ending 2001):



[See PDF for Image]



[A] Some figures provided in this table are estimates.



[B] The issuer maintains foreign correspondent banking relationships 

but does not market credit cards through these correspondent banks.



Sources: Figures used in this table are from The Nilson Report, Oxnard, 

California, Issues 756, 758, and 760, January, February, and March 

2002, respectively, and GAOs analysis of responses received from the 

issuers. :



[End of table]



Seven of the 9 issuers are members of the 2 major credit card 

associations and relied on the associations networks to carry out 

their card transactions. In contrast, the other 2 issuers carried out 

their card transactions from automated networks they own and operate; 

each of these entities acts as both issuer and acquirer. Also, as shown 

in table 3, 6 of the issuers reported that they issued cards in foreign 

countries, but none of the 9 issuers markets cards in countries on the 

OFACs list of sanctioned countries.



Table 4 presents information about the 6 acquirers selected for our 

review. The 6 acquirers also participated in our review as issuers, 

since 6 of the 9 issuers in our review were also engaged in acquiring 

services. Together, the 6 acquirers accounted for about 57 percent of 

the total industry wide purchase volume from credit cards ($652.4 

billion out of $1.134 trillion) based on information from The Nilson 

Report.[Footnote 25] The total number of merchant outlets in the United 

States is estimated to be about 4.9 million. Many of the outlets accept 

credit cards from more than one of the issuers in our study. Two of the 

6 acquirers perform acquiring services in foreign markets.



Table 4: Selected Characteristics of Acquirers in GAOs Review (Year 

Ending 2001):



Acquirer: A; Number of outlets[A]: 4.1 Million; Purchase volume

($ billions): $91.4; Number of Merchant Clients: unknown.



Acquirer: B; Number of outlets[A]: 3.1 Million; Purchase volume

($ billions): 224.5; Number of Merchant Clients: unknown.



Acquirer: C; Number of outlets[A]: 490,000; Purchase volume

($ billions): 114.3; Number of Merchant Clients: 390,000.



Acquirer: D; Number of outlets[A]: 224,869; Purchase volume

($ billions): 42.3; Number of Merchant Clients: 165,362.



Acquirer: E; Number of outlets[A]: 201,577; Purchase volume

($ billions): 175.8; Number of Merchant Clients: 67,675.



Acquirer: F; Number of outlets[A]: 4,652; Purchase volume

($ billions): 4.1; Number of Merchant Clients: 3,950.



[A] Figures for some of the outlets are estimates.



Sources: Figures used in this table are from The Nilson Report, Oxnard, 

California, Issues 756, 758, and 760, January, February, and March 

2002, respectively, and GAOs analysis of responses received from the 

acquirers. :



[End of table]



Table 5 describes the services that the 3 major credit card processors 

in our review provided for the issuers and acquirers we reviewed. Of 

the 3 processors, 2 provided services for 5 of the issuers. The 

processors provided, at the issuers direction, issuing, authorizing, 

and account billing services, among others. The processors also 

provided acquiring services such as verifying merchant account 

information, monitoring merchant transactions, or providing software 

products to monitor merchant transactions. Two processors were also 

engaged in acquiring merchants on their own behalf.



Table 5: Selected Characteristics of Credit Card Processors in GAOs 

Review (Year Ending 2001):



[See PDF for Image]



Source: Analysis of responses to GAO review.



[End of section]



Appendix III: Organizational Structure of the Associations in Our 

Review:



Each of the two associations in our review is owned by its member 

financial institutions that issue bankcards, or authorize merchants to 

accept those cards, or both. VISA International (VISA) is owned by 

about 21,000 member financial institutions and is a private, non-stock, 

for-profit Delaware membership organization composed of competing 

members, and is a corporation with limited liability. MasterCard 

International Incorporated (MasterCard) is a private, non-stock, 

Delaware membership corporation. Approximately 20,000 financial 

institutions participate in the MasterCard and related systems. 

MasterCard has two levels of membership; principals and affiliates. The 

principal members have a direct relationship with the association, 

while the affiliates are sponsored by principal members. For example, 

an offshore bank that has a correspondent banking relationship with a 

principal member can apply to become an affiliate if the principal 

sponsors the offshore bank. Principal members are responsible for their 

affiliates behavior.



MasterCard recently changed its corporate status by creating a stock 

holding company, MasterCard Incorporated, which owns substantially all 

the voting power and all the economic rights in MasterCard. MasterCard 

Incorporated also recently acquired Europay International S.A., which 

has exclusive licensing rights in Europe for certain MasterCard brands. 

In connection with these transactions, each of MasterCards principal 

members and Europays shareholders received shares in MasterCard 

Incorporated and membership interests in MasterCard, which will 

continue to be the principal subsidiary of the holding company. 

MasterCard also acquired 100 percent interest in Mondex International, 

a global electronic cash company, on June 29, 2001.



Regional Structure of Associations:



VISA is organized into six geographic regions--each with a Board of 

Directors--serving member financial institutions in the region. These 

regions are:



* VISA Asia Pacific;



* VISA Canada;



* VISA Central and Eastern Europe, Middle East, and Africa;



* VISA European Union;



* VISA Latin America and the Caribbean; and:



* VISA U.S.A.



