An almighty row has broken out
in the US prepaid market after a proposed change to the Bank
Secrecy Act, largely used to catch tax-dodging multimillionaires,
to include prepaid cards. The proposals have received an angry
response from prepaid companies and retailers alike.


A new proposal by the US agency
charged with policing money laundering could slow the meteoric
growth of prepaid cards.

The Financial Crimes Enforcement
Network (Fincen) has proposed changes to the Bank Secrecy Act (BSA)
mandated by the Credit Card Accountability, Responsibility and
Disclosure Act of 2009 that would require retailers to collect
identifying information when selling prepaid cards. Prepaid issuers
would be required to store the data for up to five years under the
rule, which was issued in June and which generated dozens of
industry responses in opposition to the proposal.

Fincen has already covered a
limited framework of prepaid products as part of the money services
businesses regulations for sellers, issuers and redeemers of stored
value. The new proposal would make nonbank providers of prepaid
cards also subject to BSA rules.


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Open to abuse

Many of the same factors that make
prepaid access attractive to consumers make it vulnerable to
criminal activity. For instance, the ease with which prepaid access
can be obtained combined with the potential for relatively high
velocity of money through accounts involving prepaid access and
anonymous use may make it particularly attractive to illicit

For criminals, the ability to
receive and distribute a significant amount of funds without being
subject to many of the reporting or record-keeping requirements
that would apply to similar transactions using cash or involving an
ordinary demand deposit account at a bank is a boon to their
illicit operations.

The proposal would also require
retailers to establish anti-money-laundering compliance
programmess, but the most onerous task would be creating systems to
watch for suspicious activity, such as loading or withdrawing
significant amounts of money with a card. It also calls for nonbank
providers of prepaid cards – the companies with the most control
over customer relationships – to register with Fincen as
money-service businesses if they have not done so already and to
track and report transaction data.

“If these gaps are not addressed,
there is increased potential for the abuse of prepaid access as a
means for furthering money laundering, terrorist financing and
other illicit transactions through the financial system,” Fincen
said in the proposal.

“For instance, the ease with which
prepaid access can be obtained, combined with the potential for
relatively high velocity of money through accounts involving
prepaid access and anonymous use, may make it particularly
attractive to illicit actors.”


Causing ‘major

The major prepaid programme
operators – Green Dot, NetSpend and AccountNow – responded to the
rule by arguing that they long have done much of what Fincen is
requesting, but that the new requirements will prove so onerous for
retailers and bank issuers of prepaid products that it could stall
the fast-growing prepaid space.

In a recent SEC filing, Green Dot
said the new Fincen rules “would significantly change the way
customer data is collected for certain prepaid products… by
shifting the point of collection to our retail distributors,” which
include Walmart, CVS Caremark, 7-Eleven and a host of national
grocery chains.

“If we or any of our retail
distributors were unwilling or unable to make any required
operational changes to comply with the proposed rules as adopted,
we would no longer be able to sell our cards through that
noncompliant retail distributor,” Green Dot said in the filing.

In a letter to Fincen opposing the
rule, the National Retail Federation said the proposal could create
“major disruptions” at businesses across the nation and predicted
stores would “simply forgo the sale” of gift cards if subjected to
the requirements as written.

Starbucks told Fincen in a letter
that it would have to discontinue its cross-border, closed-loop
gift card programme, which lets customers use gift cards activated
in the US in some foreign countries and vice versa, if the proposal
is adopted.

“It would require Starbucks to
retrain its baristas to take on responsibilities that are totally
different from their current job duties… and would expose
Starbucks to a new and different regulatory regime that is totally
unrelated to operating retail coffeehouses,” the Seattle-based
coffee giant said.

The proposed rule does contain an
exemption for closed-loop prepaid access and prepaid access limited
to a $1,000 maximum. However, those exemptions would only apply if
a prepaid access device does not permit international transmission,
which creates problems for internet redemptions, redemptions
outside of the US and transfers among users.

In its letter to Fincen, the
National Association of Convenience Stores urged the agency to
construct the Act with a reasonable balance between the regulatory
burdens and the anticipated benefits, commenting that the proposed
exemptions “are drawn too narrowly to benefit those retailers
engaging in transactions that pose a low risk of illicit

It also said that the network
should not impose a $1,000 threshold aggregated across all types of
prepaid access, maintaining that such a requirement “would be
impossible to administer and, even if it could be implemented,
would threaten the continued viability of prepaid access


A fine line

It is a precarious time for
tightened regulations on prepaid cards, which have proven
invaluable in reaching underbanked and unbanked households. One
reason these products are widely used is that plastic is often
regarded as a type of validation into the mainstream of the US
financial system.

Without them, consumers can not
shop online or reserve a hotel room. They are a popular option in
lieu of operating on a cash-only basis, which presents its own
risks, or purchasing money orders or cashier’s checks, which are
less flexible and may carry an additional expense.

The government is treading a fine line, trying to rein in the
use of prepaid cards for money laundering while not hampering the
overall growth of the market.