Lately the 5th Anti-Money Laundering EU Directive (AMLD5) retained a particular interest on innovative instruments of payment, among which Prepaid Cards and digital currencies.

In 2013 the Financial Action Task Force (FATF) had raised a non-binding public guidance for a risk based approach on Prepaid Cards, Mobile Payments and internet-based payment services (the New payment products and services - NPPS).

KYC/CDD and potential threats
Providers of NPPS fall within the definition of a financial institution by conducting money or value transfer services, or by issuing and managing a means of payment. Therefore, they should be subjected to AML/CFT preventive measures as required by the FATF Recommendations and transcribed in EU AML Directives, including, for example, customer due diligence, record keeping, and reporting of suspicious transactions.

Why have prepaid cards emerged in the first place ?

Prepaid cards were introduced in the payments market at the end of the 1990s as an alternative to credit cards (which require the card issuer to evaluate the cardholder’s minimum level of creditworthiness) and debit cards (which entail the existence of a payment account at a bank or a financial institution). Prepaid cards began as a device used to pay for goods and services where the issuer does not need to conduct any analysis on the cardholder’s standing credit , or bear the costs for opening and managing a payment account. Many prepaid cards may now be used to withdraw cash from automated teller machines (ATMs) including internationally.

What is the difference between a closed and open Prepaid Card ?

Non-reloadable or Closed-loop Prepaid Cards have low AML risk characteristics. It can only be used for purchases at a single, or among a limited network, of merchants. These cards do not provide access to the global ATM network and are not able to have cash refund through merchants. These typically concern gift cards.
Adverse media and CDD/KYC/EDD

With Reloadable or open-loop prepaid cards, consumers use the prepaid cards to access the related funds held in an associated payment account (chip-storage is in decrease). These are real payment network-branded cards that allow transactions with any merchant or service provider participating in the payment network.

Which money laundering risk factors are associated with Prepaid Cards ?

A significant reason why prepaid cards are attractive to criminals is due to the accessibility to purchase the cards. Criminals are aware of retail outlets where they can buy open-loop prepaid cards and how much they can load on each card and remain anonymous. By using money laundering well known "smurfing" technique, criminals can easily load hundreds of prepaid cards, stay under the KYC threshold and avoid identification and verification processes.

Non-face-to-face relationships and anonymity / Remote relationships
If customer identification and verification measures do not adequately address the risks associated with non-face to face contact, such as impersonation fraud, the ML/TF risk increases, as does the difficulty in being able to trace the funds.

The Geographical reach
Open-loop prepaid cards often enable customers to effect payments at domestic and foreign points of sales through global payment networks. Some prepaid card programmes also allow cardholders to transfer funds from person-to-person.
The compact physical size of prepaid cards also makes them potentially vulnerable to misuse by criminals who use them, instead of cash, to make physical cross-border transportations of value.

Methods of funding
Anonymous funding methods obscure the origin of the funds. Cash poses the highest potential risk, as no transaction history is available.

Access to cash
The international ATM network allows funding in one country and cash withdrawals in another

Segmentation of services
Prepaid cards may involve several parties for the execution of payments including the program manager, issuer, acquirer, payment network, distributor and agents. A large number of parties involved in the provision of NPPS, especially when spread across several countries, can increase the ML/TF risk of the product due to the potential of segmentation and the potential loss of customer and transaction information.

What are 5AMLD measures to frame the use of Prepaid Cards ?

  • 1

    Lowering the threshold for identifying the holders of anonymous prepaid cards from €250 to €150.

  • 2

    Know-your-customer (KYC) investigations to be performed for remote payment transactions exceeding €50, or if a withdrawal of more than €50 is made for a Prepaid Card;

  • 3

    Prepaid cards issued outside the EU can only be used in the EU if they comply with equivalent anti-money laundering (AML) standards (Member States flexibility).

Will risk mitigation measures help the fight against money laundering and terrorist financing ?

The adoption of limitations (e.g. loading thresholds, limited spending capacity) significantly reduces ML/TF risks. Funding or purchasing limits, reload limits, cash access, and whether the card can be used outside the country of issue, ...

The circumvention by criminals will further plague our financial systems but that does not mean that we can allow failures in AML compliance. Gradually loopholes will be closed with time and bogus transactions will be traced by the continuous efforts of all professionals in the market. This also emphasises the importance of a yearly EWRA where we identify the significant risks for the entity and develop controls that mitigate these risks.
The amendments to AMLD5 Directive (EU) 2015/849 should be transposed by 10 January 2020. Member States should set up beneficial ownership registers for corporate and other legal entities by 10 January 2020 and for trusts and similar legal arrangements by 10 March 2020.
Oscar Canario da Cunha - Pideeco Network Partner
Oscar Canario da Cunha Managing Director
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