VISA U.S.A and VISA Canada are separately incorporated group members of 

VISA International. The other four regions are part of VISA 

International, which is incorporated in the United States.



MasterCard is organized into the following geographic regions:



* Asia Pacific;



* United States;



* South Asia/Middle East/Africa;



* Latin America/Caribbean; and:



* Europe.



Functions of the Associations:



The role of the associations in the day-to-day management of their 

operations is very similar, although each association is managed 

independently. Generally, each of the associations is responsible for 

the following activities with regard to members and merchants 

participating in their respective acceptance and payments systems:



* establishing standards and procedures for the acceptance and 

settlement of each of their members transactions on a global basis;



* providing a global communications network or providing technical 

standards supporting communications over public communications 

networks, for interchange; that is, the electronic transfer of 

information and funds among members;



* conducting the due diligence for the financial soundness of potential 

members and requiring periodic reporting of members on fraud, 

chargeback, counterfeit card, and other matters that may impact the 

integrity of the association as a whole;



* developing marketing programs that build greater awareness of the 

brand;



* conducting customer service with member institutions;



* enhancing and supporting the marketing activities and operational 

functions of the members in connection with the associations programs 

and services; and:



* operating the security and risk systems to minimize risk to the 

member banks, including operating fraud controls to allow members to 

monitor transactions with their cardholders and establishing specific 

design features of the bankcard to enhance security features.



Officials from one of the associations indicated that their association 

is now conducting due diligence for money laundering risks presented by 

existing and potential members.



Association Funding of Operations:



The associations rely on a mix of revenue sources to support 

themselves, largely based on brand and transaction fees generated when 

a bankcard is used. To a lesser extent the associations support 

themselves with varied membership fees, registration fees, and other 

fees, such as user fees, which are fees charged to members for services 

they elect to receive from the association. For example, one 

association charges members for fraud monitoring services. Officials 

from one of the associations indicated that their fees are structured 

to give members an incentive to issue cards and increase purchase sales 

volume.



Board of Directors:



VISA Internationals Board of Directors is made up of representatives 

from each of the regional boards, and it governs the associations 

global policies and rules. Each region has its own Board of Directors, 

which governs policies and rules within that region. The Board of 

Directors for the U.S. region has two classes of directors, one 

appointed and the other elected. Those member institutions that have a 

certain percentage of the associations overall sales volume may 

appoint board members. The other directors are elected by member vote, 

based upon a slate of candidates recommended by the associations 

management. VISA Internationals Board of Directors is elected in the 

same manner as the U.S. regions Board of Directors. Since VISA does 

not issue stock, it calibrates the number of votes to its members by 

providing those with greater sales volumes, a greater number of votes 

on the Board of Directors. The President and Chief Executive Officer of 

the U.S. region is also on the U.S. Board of Directors. The Chairman of 

the Board of the U.S. region is elected by the directors and is from a 

member bank.



VISA Internationals Board of Directors is responsible for setting 

policies and procedures, appointing officers, approving the budget, and 

so forth. The regional boards pass by-laws and regulations related to 

operations for their particular region. For example, in some regions of 

the world, short-term interest cannot be charged, so the regional board 

would accommodate its rules for these cases. The Boards of Directors 

for the regions can pass any rule, as long as it is not inconsistent 

with the global policies and rules.



MasterCard has a Board of Directors that is made up of officials from 

member financial institutions in addition to the MasterCard Chief 

Executive Officer. This Board of Directors has responsibility for the 

following:



* deciding on the compensation of the associations Chief Executive 

Officer;



* deciding whether to license, deny, or drop members from the 

association;



* authorizing major decisions; and:



* developing and updating the by-laws.



MasterCard Board members are elected by principal members of 

MasterCard.



Licensing of Banks in Offshore Jurisdictions:



Officials of one of the associations told us that in order to license a 

bank located in the United States or in an offshore jurisdiction to 

become a member, the bank first had to submit a detailed application to 

the association. The regional Board reviewed the application to assess 

the ability of the bank to provide the benefits of the associations 

service to cardholders, and required a majority approval to allow the 

bank to become a member. The association officials provided us with an 

application for membership only in the U.S. region, but stated that the 

application for the international regions was similar. The application 

required information from the applicant to demonstrate its ability to 

meet membership obligations, based on financial capacity and ability to 

manage projections for the program it has arranged with the 

association. The application is vetted by the local region relative to 

local and global standards, and includes the following:



* the name and legal address of the principal;



* the name of the signing officer;



* the name and address of the sponsor, and whether the bank had any 

affiliation with a nonfinancial institution;



* the name and contact information for fraud and investigations;



* the applicants financial information (for example, the balance 

sheet, income statement, and so forth); and:



* the potential earnings or sales volume over a period of three years.



