Last week, the Financial Crimes Enforcement Network released a ruling that says merchants and nonbank owners of ATMs that reload prepaid cards are not in a regulatory category called money services businesses. The ruling means a bank that sponsors ATM and point-of-sale locations must comply with the Bank Secrecy Act for the transactions conducted at locations it sponsors.
Banks that sponsor nonbank owners and operators of ATMs and merchants "are fully responsible for transactions initiated at those ATMs and POS terminals to the same extent as if they owned and operated them," FinCEN said in the March 10 ruling.
In the past, a shift of responsibility to sponsoring banks would have had little impact on banks' risk and compliance because ATMs primarily dispensed cash and merchants did not accept cash as part of a card-network transaction. Because ATMs and merchants are reloading prepaid cards, the risks banks face by sponsoring ATMs and merchants change with this ruling.
Limited Scope of Ruling
The FinCEN ruling has limited effect and scope. FinCEN issued the decision to the party that requested the ruling as a private-letter ruling and made it public May 20. The letter does not disclose who requested it. FinCEN limits the ruling to the facts presented. To the extent the ruling is binding, it affects only the requesting party. The requesting party was an unnamed owner-operator of a debit card network.
Some observers read the decision as general guidance and a final decision but doing so presents dangers. First, merchants who reload prepaid cards in programs other than the one described in the ruling may receive a different decision from FinCEN. Second, FinCEN based the decision on the facts presented. To the extent the actual situation differs from the facts presented–either because the facts changed or were inaccurate or incomplete when presented–FinCEN may change its decision.
Merchants also must understand their obligations to prevent money laundering. All merchants in the United States must comply with federal and state criminal statutes. Merchants that reload prepaid cards and have failed to put systems in place to prevent money laundering may find themselves unprepared.
For example, employees who have not been properly trained may fail to identify common money-laundering techniques that put the merchant at risk. Additionally, employees of large merchants can be as susceptible to bribery by criminals as employees of convenience stores and other outlets that distribute money services business products.
Merchants subject to the ruling may have independent Bank Secrecy Act obligations. Such merchants might meet the "trade or business" test under the act, meaning they must file FinCEN Form 8300 for all reload transactions involving cash or monetary instruments of more than $10,000. Those merchants must file Form 8300 for single or related transactions greater than $10,000.
The aggregation period for multiple transactions–the time in which multiple transactions must be added together to see if they meet the threshold–is one year. In addition, the merchant must notify the cardholder that it has filed a Form 8300.
As a result of this ruling all banks should take a hard look at the products and services they offer and determine whether through ATMs they own or through ATMs or merchants they sponsor, they directly or indirectly participate in one or more prepaid card reload programs. If a bank does participate, it should evaluate, update and enhance its Bank Secrecy Act and money-laundering prevention compliance, including the following controls:
• Risk Assessment
• Currency Transaction Report and Suspicious Activity Report Filing
• Customer Due Diligence
A sponsoring bank may not have enough information about transactions or cardholders to meet some of its Bank Secrecy Act obligations. Sponsoring banks need to work with issuing banks and debit card networks to assure that they have access to information they need to comply with the act, especially compliance with Currency Transaction Reports and Suspicious Activity Reports. Networks may need to change rules.
Objective - Clarity
The FinCEN ruling has raised questions rather than brought clarity to the prepaid world. Are nonbank-owned ATMs and merchants in reload programs operated by credit card networks money services businesses? Are nonbank-owned ATMs and merchants that participate in reload networks owned and operated by large money services businesses (such as Western Union or MoneyGram) or owned by other nonbank entities, to be deemed money services businesses? Is a merchant that participates in more than one reload program a money services business for some reload transactions and not a money services business for other reload transactions? Will the sponsoring bank have Bank Secrecy Act responsibility for all reload transactions processed through the POS terminals at the merchant, regardless of whether the reload program is a bank or a nonbank reload program?
To the extent that FinCEN addresses the status of players in the prepaid space in a piecemeal fashion, clarity of Bank Secrecy Act obligations will be illusory. Industry members should take action individually and collectively; industry players should urge FinCEN to take industry-wide action to bring certainty to the prepaid space.
FinCEN needs to involve interested parties, including state and federal bank regulators, in its consideration of how to improve the way it allocates the burdens of the Bank Secrecy Act and obligations to prevent money laundering. Until FinCEN begins to take action based on a complete understanding of the payment systems involved, both domestically and globally, the debit and credit networks, the processors, program managers, marketers and independent sales organizations it will continue to issue rulings that contribute to confusion in the marketplace. Such confusion only results in higher costs to all–either in unnecessary duplication of compliance efforts or no compliance action, which ultimately could result in regulatory enforcement actions and prosecutions.
Patrice Motz serves as executive vice president of London Potomac Consulting.