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Deloitte Sees Impact from Anti-Money Laundering Rules for Prepaid Cards

March 28, 2012

The Treasury Department’s anti-money laundering rules for prepaid cards are set to take effect on March 31, and they are likely to force many financial institutions and their accountants to be more aware of how such cards are being used.

“It is significant in that it now for the first time requires providers and sellers of prepaid access to have anti-money laundering programs,” said Alan Sorcher, a director at Deloitte Financial Advisory Services LLP who leads the firm’s anti-money laundering strategic leadership group. “The rules are a little bit complex, but those terms, ‘provider of prepaid access,’ didn’t even formally exist before the rule was promulgated. The rule requires buyers and sellers to have AML programs and to gather certain information from customers, to file suspicious activity reports, and maintain other transactional records, so it’s definitely significant from a compliance standpoint and is definitely going to be a change.”

The rules for prepaid access could apply not only to prepaid cards such as gift cards, but also to other types of devices such as key fobs and potentially mobile phones. The rules don’t apply to debit cards from banks, however, nor to gift cards that are associated with a particular retailer. There is an exemption for such programs, but only if the cards allow users to put less than $2,000 a day on them. However, gift cards that can be used to make purchases anywhere would fall under the rules.

The Treasury Department’s Financial Crimes Enforcement Network will be enforcing the rules, but with some exemptions in place. “They have set some minimum thresholds to exempt out what FinCEN is seeing as not raising much risk of money laundering or terrorist financing,” said Sorcher. “If the retailer put restrictions on its cards like you could only use it at a Starbucks or any particular retailer and you couldn’t put more than $2,000 on it in on any given day, then that card program would not be subject to the rules provisions, so the retailer would not have to comply with the rules. As far as consumers go, they will only see a difference if it’s a program that has to comply, and then if they go into a retailer, if it’s a seller who has been defined as a seller of prepaid [access], they may have to provide some ID information and things like that when they buy the card.”

The use of prepaid cards has increased markedly in the past decade or so. When FinCEN issued money services business rules in 1999, it did not apply them to prepaid or “stored value” cards because the Treasury Department was reluctant to hamstring the development of a budding industry. However, the agency now realizes that there are vulnerabilities with the use of prepaid cards. As with cash, there is no address on record to trace the holders of the cards. Now there will be.

Businesses, and probably their accounting staff, will have responsibilities under the new AML rules. “You have to maintain customer records and transactional records,” said Sorcher. “If you’re someone who is involved in recordkeeping, you have to make sure that the records reflect the customer name, address, date of birth, and ID number like the Social Security number, and you have to ensure that the transactional records that reflect the transactions associated with the cards are being maintained for five years, and in a way that they’re accessible so if the provider is requested or subpoenaed by the government, they can access and make those records available to the government.”

Part of the rules took effect last September for prepaid access providers, and the final requirements applying to sellers and a few other requirements take effect on March 31. “I think these rules are very significant in terms of the compliance impact that it has on providers of prepaid access and on those that are deemed to be sellers,” said Sorcher. “It says also something about where we’re moving in terms of payments and the government’s views of it. In 1970 when the first wave of anti-money laundering rules came into effect, the focus was really on cash. Now, 42 years later, we see that even though there have been these historic changes in the marketplace on how transactions occur and how consumers conduct business, the government has been very reactive in applying the rules to these new forms of payment. I think mobile payments are also changing the way the marketplace does business, so I think it sends a signal that the gaps are going to be filled.”

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