Officials from the other association told us that in order to license 

an offshore bank to become a member, the bank first had to submit a 

detailed application to the association that was reviewed, among other 

things, to ensure that the bank met the associations eligibility 

requirements. We were not provided with a copy of the application, and 

thus are unaware of what type of information the association requested 

from the applicant. The regional Board of Directors reviewed the 

application, and the Board required a majority approval to allow an 

offshore bank to become a member. The association also conducted a risk 

assessment on the potential member to determine if the member presented 

undue financial, legal, or other risks to the association. In addition, 

once a member was accepted into the association, the associations 

security and risk departments would conduct monitoring of the member 

for activities such as fraud, chargebacks, and counterfeit cards to 

identify issues before they developed into significant problems for the 

association. If problems were identified, the security and risk 

departments would investigate and, if necessary, perform audits or 

reviews of relevant member banks to determine whether sanctions or 

corrective actions were required.



Officials from both of the associations indicated that the due 

diligence procedures for membership from international or offshore 

banks was very similar to that for U.S. member banks. As described 

earlier in this report, these procedures included:



* obtaining documentation showing that the bank is licensed and subject 

to bank supervision and regulation in the jurisdiction where it is 

licensed;



* applying underwriting procedures to ensure that the bank is 

financially sound and can meet its financial obligations; and:



* obtaining assurances that the bank will abide by the associations 

rules and regulations and comply with applicable laws of the banks 

home country.



Officials of one of the associations told us that in addition to 

relying upon the laws and regulations of an applicants home 

supervisory authority, each of the associations regions had its own 

underwriting standards that were tailored to the unique characteristics 

of the region or country. Each region might require additional steps 

for underwriting and membership, but this was up to the region and 

might be based on differences unique to each region. Generally, the 

association officials indicated that the association did not conduct 

in-depth due diligence on the signing officer on the application, and 

did not get the names of the Board of Directors of the applicant 

institution or the names of other principals. These officials 

indicated, however, that they have obtained this information in 

isolated circumstances. The association officials indicated that the 

associations regions assume a minimum level of due diligence by the 

government agency that had chartered the institution, and the 

association relied on this government agency to obtain information on 

the signing officers, Board of Directors, and principals of the 

institution.



The officials of this association also indicated that lacking a legal 

framework to do so prior to the implementation of the Patriot Act, the 

association did not have a policy to identify banks that may be using 

its payment system for potential money laundering activities. However, 

the officials indicated that the association has implemented programs 

in compliance with the Patriot Act requirements since its enactment. If 

one of the member banks were engaging in this activity using the 

associations payment system, the association now believes there is 

sufficient information, including information collected through formal 

procedures and informal networks, in addition to requests from law 

enforcement and government authorities, to highlight potential activity 

of this nature in the system. If the association learned that one of 

its member banks was owned or controlled by criminals such as drug 

traffickers, the association would review the facts, consult with legal 

authorities, and if necessary and appropriate, take steps to terminate 

its relationship. The association has taken steps in this regard in the 

past.



Officials from this association also indicated that the legal framework 

prior to the enactment of the Patriot Act did not provide the 

association with categories of countries, or help the association 

determine which countries have what are now considered to be lax money 

laundering regulations. These officials indicated that U.S. member 

banks are not allowed by U.S. laws and regulations to issue cards that 

can be used in Office of Foreign Assets Control (OFAC) countries. 

However, member banks in other countries can issue cards that can be 

used in OFAC countries. For example, a French member bank can issue 

bankcards to a non-U.S. citizen that can be used at a merchant in Cuba, 

but no U.S. issuer would authorize or settle this transaction.



Officials from the other association stated that prior to the passage 

of the Patriot Act, the association followed the same standards for 

U.S. and offshore banks in allowing them to become member institutions. 

That is, all financial institutions seeking membership in the 

association, whether located in the United States or elsewhere, were 

reviewed to determine whether they met the associations eligibility 

criteria. Officials from this association indicated that their review 

was intended to ensure that financial institutions presenting 

unreasonable financial, legal, or other risks were not admitted into 

its system, although the reviews did not specifically focus on money 

laundering issues. As we mentioned earlier in this report, this 

association indicated that as a result of its implementation of an 

anti-money laundering (AML) program required by the Patriot Act and 

approved by senior management, it will now look closely at its 

licensing documents and other information to review its members for 

money laundering risks. This association will review its entire 

membership in the United States and abroad. It will review such things 

as potential members backgrounds before doing business with them, to 

ensure that the association will not be a system abused by money 

launderers. The association will first focus on those jurisdictions 

with lax AML laws and other jurisdictions deemed to involve high risks 

of money laundering-related activities. The risk management, security 

risk, and licensing groups will play key roles in the new AML program.



[End of section]



Appendix IV: Observations on Money Laundering Scenarios:



We presented the issuers, acquirers, and examiners in our review with 

six money laundering scenarios and invited comments about the most 

appropriate due diligence procedures for avoiding possible money 

laundering in each case. We also asked for descriptions of any 

limitations that might be encountered in carrying out such procedures. 

The issuers, acquirers, and examiners commented selectively on the 

scenarios, choosing not to comment on some scenarios. None of the 

scenarios reflected the policies, procedures, or practices of any of 

the participants in GAOs review. The scenarios and the comments we 

received are summarized below. The examiners comments do not represent 

the official position of the federal banking agencies.



