A new report from a US think tank has
highlighted prepaid solutions and money transfer services as being
‘useful’ to terrorists, even though regulation of such solutions
has been tightened considerably over the past few years. So has the
report based its conclusions on erroneous assumptions?
Victoria Conroy reports.

Terrorists looking to launder money and avoid the detection of
law enforcement agencies may find prepaid cards and mobile funds
transfers useful, according to a report released by The Washington
Institute for Near East Policy (WINEP), a Washington, DC-based
nonprofit organisation that studies the Middle East and policies
relating to the region.

The scope of the report – The Money Trail, Finding Following
and Freezing Terrorist Finances
– covers US and international
efforts to combat terrorist financing and the effectiveness of
efforts by governments and international organisations to address
it.

According to the report, finding the means to quickly and
securely raise, launder, transfer, store and gain access to funds
remains a top priority for all terrorist groups, and terrorist
finance is an area of rapid change, as terrorists actively seek to
evade governmental scrutiny and take advantage of emerging
technologies – including prepaid cards. For governments, keeping up
with this rapid change continues to be an uphill struggle.

Both globalisation and technological innovation have had major
impacts on terrorist financing. Globalisation has seen the volume
of funds flowing internationally increasing dramatically. According
to the report, in 2000, foreign workers sent $113 billion back to
their home countries. By 2006, that figure had more than doubled to
$255 billion. Meanwhile, technology has given rise to mobile
payments and the transfer and storage of funds online. It is the
advent of the internet that has had the most impact on terrorist
financing, as it provides a cheap, fast, efficient and relatively
secure means of communication.

Technology evolution presents problems

While terrorists are taking advantage of technology, some are
also reverting increasingly to less sophisticated methods in order
to stay out of the official banking system, such as using cash
couriers and informal remittance channels, and of course, cash
itself remains one of the most important ways for terrorists to
transfer and launder funds. Although these methods are less
efficient than banks, they make the job of tracking funds more
difficult for law enforcement agencies. According to the report,
trying to regulate cash couriers in the Persian Gulf region has
been an uphill struggle, in a region where carrying bulk cash is a
common practice.

The report cites a case study on the terrorist group Hizballah,
and the use of Western Union money transfer offices by its
operatives. According to Israeli officials, Hizballah operatives
run several Western Union offices in Lebanon and use the co-opted
services of others worldwide. In some cases, where the Western
Union agent is a Hizballah member or supporter, experts believe
Hizballah gets a cut of the 7 percent service fee to wire money,
and in other cases, Hizballah simply uses the company to launder
and transfer funds.

“Although Western Union officials have not been complicit in
this activity, the company failed to make any real efforts to vet
local operators even as its international operations grew
exponentially over a few years, especially in areas of conflict,”
the report stated.

But the problem is not confined to the Middle East region. Even
in the US, where regulations on money remittances have been put in
place, implementation has often been inadequate. Although it is now
a criminal offence to operate an unlicensed money remittance
service in the US, the federal government estimates that fewer than
20 percent of US money service bureaus have fulfilled registration
requirements.

Prepaid – erroneous assumptions?

Prepaid cards, which are often issued anonymously, represent
another challenge, according to the report, even though it could
not cite a specific incident where prepaid solutions had been used
in terrorist financing. According to the report, under current US
law, these cards are not considered a monetary instrument and
consequently there is no regulation over the amount of money that
can be put onto these cards and taken out of the country.

According to an official quoted in the report, “you could put
$300,000 onto a stored-value card, walk out of the country, and
withdraw funds elsewhere” without having committed any offence. If
a courier was detained with such a card, someone could remove the
money from the card without the government’s knowledge, the report
added.

The WINEP report does in some ways echo many of the findings of
an earlier report published in 2007 by the Federal Reserve Bank of
Philadelphia, which highlighted prepaid as a way for criminals to
engage in money laundering, particularly because of the
cross-border features of some prepaid cards that allow a person to
use a foreign-issued card in the US and a US-issued card outside
the US. In the Fed’s report, it cited an instance of a criminal
gang that purchased multiple gift cards from a US retail chain with
stores outside the US, and sent the cards to an accomplice in
another country where the cards were sold for local currency.

The WINEP report does not distinguish between closed-loop gift
cards and open-loop prepaid cards, and it is generally accepted by
prepaid industry experts and law enforcement officials that
closed-loop gift cards come with relatively small preset monetary
amounts that would make them inefficient for money laundering.

Industry regulations tightened

As long ago as 2005, payment networks and others in the prepaid
industry have implemented restrictions on load limits for open-loop
prepaid cards, along with rigorous know-your-customer (KYC)
procedures, anti-money laundering processes and other ID-related
processes. And earlier this year, the Network Branded Prepaid Card
Association (NBPCA) published a list of recommended practices for
anti-money laundering compliance to assist in the prepaid
industry’s response to reduce the potential for prepaid cards to be
used for illegal activities.

According to WINEP, the evolutionary nature of terrorist
financing requires regular and ongoing assessment to identify
potential vulnerabilities. Among the report’s recommendations are
that financial institutions should be facilitated to share
information, in much the same way that they share information about
fraud – similar databases should be created for terrorist
financing. Also, financial institutions should be allowed to adopt
a more risk-based approach to combat terrorist financing.