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Drug lords and financing terrorism, how prepaid cards were between it all.

The worldwide popularity of prepaid cards is growing all the time, but if this market is not monitored effectively it could lead to criminal organisations using it to launder their dirty money.

Julian Dixon
August 11, 2020

It will be a long time before the citizens of Paris and Brussels forget the devastating terrorist attacks of 2015 and 2016. Hundreds were killed and many more injured across both cities after a series of suicide bombings and mass shootings.

Police subsequently discovered that the atrocities were partially funded by prepaid payment cards. As the European Commission admitted afterwards: “Prepaid cards or virtual currencies can make it easier for terrorist networks to finance their activities anonymously.”

Since then, the European Union has strictly regulated the use of such cards.

Through its 5th Anti-Money Laundering Directive, which came into force in January 2020, it has decreased the threshold (from 250 Euros to 150 Euros) at which prepaid card customers are obliged to verify their identities.

Prepaid cards are payment cards that can be pre-loaded with cash and then used in a similar way to normal bank payment cards. In the industry they are known as open-loop cards. Store gift cards, on the other hand, are restricted to a single chain of shops, and cannot be used in bank ATMs. They are known as closed-loop cards.

Both types have been popular with criminals for decades. The reason is simple: anonymity.

How cartels used prepaid cards

Back in the 1990s, the Mexican drug lord El Chapo (who is currently serving a life sentence in Colorado) found prepaid cards to be very useful indeed.

Given the nature of the trade, drug traffickers deal in vast numbers of banknotes, often in small denominations. To his chagrin, El Chapo discovered that, even after his traffickers had sold their cocaine and converted it to cash, they were still being caught out by drug-sniffing dogs since cocaine residue had transferred from their fingers onto the cotton fibres of their banknotes.

Unsurprisingly, this wasn’t good for his nefarious business. So what was the drug lord’s solution?

He purchased thousands of prepaid debit cards, the plastic of which could be conveniently wiped clean. Once the cards had been transported past the sniffer dogs and back to Latin America, he hired people to use them to withdraw cash from bank ATMs. A case of laundering money both literally and metaphorically, you might say.

Not only cartels though

Over the years there have been countless examples of money laundering through both prepaid cards and store gift cards. Sometimes criminals use prepaid cards to transport money overseas without alerting the authorities, even using money mules to purchase and transport the cards for them.

Other times, they anonymously load store gift cards with dirty cash before using them to purchase high-value electronic goods which they later resell for clean cash.

Prepaid cards can be used to parcel large amounts of money into smaller amounts, thereby avoiding anti-money laundering alerts when the funds are paid into bank accounts. (It’s a process known as smurfing.)

Covid-19 has even seen scammers encouraging bogus charity donations via store gift cards.

One infamous gift card scam took place in Florida, a few years ago, when a criminal used stolen credit cards to buy 45,000 store gift cards for Walmart and other major retailers before re-selling the cards online to legitimate customers for a total of $9 million. Fortunately authorities became aware of the scam, searched out the IP address on the fraudster’s computer, and subsequently arrested him.

Preventing money laundering through prepaid cards

The worldwide popularity of prepaid cards is growing all the time. According to Allied Market Research, by 2027 the global market could garner as much as $5,510 billion in revenue.

Retailers are therefore understandably keen to crack down on any scams. Walmart, for example (the world’s largest company by revenue) requires customers to show identification for gift card purchases over $5,000. Another major retailer, CVS Pharmacy, has an even lower threshold for this and will not allow customers to buy more than $2,000 worth of gift cards in a single day.

Kirsten Trusko is CEO of IRC Advisory, a consultancy in the US payments industry. She stressed how, since the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, strict industry controls have been implemented and that money laundering through prepaid cards has “reduced dramatically”.

She explained to Napier how there is now a limit on the amount one can load onto payment cards without presenting identification; how cards cannot be reloaded or be used at an ATM until the owner passes an identification check; and how there are limits on how many cards one person can purchase.

“A few money laundering colleagues in law enforcement have said: ‘That’s a lot of work and a damn inefficient way to launder money’.”

She added, “Laundering is often done via mules (often college students) who buy limited numbers of these cards. Sometimes the mules are given store gift cards to purchase goods, and then have to fence them. But law enforcement has [said] this is a very costly conversion: the mule has to be paid, and the goods purchased, while fencing them is often at a discount of 30 per cent or more.”

On this side of the Atlantic, too, both the European Commission and the UK’s Financial Conduct Authority have attempted to crack down on the problem.

The latter has assessed the anti-money laundering controls of various authorised electronic money institutions (including some which offer prepaid cards) and found them to have “adequate controls in place to mitigate the risks of money laundering and terrorist financing”.

In a 2018 report, they added: “Ongoing monitoring is necessary to help identify unusual activity and transactions. If customers cannot provide a reasonable explanation for unusual activities or transactions, these may give rise to suspicions of money laundering or terrorist financing (or fraud). Electronic money institutions should consider whether the information they have amounts to reason to suspect money laundering or terrorist financing. If so, this must be reported to the National Crime Agency.”

Many key players in the payment and gift card industry believe these new regulations have substantially allayed the problem.

Tony Craddock is Director-General of the Emerging Payments Association, one of the UK's most influential trade associations in the payments industry. He believes the abuse of prepaid cards and gift cards is more widespread in the United States than in Europe where there are stricter limits on the amounts of money that can be loaded.

“It's a very clunky means of money laundering,” he told Napier. “Typically, it’s for small criminals rather than big criminals.”

Gail Cohen is Director-General of the UK Gift Card and Voucher Association. She said that gift cards and vouchers are typically of low values, with an industry average of between just £27 and £28.

“So they are not very attractive as a money laundering, fraud or phishing solution,” she told Napier. “The responsibility sits with each one of our individual members to ensure their solutions are compliant with regulatory practices and system security.”

The outlook

It now looks as if regulations might get stricter still. In December 2020 the European Union’s 6th Anti-Money Laundering Directive comes into effect.

One of its key requirements is a minimum sentence of four years for money laundering offences. Surely that’s good news for everyone clamping down on financial crime.

Nevertheless, responsible businesses must still remain alert to fraud and money laundering.

One of the most effective ways to do this is by investing in technology to keep up with evolving criminal methods.

If and when prepaid cards fall out of favour for money laundering, businesses should be alert to what criminals will look to take advantage next.

Looking to improve your anti-money laundering systems?

Feel free to contact us to speak to one of our experts, or request a demo to see our award-winning technology in action.

Julian has more than 20 years of financial services experience gained at major investment banks including Deutsche Bank, JP Morgan and Commerzbank. His roles have ranged from front-office sales leadership to private equity. Julian has extensive knowledge of financial services processes and technology.
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