Scenario 1:



In this hypothetical scenario, money launderers establish a legitimate 

business in the U.S. as a front for their illicit activity. They 

establish a bank account with a U.S.-based bank and obtain credit cards 

and ATM cards under the name of the front business. Funds from their 

illicit activities are deposited into the bank account in the United 

States. While in another country, where their U.S.-based bank has 

affiliates, they make withdrawals from their U.S. bank account, using 

credit cards and ATM cards. Money is deposited by one of their cohorts 

in the U.S. and is transferred to pay off the credit card loan or even 

prepay the credit card. The banks on-line services make it possible to 

transfer funds between checking and credit card accounts.



Comments on Scenario 1:



The two acquirers and two issuers who commented on this scenario agreed 

that conducting due diligence on the merchant at the opening of the 

account would be key in preventing this merchant from obtaining an 

account. The issuer stated that the burden of such due diligence 

belonged to the acquiring bank that established the merchants deposit-

taking account. Moreover, the issuer said that due diligence should 

include an on-site inspection and analysis of the merchants cash flow. 

In discussing due diligence that would be adequate, the two acquirers 

emphasized their own procedures, which reportedly included a thorough 

verification of the merchant or principal owners, screening of the 

merchant against a fraud database or the OFAC list of individuals, and, 

for a private banking unit, the application of know your customer 

rules. One acquirer also referred to its automated monitoring system, 

which would reportedly track merchant transactions by size and rate and 

flag overseas transactions. This acquirer described limitations in 

carrying out due diligence procedures by noting that without a reason 

to suspect a merchant, the acquirer would have no reason to suspect 

that merchants money was bad money.:



The examiners for six of the issuing banks concurred that the bank that 

opened the account for the business should conduct appropriate due 

diligence to determine the legitimacy of the business. Some indicated, 

for example, that the bank should visit the business and should 

understand the nature of the business and type of activity expected of 

the business, including the size, frequency, and types of payments that 

are most typical of the business. Some examiners expected the bank to 

monitor the business for deposit activity, including monitoring for 

potential structuring. One also expected the bank to monitor the 

account for significant changes, such as prepayments going to credit 

cards. Another examiner stated that despite the due diligence conducted 

on a business, including site visits, an illegitimate business could 

still appear legitimate. The examiner stated that continued monitoring 

of the business was therefore important.



Scenario 2:



This scenario is not hypothetical, but involves a closed bank in the 

Cayman Islands. The banks president admitted to using its 

correspondent banking relationship with a U.S.-based credit card 

processor to obtain credit cards on behalf of its clients, some of whom 

were money launderers. These clients used credit cards to facilitate 

access to illicit funds held in the offshore bank.



Comments on Scenario 2:



One issuer who also provided acquiring services said that large issuers 

have sophisticated fraud detection systems. However, the issuer 

indicated that it would be difficult for a bank such as the one 

presented in this scenario to detect fraud and, thus, potential money 

laundering if the funds deposited by the clients engaged in money 

laundering appeared to be legitimate. The issuer also said that money 

launderers conducting cash transactions through the major credit cards 

would risk detection as a result of the authorization and 

identification procedures.



Three of the six examiners indicated that the U.S.-based credit card 

processor should have performed due diligence on the bank in the Cayman 

Islands. Two of the examiners stated that the U.S.-based banks that had 

correspondent relationships with the Cayman Island bank should also 

have conducted due diligence, including reviewing the AML policies and 

procedures of the Cayman Islands bank. According to the examiners, 

review of the AML policies and procedures is important since the U.S. 

bank has no knowledge of the customers of its correspondent bank. One 

examiner stated that regulators were suspicious of correspondent 

relationships in jurisdictions with lax AML controls, and further noted 

that the Patriot Act requires U.S. banks to obtain more information on 

foreign correspondent accounts of banks located in such jurisdictions.



One examiner said that although the credit card processor should have 

performed due diligence on the Cayman Islands bank, money laundering 

would have been difficult to detect. Another examiner stated that a 

bank presidents complicity in a money laundering scheme would make 

that money laundering next to impossible to detect.



Scenario 3:



In this hypothetical scenario, the bank is located in a foreign country 

with lax anti-money laundering (AML) regulations. The foreign bank is 

owned by drug dealers and accepts their illicit funds. The bank becomes 

an issuing bank as a result of its existing correspondent relationship 

with a U.S. bank. Consequently, the drug dealers are also able to get 

credit cards from this bank and use them to obtain cash advances of 

their illicit funds or make purchases within the U.S. and other 

countries. They also make credit card payments to the foreign bank 

using illicit funds.



Comments on Scenario 3:



The one issuer commenting on this scenario stated that the rules for 

obtaining cash advances through credit cards, which are standard 

throughout the world, work against money laundering. For instance, a 

U.S. bank must perform identification matches and authorizations of new 

transactions, thereby revealing the identities of potential money 

launderers. The issuer also said that the credit card associations are 

expected to conduct an investigation of the issuing bank before giving 

permission to the bank to issue credit cards.



