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Prepaid Cards: Candy For Criminals?


It's the holiday season, which means that many shoppers will solve their gift-giving dilemmas by buying prepaid gift cards from retailers such as Neiman Marcus and Starbucks (). But there is a darker aspect to the prepaid card boom, which involves a new kind of card that can be used almost anywhere -- including ATMs worldwide.

Law enforcement officials say these newer cards, many of which can be reloaded online or at check out counters, are an ideal tool for credit-card thieves, drug rings, and even terrorist cells. "It is a great concern to DEA and the FBI because of the terrorist financing angle," says Don Semesky, chief of the office of financial operations at the Drug Enforcement Administration.

Prepaid cards have grown rapidly into a $63.4 billion business. There are two kinds. So-called closed-system cards can be used only at the retailers that issue them. The newer open-system cards, in contrast, can be used at almost any retailer. Better yet, you can use many as ATM cards and withdraw the amount you put on the card anywhere in the world. Sunoco (), Rite Aid (), and Safeway (), among others, all sell these open-system cards, and will replenish them as well.

Most of the open-system cards sport MasterCard or Visa logos: Their networks provide the ATM privileges the cards enjoy. "It's the first blending of a bank and nonbank product," says Patrice Motz, a special counsel at Washington law firm Bryan Cave LLP and a former official at the Financial Crimes Enforcement Network (FinCEN) of the U.S. Treasury Dept.

That bank/nonbank link is the key to the problem, since the cards have ATM privileges but are not linked to personal bank accounts, which are closely monitored. "It's a very easy way to launder money," says Larry D. Johnson, head of the Secret Service's criminal investigative unit. Cards are easier to smuggle than cash across the border. Although at some point purchasers are supposed to provide basic identification to vendors of the cards, in reality it can be hard to trace ownership. "This is not just an issue in the U.S., but throughout the global financial community," says Daniel Glaser, deputy assistant secretary for Terrorist Financing & Financial Crimes in the Treasury Dept.

Law enforcement officials have not yet prosecuted many cases involving prepaid cards, but they see the impact already. In one case this year, a Mexican criminal caught at the border used stolen credit cards to transfer funds onto prepaid cards. And U.S. police in the Southwest have noted clear changes in money movements across the border, where they closely track suspicious wire transfers. The number of dodgy transfers is drying up. "The dollar numbers that we're looking at are declining dramatically," says Arizona Assistant Attorney General Cameron H. Holmes. "The use of stored-value cards is, if not the main reason, at least one reason they are able to escape our scrutiny."

OUTSIDE THE LAW

Organized criminals further avoid detection by "smurfing," or breaking down large amounts of cash into smaller sums that are then loaded on to many different cards. The industry, though, claims that law enforcement officials are overstating the threat. "The perception is very different from the reality," says Rhonda Bentz, a Visa USA vice-president in charge of public affairs. "We have many sophisticated fraud systems in place."

Officials counter that such transactions need even more scrutiny, since 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 R. Van Cleef, a money-laundering expert and partner at Bryan Cave. "Those laws have not been revised for the very new world we are in today."

The bigger question is whether these cards can be used for far more frightening purposes. An internal U.S. Treasury report notes that the September 11 hijackers were later identified by their bank accounts, card signatures, and wire transfers. "Had the terrorists used prepaid cards to cover their expenses, none of these financial footprints would have been available," the report said. A chilling thought.

By Chester Dawson


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