The prepaid card industry has come a long way since the turn of the century, far enough to be included in tighter government regulation.

Starting April 1, providers and sellers of certain prepaid cards could face civil penalties from the U.S. Department of the Treasury’s Financial Crimes Enforcement Network if they do not have anti-money-laundering programs in place.

Because of the potential use of prepaid programs to finance terrorism or launder money, the network, known as FinCEN, issued a rule in July requiring policies and safeguards promoting extra vigilance (see story).  It set March 31, 2012, as the date for compliance. Violations can result in civil money penalties.

The rule, which defines exempt and nonexempt prepaid programs, validates prepaid’s growing position in the payments market, Alan Sorcher, a director for Deloitte Financial Advisory Services, tells PaymentsSource.

“In 1999, when FinCEN rolled out the rules for money-service businesses, which stored value prepaid access is part of, they didn’t do much on stored value because they realized it was a very developing area, heavily dependent on technology, and they didn’t want to hamper it,” Sorcher says. “They’ve gone back to stored value, renamed it ‘prepaid access,’ and issued a whole set of requirements that go with it.”

FinCen’s actions illustrate how the payments market is changing, as are the challenges for regulators and the industry to stay on top of it and the vulnerabilities and risks that arise, he says.

The rule defines a provider of prepaid access as “the participant that agrees to serve as the principal conduit for access to information from the other program participants,” such as card companies and financial institutions. It also defines sellers of prepaid access as “someone that receives funds or the value of funds for an initial loading or subsequent loading of prepaid access,” such as retailers.

Providers and sellers of prepaid access must establish an anti-money-laundering compliance program that includes customer-verification procedures, collection of identifying information, and the filing of suspicious activity and currency transaction reports. Also, providers must keep transaction records generated during the normal course of business.

Sorcher says providers and sellers can avoid having to comply if they provide or sell cards considered low risk in that that someone cannot load a card account with more than $1,000, or they don’t distribute cards usable to transfer funds or for use internationally. Also exempt are flexible spending account prepaid cards, he says.

Also exempt are closed-loop gift cards whose accounts hold less than $2,000 and cards that require user activation online or with a phone call , Sorcher says.

Sellers will be most affected by the rule because financial institutions already implement anti-money-laundering programs, he says. Sellers who choose to sell nonexempt cards will have to satisfy the anti-money-laundering program requirements.

Indeed, the sellers’ point-of-sale systems will be key to keeping sellers in compliance, Ed Lawrence, a director at Auriemma Consulting Group, tells PaymentsSource.

“You can’t depend solely on the person at the register, probably the lowest paid person with the highest turnover, and you can’t expect them to remember all of the rules,” Lawrence says.

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