Three of the six examiners who responded to this scenario indicated 

that under the Patriot Act, U.S. banks are required to obtain 

documentation of the ownership of foreign banks. Five of the six 

examiners indicated that the U.S. bank needed to conduct additional due 

diligence on the correspondent bank, given that it is located in a 

jurisdiction at high risk for money laundering. Some of the additional 

due diligence would include:



* understanding the banks ownership and structure;



* knowing how the bank is regulated;



* assessing the banks management, additional financial statements, 

licenses, and certificates of incorporation; and:



* reviewing business references and identification.



Scenario 4:



In this hypothetical scenario, money launderers submit false documents 

to obtain a merchant account with a U.S. bank and often use their 

credit cards to cover the start-up costs of establishing their front 

business. The money launderers also create false information and 

submit false identification and other information to the bank to 

establish their merchant account. They commit bank fraud to establish 

a false merchant account and also conceal the original source of their 

income. Given this scenario, the merchant (or acquiring) bank accepts 

the credit sales draft and receives its commission from the 

transaction.



Comments on Scenario 4:



Only one issuer, also engaged in acquiring services, offered 

substantive comments on this scenario. This bank stated that to 

identify the activities of the merchant in this scenario, the acquirer 

would have to verify that the merchant was physically located at the 

address given to the bank, perform a background check on the merchant, 

and develop a profile of the merchants transactions that would be used 

for monitoring the merchant. Two acquirers commented that the same 

controls discussed in scenario 1 applied in this scenario.



The examiners also said that the acquiring bank needed to conduct due 

diligence up front to determine the legitimacy of the business and 

monitor the account for unusual transactions. The examiners 

description of the due diligence included site visits of the business, 

verifying the business through third parties such as Dunn and 

Bradstreet, and obtaining credit bureau reports and financial 

statements. The examiners also expected the acquiring bank to compare 

actual transactions with expected transactions, with major differences 

triggering an investigation of the merchant.



Scenario 5:



In this hypothetical scenario, a criminal is able to open up a number 

of credit card accounts with different issuers. The criminal prepays 

each of the cards with a few thousand dollars and then leaves the 

country with the prepaid cards. He does not report that he has prepaid 

credit cards worth more than $10,000 when he leaves the country. Once 

overseas, he is able to withdraw cash or purchase items with the credit 

cards.



Comments on Scenario 5:



Four issuers offered comments on this scenario. Three stated that there 

would be no way for a bank to know if a cardholder maintained credit 

balances on multiple credit cards from different issuers. One issuer 

commented that under this scenario, a bank must ensure that it has 

controls covering prepayments of credit card accounts or controls that 

monitor prepayments creating a credit balance. The four issuers stated 

that they monitored credit balances, and credit balances triggered 

their systems. They also stated that they applied additional controls 

over credit balances. For example, they imposed limits on cash 

withdrawals. These limits varied among the issuers. For example, one 

issuer mentioned that if the customer had a $10,000 credit balance and 

$5000 cash withdrawal line, amounting to a $15,000 credit balance, the 

bank would allow the customer to access only $5,000, thereby preventing 

the customer from accessing the total credit balance in a foreign 

country. Two issuers said that they would or have canceled customers 

with large credit balances, and one of these has also taken action to 

block related transactions. If the customer wanted a refund of the 

credit balance, all the issuers agreed that they would not 

automatically send a refund check. First, they said, that they would 

review the payment or perform some investigation. Two issuers 

additionally said that they would impose controls over a customers 

attempts to access a credit balance while overseas. One said its 

systems would flag this, and his institution would file a SAR. The 

other said that her institution would impose limits over cash 

withdrawals made in a foreign country.



Five examiners responded to this scenario and three concluded, as did 

the issuers, that it was not possible for an issuing bank to know that 

its cardholder was carrying a credit balance with other issuers. Three 

examiners also indicated that the banks needed to have systems in place 

to monitor prepayments and credit balances.



Scenario 6:



This scenario is similar to Scenario 5, except that the criminal ties 

together his checking and credit cards. The criminal places dirty 

money in a U.S. bank and establishes a checking and credit card 

account. He also obtains an ATM card. The individual then prepays his 

credit card account by about $8,000, by transferring funds from his 

checking account to his credit card account through the banks ATM 

machine, or through on-line banking in the United States, or both. When 

the banks system flags the prepayment, the individual tells the bank 

that he is planning to go abroad and wants to ensure that he has 

sufficient credit for his purchases. Nevertheless, he prepays his 

credit card account several times more and gives the same reason for 

the prepayments to the bank. When the individual goes abroad, he goes 

to the banks affiliate in a country known for lax AML laws and 

withdraws at least $3,000 in cash. He also makes a number of credit 

purchases from merchants who do not have electronic registers.



Comments on Scenario 6:



An issuer offering comments on this scenario said that it subjects an 

individual to separate due diligence procedures for opening a checking 

account versus a credit card account. Further, the issuer said that the 

customer would also be subject to limitations on cash withdrawals. For 

example, if the customer used an ATM machine of another bank, the 

customer would be subject to the issuers limits on cash withdrawals as 

well as the limits imposed by the other banks ATM machine. The issuer 

stated that because a bank does not know if its customers are 

criminals, a credit balance alone does not appear to be criminal or 

suspicious. According to the issuer, sometimes customers use credit 

balances for travel and will call the bank proactively to inform the 

bank that they are paying an excessive amount on their credit card 

account for the purpose of travel.



