Federal Law Enforcement Agencies Still Worry About Prepaid Cards, Actual Criminal Practices Cited

WASHINGTON – Prepaid cards, including gift cards, have become the hit of the 2005 holiday season, popular with issuers, consumers and retailers alike. But even as the market for the cards continues to grow, federal law enforcement officials have continued to raise concerns about the implications some of the cards carry for potential criminal and terrorist activity. “I think it’s important to state that we have concerns about prepaid cards but that not all cards are the same,” explained Eric Zahren, spokesman for the U.S. Secret Service, one of the agencies charged with investigating fraud and money laundering. “That is one of the challenges we face in the topic.” Zahren and other law enforcement officials say these distinctions are crucial to understanding their worry about prepaid cards and assessing the risk they present. Currently there are a number of different card types. The first distinction is between so-called open-system cards, which carry Visa or MasterCard logos and which can be used anywhere those logos are present and closed-system cards which can be used only in the store or retail chain where they were purchased. But there are other distinctions as well. Within the so-called open-system cards there are those which are issued by financial institutions versus others which are issued by retailers who merely issue them in cooperation with financial institutions. Within this group are cards which cannot be reloaded with money (often gift cards) and cards which can be reloaded. Other categories include cards which can be used to access cash at ATMs versus cards which do not allow this access. Each of these card categories carries different elements of risk, Zahren and others said. Speaking broadly, the sorts of cards that credit unions are selling this holiday season, the open-system card which cannot be reloaded and which has a fixed expiration date worries federal law enforcement agencies least. If they sell their cards to their members only, credit unions by definition know their card purchasers. Further, the cards often carry caps which limit how much money can be put on them and often include no ATM access. These sorts of things make these cards lower risk from a law enforcement perspective. By contrast, open-system cards which can be reloaded and are sold by retailers to the public – and which carry long expiration dates and grant ATM access – worry law enforcement officials a great deal. The officials worry that without either regulation or voluntary changes on the part of industry, they will start to see more cases of people who steal credit cards and put as much money from the stolen credit cards as possible onto prepaid cards which can be passed out quickly to partners in crime. The prepaid cards can be more easily smuggled across borders, the officials noted, and leave their owners virtually untraceable. This lack of an ability to trace transactions leaves law enforcement and security officials most worried. A spokesman for the U.S. Treasury confirmed the existence of an internal report that observed that all of the Sept. 11 hijackers had ultimately been identified and tracked through bank accounts, cards signatures and wire transfers, none of which would have been available had they been using laundered money on prepaid cards to pay for their conspiracy. Law enforcement officials still have not yet prosecuted many cases involving prepaid cards, but they have begun to be more open about the sorts of violations they say they are seeing. In one case this year, a Mexican criminal caught at the border used stolen credit cards to transfer funds onto prepaid cards, according to the Department of Homeland Security. The department confirmed that police in the Southwest have noted clear changes in money movements across the border, where they closely track suspicious wire transfers, and where the cards have begun to have an impact. Further, Zahren confirmed that criminals are organizing to further avoid detection by “smurfing,” or breaking down large amounts of cash into smaller sums that are then loaded on to many different cards. Zahren and others argue that gift card transactions need even more scrutiny than other card transactions because they fall outside the purview of federal statutes, including most money-laundering laws and some provisions of the Patriot Act of 2001, that govern banks and other financial institutions. “In a cash-based world we had built up a world of controlled monitoring,” says Carol Van Cleef, a money-laundering expert and partner at the Bryan Cave law firm. “Those laws have not been revised for the very new world we are in today.” So what might gift card regulations eventually look like? No one is sure. None of the law enforcement agencies who track the issue said they were prepared to propose regulations to govern the trade, and Zahren said the Secret Service would much prefer the industry take charge of regulating the trade. For their part, neither Visa nor MasterCard would comment for the record about the precise measures they have adopted to combat fraud and money laundering using the cards, but they both maintained that they had measures in place and looked forward to working with issuers to develop more safeguards. -