Regulators target use of prepaid cards for money laundering

The Financial Crimes Enforcement Network (FinCEN) within the Treasury Department has been working on rules since 2011 that would require travelers to tell customs officials if they’re carrying more than $10,000 on the cards. Currently, travelers must only declare cash and travelers cheques above that amount.

Federal law enforcement officials say criminals use the cards, which can be branded with symbols like Visa or MasterCard, to travel undetected with huge sums of money.

“A growing number of prepaid cards are being used for illicit purposes,” said Dani Bennett, an Immigration and Customs Enforcement (ICE) spokeswoman.

Though some of the prepaid cards are embossed with the user’s name on the front and are issued by a bank, others leave no paper trail, regulators claim.

In January, the Federal Reserve estimated that $202 billion would be loaded onto government benefit, payroll and general-use reloadable cards in 2013, up from $28 billion in 2009.

Congress asked Treasury to eliminate the loophole in 2009, but the credit card industry is pushing back now that the regulations are being finalized at the White House.

Last week, Visa, MasterCard Worldwide and American Express met with administration officials from six different agencies about the rules, including the White House’s Office of Information and Regulatory Affairs (OIRA), the powerful office that oversees the crafting of rules.

The White House has not provided details about the meeting, and officials involved in the rulemaking process are not permitted to discuss their deliberations.

An industry trade group, however, told The Hill that the prepaid card rules discriminate against the millions of Americans who decide to opt against the banking system or receive paychecks or government benefits on such cards.

“Nobody takes your ATM card to find out what’s in your bank account when you go through customs. If you’ve got a huge line of credit on your credit card — no one asks to see it,” said Judith Rinearson, regulatory counsel at the Network Branded Prepaid Card Association (NBPCA). “Why should prepaid cards be any different?”

Every transaction is tracked, just like on any other credit card, she added.

The Treasury, in the proposed rule, noted potential concerns surrounding the open-ended definition of prepaid cards and requested ways to assuage the industry’s fears. Read the public comments here.

The results of those potential changes, however, won’t be apparent until the final rule is published. The White House received the final rule last month and has a total of 90 days to review it.

A Senate aide familiar with the regulations said that getting the rule done quickly is a major item on one Democratic lawmaker’s to-do list.

“It’s just one more tool law enforcement would have,” the aide said. “There’s no perfect solution, it’s just one more tool in the toolbox.”

Private briefings with administration officials revealed that machines that could scan prepaid cards to determine how much are on them are “ready to go,” according to the aide. “They could do it tomorrow.”

It’s not clear how the screenings would work, and both ICE and Customs and Border Control (CBP) would not elaborate on the technology.

In its comment to the proposal, the NBPCA said the magnetic strip on the back of open-loop prepaid cards is not designed to display the card’s value. Authorities would need to get a subpoena before they could peer into someone’s account, much like the requirements for seeing a person’s bank account balance.

But that’s all on hold until OIRA clears the Treasury’s final draft.