One of the four examiners who responded to this scenario indicated that 

the bank should first monitor the deposit account to identify any 

suspicious activity. Three of the examiners indicated that the banks 

have systems to monitor prepayments, and that these types of 

prepayments would be flagged. One examiner stated that realistically, 

most banks would not allow prepayments like those specified in this 

scenario. Another examiner indicated that if a customer were truly in 

need of money while overseas, the bank should offer methods of 

obtaining it other than prepayments. This examiner indicated that if 

the customer were to repeatedly prepay the credit card, the bank should 

determine if these transactions are reasonable. If the transactions are 

not, the bank should close the account or take some other appropriate 

action.



[End of section]



Appendix V: Review of SAR Database on Potential Money Laundering 
through 

Credit Cards:



As part of our effort to determine the vulnerability of the credit card 

industry to money laundering, we asked the Financial Crimes Enforcement 

Network (FinCEN) to review its suspicious activity report (SAR) 

database. FinCEN did not provide us with access to the SAR database or 

to the SARs the agency identified as the result of its review. We 

therefore relied on FinCEN to use our criteria, as described below, in 

reviewing the SAR database and to provide us with a report of the 

results.



We specifically requested that FinCEN review the SAR database for the 

2-year period of October 1, 1999, through September 30, 2001, to 

identify and quantify reports with the following characteristics:



* Bank Secrecy Act/structuring/money laundering violations checked by 

the financial institution on the SAR form and the term credit cards 

specified in the narrative section of the form;



* Bank Secrecy Act/structuring/money laundering violations checked by 

the financial institution on the SAR form and the terms debit card or 

ATM card specified in the narrative section of the form;



* credit card fraud violations checked by the financial institution on 

the SAR form and the terms Bank Secrecy Act, structuring, or money 

laundering specified in the narrative section of the form;



* debit card fraud violations checked by the financial institution on 

the SAR form and the terms Bank Secrecy Act, structuring, or money 

laundering specified in the narrative section of the form.



FinCEN reported that its initial query of the SAR database using our 

criteria resulted in the retrieval of 669 SARs. FinCEN transferred 

these SARs to an excel spreadsheet to analyze the statistical portion 

of the report and also transferred them to a Word document for analysis 

of the narrative content. A FinCEN official indicated that each SAR was 

read and sorted according to methodologies as described by the filing 

institution. He indicated that duplicates were eliminated, as were SARs 

that had nothing to do with money laundering. For example, FinCEN 

eliminated reports that involved credit cards used as a form of 

identification, or statements by banks that the suspect had a credit 

card from a specific bank or had applied for a credit card. After the 

process of elimination, 499 SARs were identified as accurately 

responding to the criteria we stated above. These SARs represent about 

one-tenth of 1 percent of the SARs filed by financial institutions 

during the 2-year period we specified.



Most SARs Related to BSA/Structuring/Money Laundering Violations:



FinCEN provided the following breakdown on the 499 SARs that were 

identified in the review:



* Financial institutions filed 488 (97.7 percent) of the SARs for BSA/

structuring/money laundering violations;



* Eight SARs that were filed by financial institutions cited credit 

card fraud as the primary violation;



* Two SARs that were filed by financial institutions cited debit card 

fraud as the primary violation;



* One SAR that was filed by a financial institution cited defalcation/

embezzlement as the primary violation.



FinCEN found that 134 financial institutions, including 1 foreign bank 

licensed to conduct business in the United States, filed the 499 SARs. 

The amount of money involved in the violations ranged from $0 to $9.76 

million. Seven of the SARs filed by these institutions were for amounts 

in excess of $1 million. Seventy of the 499 SARs (14 percent) were 

referred directly to law enforcement by the financial institution, in 

addition to being filed with FinCEN. Of these, 39 were reported to 

federal agencies and 31 to state or local authorities.



Most SARs Were Isolated Cases:



FinCEN found only a few cases in which 2 or more SARs were filed on the 

same individual or business. This indicated that activity reported on 

most of the SARs was considered an isolated incidence by the 

reporting banks, according to FinCEN. One exception involved 6 SARs 

that were filed in early 2001 on four suspects, which revealed that 

check payments credited to these individuals credit card accounts were 

made by a fifth individual. This activity indicates that the subjects 

had ties to the person making the payments, according to FinCEN. This 

individual had been indicted on charges of money laundering, contraband 

cigarette smuggling, and visa/immigration fraud charges. This was the 

only incidence within the 499 SARs where a group of individuals could 

be linked to one another.



Cash Structuring Fairly Common in SARs Filed:



FinCEN found that 115 of the 499 SARs (or 23 percent) described cash 

structuring activity in the narratives. Typically, the SARs described 

customers attempting to make multiple deposits in amounts under 

$10,000, thus avoiding the Currency Transaction Report (CTR) filing 

requirement. Most often, the customers were attempting to deposit cash 

into various accounts, pay down loans, purchase cashiers checks, and 

make credit card payments. When the customers were notified that a CTR 

would be filed based on the total amount of money transacted, most 

withdrew one or more transactions to get under the CTR threshold. This 

activity was routinely reported as suspicious by the financial 

institution. FinCEN noted that of particular interest was the high 

dollar amount customers wanted to pay on their credit cards. The 

attempted total payments were typically well over $5,000 and often 

exceeded $10,000.



