Money Laundering Risks of Prepaid Stored Value Cards (2008)

In the past decade, there has been an increasing reliance on electronic means of transferring funds for personal and business purposes. One recent development has been the emergence of plastic cards with the capacity to store value electronically, which can be used for a range of retail transactions. With the advent of comprehensive anti-money laundering laws throughout the developed world, criminals are turning to alternative ways of moving funds across borders to circumvent reporting and detection systems. One identified risk is the misuse of prepaid stored value cards to keep the proceeds of crime and move them across borders without alerting law enforcement and financial intelligence units. This paper describes the nature of these risks and considers whether existing regulatory measures are adequate to address them. Judy Putt General Manager, Research The use of electronic transactions has increased considerably in recent years. In Australia, the volume and value of cheque transactions in paper-based clearing systems fell from an average of 2.7 million per day in 2001 to 2.1 million in 2005, and from an average of $8.3b per day in 2001 to $6.3b in 2005 (APCA 2005). A correspondingly large increase in electronic banking has also been observed. This is hardly surprising, as the financial incentive to do business electronically in today's highly competitive market is significant, with the cost of an online transaction often being a fraction of a non-electronic transaction (De Young 2001). Similarly, online retail spending has increased considerably with total sales in the United States in 2007 exceeding US$1 0Ob (Ames 2007). One of the more popular electronic payment systems is prepaid stored value cards (SVCs), such as gift cards issued by retail stores. The overall market for gift cards is projected to grow to nearly $88 billion in 2008, with the fastest growth occurring in corporate purchases of gift cards for employees and customers, and in open gift cards - like the American Express Gift Card that can be redeemed at multiple merchants. . . . Corporate purchases will rise 72% from 2005 to 2008, growing from [US]$9 billion to [US]$1 5.5 billion. Open gift card sales are expected to almost quadruple from 2005 to 2008, growing from [US]$1 .3 billion to [US]$5 billion, according to Mercator (American Express 2006). This extensive use of SVCs, coupled with the convergence of financial services and electronic payment technologies, has created new opportunities for money laundering. This paper examines the nature of the risks and how they can best be addressed. Prepaid stored value cards Stored value cards are cards with data encoded in either a magnetic strip or a computer chip that are preloaded with a fixed amount of electronic currency or value. This can be redeemed or transferred to individuals and/or merchants in a manner that is similar to spending physical currency. The players in a typical SVC program include: * program managers - owners of prepaid SVC programs who establish relationships with payment processing facilities (e.g. banks and payment networks) and distributors, and establish pooled account(s) at banks * payment processing facilities - are responsible for payment transactions for prepaid SVC programs, and they track and distribute funds in pooled accounts. Program managers may also choose to function as their own payment processors * banks - may also function as program managers and/or distributors, and are responsible for maintaining pooled accounts, settling payments and issuing branded prepaid SVCs (open-system cards) * the payments network - the link' between payment processing facilities, and the retailer and automated teller machine (ATM), for authorisation of payment transactions * a distributor (e.g. banks and nonfinancial institutions) - responsible for selling prepaid SVCs. The market for SVCs has increased considerably over the years, particularly in terms of its availability and size. …