US govt's pre-paid declaration plans questioned

The feasibility of US government plans that would require travellers to add pre-paid card balances to declaration reports when they cross borders have been called into question.

Last October the Treasury's Financial Crimes Enforcement Network (FinCen) outlined plans to expand the scope of its cross-border reporting requirements - designed to combat money laundering and terrorist financing - to include "tangible pre-paid access devices".

However, the enforceability of such a rule, which could come into play by the end of the year, has been questioned by, among others, Cynthia Merritt, assistant director of the Retail Payments Risk Forum at the Federal Reserve Bank of Atlanta.

In a blog post, Merritt asks: "How can you tell how much money is loaded on the prepaid card to validate the declared value? In fact, how will enforcement officials even distinguish prepaid cards from credit and debit?"

According to a comment on FinCen's Notice of Proposed Rule Making (NPRM) from the Department of Homeland Security, the answer is a "handheld reader with features that will, among other things, allow law enforcement to quickly and accurately differentiate between a traveller's debit, credit, and prepaid product...in a manner which imposes minimal to no inconvenience to individuals and complies with US laws, regulations, and procedures."

In its own comment, the American Bankers Association has broadly backed the proposal as one that "satisfies the statutory mandate in a minimally intrusive way".

However, other commentators have flagged up concerns, notes Merritt. The Network Branded Prepaid Card Association, says that "a card can truthfully be reported as having just $1,000 on it; and then two hours later, the card can be loaded with funds from another location and have $15,000 on it".

Channels

Regulation & Compliance Retail banking Payments

Keywords

Cards Mobile & online banking Money Laundering Reporting/compliance

Comments: (2)

A Finextra member 30 October, 2012, 08:19

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Dear Sirs,

This problem is connected to the fact that a prepaid card is really a debit card where KYC controls may not have been fully performed. This since the prepaid balance is held safely in the banking system, kept separately from anybody else´s monies and paid out on demand - i.e. deposits. If travellers should declare prepaid card balances they should also declare debit card account balances. I can use my regular debit card in the same manner as a prepaid card - for instance give it away with pin code info to a third party. The monies on the debit account can then be accessed in atm and pos environment by the holder of the card. Unless I voluntarily deposit more monies into the account or transfer monies away from the account , the handout is limited to the balance in a similar manner as for prepaid cards. When the third party has emptied the account I can block the debit card and ask for a new one...

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Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune 01 November, 2012, 14:14

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Declaration is required only for cash and cash-equivalents. For all practical purposes, prepaid card balances are equivalent to cash. So, in principle, the US government's move has long been pending. Practical difficulties of the nature pointed out in the article remain.

Although banks might treat a prepaid card as a form of debit card, the two are vastly different from the perspective of the cardholder and the regulator. For example, a debit card holder knows the bank account to which the card is linked (in fact, the account comes first, the debit card follows), whereas a prepaid card holder only knows the name of the logo partner (e.g. NetSpend). It's even likely that there's no 1-to-1 mapping between a prepaid card account and the underlying bank account (which is why monies in prepaid cards are not always FDIC-insured). Banks are obliged to report several bank account transactions to regulators, whereas transaction-level reporting is not mandatory for anyone involved in the prepaid card chain. Therefore, what's applicable for prepaid cards is not necessarily applicable to debit cards, which don't need to come under the purview of the new laws that only seek to regulate cash and cash-equivalents.