15 SARs Reported Credit Card Overpayment, Which FinCEN Flagged as 

Adaptable to Money Laundering:



FinCEN found that 15 of the 499 SARs (3 percent) were filed for 

overpayments on credit cards. The overpayments required the financial 

institutions to issue refund checks. According to FinCEN, overpayments 

and refund checks can be a means to launder money through credit cards, 

particularly if the funds used to overpay the card were derived from 

illicit activities. The refund check provides the means to convert the 

illicit funds into a legitimate bank instrument that can be used 

without question as to the origin of funds.



Of the 15 SARs, 7 discussed such payments being made in cash. Other 

methods to overpay the credit card involved checks written to the 

credit card account, electronic transfers between accounts, and payment 

via debit cards. The financial institutions were unable to determine 

the source of funds for 4 of these overpayments.



Suspicious Cash Advances Found in a Fair Number of Cases:



FinCEN found that 97 of the 499 SARs (19 percent) were filed for 

suspicious cash advances. Typically, the customer used the advances to 

purchase cashiers checks or to wire funds to a foreign destination. 

Some customers also requested that cash advances be deposited into 

savings or checking accounts. Most of the cash advances were structured 

to avoid the filing of a CTR.



ATM/Debit Cards Used in Structuring Schemes:



FinCEN found that 70 of the 499 SARs (14 percent) discussed the use of 

ATM/debit cards. The individuals used these cards to structure multiple 

deposits or withdrawals to avoid triggering the filing of a CTR. Some 

of the SARs described customers who wired money into accounts from a 

foreign country, then made multiple ATM withdrawals in that foreign 

country.



Convenience Checks Used for Structuring:



FinCEN found that 32 of the 499 SARs (6 percent) were filed for use of 

courtesy/convenience checks supplied by credit card issuers. Some of 

the checks were deposited into accounts in structured amounts. FinCEN 

noted that the use of these checks to structure deposits may warrant 

future scrutiny.



Wire Transfers Did Not Show Discernable Trend:



FinCEN found that 16 of the 499 SARs (3 percent) were filed for wire 

transfer activity. FinCEN noted that there was no discernable trend or 

pattern in the case of wire transfers via the credit card industry. 

Some scenarios they found were the following:



* cash deposits followed by immediate wire transfers to credit card 

companies;



* incoming wire transfers from foreign countries to an individuals 

credit card account;



* outgoing wire transfers to credit card accounts;



* incoming wire transfers followed by checks written to credit card 

companies; and:



* cash advances used to wire funds to foreign destinations.



Three SARs filed by a single financial institution described incoming 

wire transfers from a foreign location payable to a credit card 

corporation. The aggregate total of the amounts transferred by wire, as 

reported in these SARs, was $11,824,982.90.



[End of Section]:



FOOTNOTES:



[1] Pub. L. 107-56, 115 Stat 272 (October 26, 2001). Title III of this 

act institutes new anti-money laundering requirements on all financial 

institutions and gives the U.S. Department of the Treasury the power to 

impose additional obligations on them as well.



[2] American Express and Discover Card were also included in our scope. 

They are not associations, but are full-service credit card companies 

that issue their own brand cards directly to customers and authorize 

merchants to accept their cards.



[3] Correspondent Banking: A Gateway to Money Laundering, U.S. Senate 

Permanent Subcommittee on Investigations, Feb. 5, 2001.



[4] FinCEN was established in 1990 to support law enforcement agencies 

by analyzing and coordinating financial intelligence information to 

combat money laundering. The agency is also responsible for 

promulgating regulations under certain provisions of the Bank Secrecy 

Act.



[5] The Internal Revenue Service defines financial secrecy 

jurisdictions as jurisdictions that have a low or zero rate of tax, a 

certain level of banking or commercial secrecy, and relatively simple 

requirements for licensing and regulating banks and other business 

entities. In this report, we use the term offshore jurisdictions to 

refer to financial secrecy jurisdictions.



[6] Correspondent Banking: A Gateway to Money Laundering, U.S. Senate 

Permanent Subcommittee on Investigations, Feb. 5, 2001.



[7] A prepayment is a payment made to a credit card account in an 

amount that exceeds the total balance of the account and can result in 

a large overpayment.



[8] Section 352 (a) of the Patriot Act amends section 5318(h) of the 

BSA. As amended, section 5318(h)(1) of the BSA requires every financial 

institution to establish an anti-money laundering program. As operators 

of credit card systems are identified as financial institutions under 

the BSA, 31 U.S.C.  5312(a)(2)(L), they are subject to the anti-money 

laundering program requirements. Treasury, in its interim final rule, 

defined an operator of a credit card system. This definition includes 

credit card associations as operators of a credit card system.



[9] Financial institutions cannot issue or sell bank checks and drafts, 

cashiers checks, money orders, or travelers checks for $3,000 or more 

in currency without recording certain information and verifying the 

identity of the purchaser. 31 C.F.R.  103.29(a) (2001). Additionally, 

each financial institution must retain for a period of 5 years the 

records of certain transactions that exceed $10,000, including records 

of each extension of credit in an amount that is greater than $10,000. 

