FinCEN Targets Prepaid Cards, Phones

BSA Amendment Aims to Curb Money Laundering, Terror Financing
FinCEN Targets Prepaid Cards, Phones
The federal regulatory agency in charge of stopping money laundering has issued a new proposal to further regulate prepaid cards and other devices in the United States.

The Financial Crimes Enforcement Network (FinCEN) entered a Notice of Proposed Rulemaking on these changes on June 22.

The proposed changes, called Amendment to the Bank Secrecy Act Regulations - Definitions and Other Regulations Relating to Prepaid Access, are intended to address regulatory gaps that have resulted from the proliferation of prepaid innovations over the last 10 years, as well as their increasing use as accepted payment methods. The new rules would establish a more comprehensive regulatory framework for non-bank prepaid access.

The proposal, which focuses on prepaid programs that pose the greatest potential risks of money laundering and terrorist financing, is mandated under the Credit Card Accountability, Responsibility and Disclosure Act of 2009. It covers prepaid devices such as plastic cards, mobile phones, electronic serial numbers, key fobs and/or other mechanisms that provide a portal to funds that have been paid for in advance and are retrievable and transferable.

Four Changes

These are the four changes proposed in the amendment:

  • Renaming "stored value" as "prepaid access" without intending to broaden or narrow the term and defining the term to allow for future changes in technology and prepaid devices;
  • Deleting the terms "issuer" and "redeemer" of stored value and adding the terms "provider" and "seller";
  • Placing registration requirements on providers of prepaid access and suspicious activity reporting, customer information recordkeeping, and new transactional recordkeeping requirements on both providers and sellers of prepaid access;
  • Exempting certain categories of prepaid access products and services posing lower risks of money laundering and terrorist financing from certain requirements.

The proposed changes were submitted to be published in the Federal Register on June 22. Once a 30-day comment period passes, FinCEN will consider the submitted comments and possibly amend the rules. The turnaround time for the final rules to be finalized can't be predicted, according to FinCEN spokesman Steve Hudak. "These proposed rule changes will impact a significant number of businesses," Hudak says, and FinCEN expects there will be comments made about the rule changes.

Framework for Non-Banks

These changes would create more regulatory framework for non-banks, says Debra Geister, senior director of AML and Compliance Services at LexisNexis Risk Solutions. "This is exactly what was outlined in the Card Act passed last year," says Geister. "This will not have an impact on card issuers through banks, but the other networks."

Essentially, what this would do is require BSA reporting and monitoring for those issuers that are not bank-owned or operated. In the past couple of years, Geister says, the industry has seen these issuers acquire banks or else work with banks to be able to facilitate the cards.

"This will impact not only the providers of these cards, but the retail sellers of them as well," she says. "It will require the collection of more information in order to manage the risk of the instruments."

This would be a major shift for most retailers. Geister says she worries about things like giving sensitive information to staff in those fairly "open" retail environments where there are a lot of employees and easy access. This rule may pose a barrier to the sale of these instruments, she says.

FinCEN: Why Reform is Needed

FinCEN says it believes this amendment will address vulnerabilities in the current prepaid access environment, while maintaining the flexibility to permit new developments in technology, markets and consumer behavior. There are still yet other areas of the complex payment products to be looked at by FinCEN, law enforcement agencies and federal regulators.

FinCEN has applied a limited regulatory framework since 1999 to certain prepaid products as part of the money services businesses regulations applicable to sellers, issuers and redeemers of stored value. Under the new proposal, non-bank providers of prepaid access would be subject to comprehensive Bank Secrecy Act (BSA) regulations similar to depository institutions. The proposed changes impose obligations on the party within any given prepaid access transaction chain with predominant oversight and control, as well as others who might be in a position to provide meaningful information to regulators and law enforcement, such as prepaid access sellers.

If the regulatory gaps are not addressed, FinCEN says, 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. For instance, FinCEN says 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.


About the Author

Linda McGlasson

Linda McGlasson

Managing Editor

Linda McGlasson is a seasoned writer and editor with 20 years of experience in writing for corporations, business publications and newspapers. She has worked in the Financial Services industry for more than 12 years. Most recently Linda headed information security awareness and training and the Computer Incident Response Team for Securities Industry Automation Corporation (SIAC), a subsidiary of the NYSE Group (NYX). As part of her role she developed infosec policy, developed new awareness testing and led the company's incident response team. In the last two years she's been involved with the Financial Services Information Sharing Analysis Center (FS-ISAC), editing its quarterly member newsletter and identifying speakers for member meetings.




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