31 C.F.R.  103.33 (2001).



[10] The FATF, with 28 member countries, is an intergovernmental body 

established in 1989 to promote policies to combat money laundering. In 

1990, FATF issued an initial report containing 40 recommendations for 

fighting money laundering.



[11] In 1999-2000, FATF began a process to identify jurisdictions with 

serious deficiencies in anti-money laundering regimes. As a result, 

FATF published a report in June 2000 listing 15 jurisdictions with 

serious deficiencies in their anti-money laundering efforts. These 

jurisdictions were placed on the NCCT list of the FATF. FATF published 

additional reports in June and September 2001 that resulted in the 

removal of four countries from NCCT status and the addition of eight 

new NCCTs. As of this writing, there are 19 countries designated by 

FATF as NCCTs. FATF calls on its members to request that their 

financial institutions give special attention to businesses and to 

transactions with persons in countries identified as being 

noncooperative when these businesses or persons do not rectify the 

situation.



[12] A debit card is a plastic card that is tied directly to an 

individuals checking or savings account. The debit card has the logo 

of one of the major associations, allowing the individual to make a 

purchase with the card from merchants who accept the associations 

credit cards. Transactions from debit cards are quickly deducted from 

the individuals checking or savings account, which differs from a 

credit card transaction, which the individual pays at a later date.



[13] The ATM card is a plastic card that, like the debit card, is tied 

directly to an individuals checking or savings account. It can be 

considered a debit card if it contains the logo of a major association. 

The ATM card is used to conduct banking business at an Automatic Teller 

Machine, such as depositing or withdrawing funds or checking on account 

balances.



[14] Financial Havens, Banking Secrecy and Money Laundering, United 

Nations Office for Drug Control and Crime Prevention, Global Programme 

Against Money Laundering, May 29, 1998.



[15] Fraud results in financial losses to the industry and can take the 

form of stolen or counterfeit credit cards as well as merchants 

engaging in fraudulent activity. Credit risk also results in financial 

losses to the industry when, for example, cardholders do not pay their 

credit card bills or merchants declare bankruptcy and are unable to 

cover their outstanding charges.



[16] Fraud or risk scoring is a technique that scores the transactions 

of cardholders, on a real-time basis, to identify potentially 

fraudulent or financially risky patterns. A common type of scoring 

model used by the issuers in our review involved the use of predictive 

software, based on neural network technology.



[17] Regulation Z, 12 C.F.R. part 226, which implements the Federal 

Truth in Lending Act, 15 U.S.C.  1601 et seq requires creditors to 

credit the amount of the credit balance to the consumers account, 

refund the credit balance upon written request from the consumer, and 

make a good faith effort to refund to the consumer the balance 

remaining in the account for more than 6 months. 12 C.F.R.  226.21 

(2002).



[18] A chargeback is a fee charged by a merchant service provider 

against a merchant account for a credit card transaction that had to be 

removed from a merchants account. Chargebacks are permitted for 

several reasons, including, for example, disputes between the 

individual cardholder and the merchant that arise when the cardholder 

does not receive purchased services or goods, among others.



[19] An agent bank is a bank that is authorized by another third party 

(an individual, corporation, or bank), called the principal, to act on 

the latters behalf. The agent bank may perform bankcard processing for 

a financial institution, including merchant card processing.



[20] Processors who perform acquiring services secure merchants (like 

an acquiring bank) and bear a higher degree of liability than 

processors who merely assist in processing merchant transactions for an 

acquirer.



[21] These are known as BSA examinations. These examinations are part 

of safety-and-soundness examinations for the Federal Reserve and the 

Federal Deposit Insurance Corporation, and part of consumer compliance 

examinations for the Office of the Comptroller of the Currency.



[22] The third party processors are examined and regulated pursuant to 

the Bank Service Company Act (BSCA) 12 U.S.C. 1867 (c). The BSCA 

provides that whenever a bank that is regularly examined by an 

appropriate federal banking agency, or any subsidiary or affiliate of 

such a bank that is subject to examination by that agency, causes to be 

performed for itself, by contract or otherwise, any services authorized 

under this chapter, whether on or off its premises: (1) such 

performance shall be subject to regulation and examination by such 

agency to the same extent as if such services were being performed by 

the bank itself on its own premises, and (2) the bank shall notify such 

agency of the existence of the service relationship within thirty days 

after the making of such service contract or the performance of the 

service, whichever occurs first. 12 U.S.C. 1867(c).



[23] The Council is a formal interagency body empowered to prescribe 

uniform principles, standards, and report forms for the federal 

examination of financial institutions by the Board of Governors of the 

Federal Reserve System, the Federal Deposit Insurance Corporation, the 

National Credit Union Administration, the Office of the Comptroller of 

the Currency, and the Office of Thrift Supervision, and to make 

recommendations to promote uniformity in the supervision of financial 

institutions.



[24] The Nilson Report, Oxnard California, Issue 760, March 2002.



[25] The Nilson Report, Oxnard, California, Issue 760, March 2002.



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