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Prepaid Cards in Canada: An Anti-Money Laundering Perspective (Part 1)

19/05/2020


One of the biggest challenges in the fight against money laundering is the perpetual attempt by criminals to uncover inventive ways to disguise and move the proceeds of crime. The introduction of prepaid cards into the financial system has offered new solutions to vendors and customers but has also created opportunities for money laundering and other illicit activity over the years.  

According to the United States Department of Justice report[1], prepaid cards provide an ideal money laundering instrument to anonymously move funds associated with all types of illicit activity without fear of documentation, identification, tracking or seizure. In 2019, the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) released its first assessment on terrorist activity financing and highlighted prepaid cards as one of the emerging areas of risk.

This article, the first of a two-part series, aims to shed some light on the features and vulnerabilities connected to the use and maintenance of prepaid cards.

What is a Prepaid Card?

A prepaid card is simply a payment card, physical or electronic, that can be loaded with funds and used by the cardholder to make cash withdrawals or purchase goods or services. Like traditional debit and credit cards, prepaid cards can be used for just about anything, including buying items online, making reservations and withdrawing cash from an ATM. They offer a similar level of flexibility as traditional debit and credit cards, but without the need for the customer to be linked to a financial institution or credit score.

Types of Prepaid Cards 

There are two distinctive types of prepaid cards:

  • Closed-Loop Prepaid Cards - These are cards that can only be used to make purchases or payment at the issuing merchant or authorized party’s platform such as gift cards and promotional cards. They are not redeemable for cash and do not have a reload feature which, means they cannot be reused once the balance is depleted.
  • Open-Loop Prepaid Cards – These are cards mostly issued by a financial institution and are connected to a payment network such as Visa or Mastercard. These cards allow the card holder to withdraw cash from ATMs and to add cash values multiple times until expiry. They can be used at outlets connected to the card’s payment network which makes them widely acceptable.

Why are Prepaid Cards Popular? 

The Financial Action Task Force[2] (FATF) noted that global open loop prepaid card transaction volumes were expected to reach 16.9 billion annually in 2014 and it grew by more than 20 percent between 2011 and 2015. Here are some of the reasons the prepaid card is popular:

Unconventional Banking Solutions

In Canada, customers have the right to open a bank account at a bank or a federally regulated credit union once they can fulfil the requisite identification requirements. However, access to the banking system can be denied due to a combination of factors, including, but not limited to, bad credit record and regulatory requirements. Prepaid cards promote financial inclusion and offer various opportunities to clients who might be shut out of the banking system by allowing them to carry out basic banking activities without maintaining a relationship with a brick and mortar institution. An open loop prepaid card can also be obtained without a credit check, allows for unlimited reloads and can be used to withdraw cash from ATMs.

Payment Solutions

Prepaid cards can be utilised to make payments at outlets that only accept credit cards and they share some similarities with regular debit cards. They can be used to make bill payments, point of sale and online purchases, telephone order merchants, payroll solutions, cross border remittances and money transfers. Government mandates and initiatives have also supported the idea of disbursing payments electronically through prepaid cards.

Cost Effectiveness and Budgeting

Prepaid cards provide a low-cost alternative to a host of banking services such as payroll cheques and it eliminates the onerous tasks of processing certain payment types like cheque deposits. Most prepaid cards also offer a no-fee alternative relative to traditional credit cards and offer cardholders the chance to control their spending as you can only deplete what is loaded on the card. Some financial institutions also offer free travel cards that allow exchange rates to be locked each time funds are loaded to it and up to 10 currencies can be loaded at a time allowing travellers to carry less cash.

Anti-Money Laundering (AML) Vulnerabilities and Concerns 

Despite the many benefits of prepaid cards, some of their features make the cards vulnerable to money laundering as discussed below:

Anonymity and Faceless Transactions – Two of the most common themes of a money laundering strategy are anonymity and disguise. Prepaid cards allow criminals to connect with monetary value anonymously and completely bypass the more robust risk and monitoring mechanisms of a traditional banking system. Identification requirements for prepaid cards are also relaxed relative to conventional debit or credit card application requirements. According to FINTRAC, the wide variety of funding options available to a prepaid card holder means that the origin of funds is difficult to trace. Geographical intelligence analysis in transaction monitoring investigations of prepaid card activity is also more difficult to conduct as these cards can be loaded from third-party reseller locations which might be difficult to trace.  

Cross Border Capability - Due to the high fees and high level of scrutiny associated with cross border transactions, prepaid cards offer a low-cost alternative and ease of transportability. However, they carry a significant risk of enabling the ease of moving proceeds of crime across borders and evading law enforcement. Eight years ago, the US treasury department noted that drug cartels used prepaid cards to move the bulk of their illicit cash across the US border from Mexico as funds stored in a prepaid card did not fall under the reporting requirements as other monetary instruments. In Canada, the Canadian Border Services Agency (CBSA)’s definition of a monetary instrument[3] includes prepaid cards, recognizing the cards as an avenue by which illicit funds can be brought into the Canadian financial system.  

Cash and ATM Nexus - Cash makes it difficult to establish the source of funds, making it a convenient way of initiating the money laundering process. Funds held on prepaid cards are liquid as they can be converted to cash via ATMs connected to the card’s network anywhere.

Fraud and Identity Theft - Fraudsters have been known to take advantage of the faceless feature of prepaid cards to carry out their illicit activity. Due to lack of enhanced verification of identity, criminals are also known to request payments and refunds on prepaid cards as it obscures the audit trail. Stolen and fake identities have also been utilized to purchase prepaid cards which are then sold on for profit in the dark web.

Limited Regulations and Oversight - FATF recommended to the Canadian Ministry of Finance in its 2015 mutual evaluation that prepaid cards be covered in the Proceeds of Crime Money Laundering and Terrorist Financing Act (PCMLTFA) due to the high vulnerability associated with its use.

Government Intervention 

In June 2019, amendments were made in the PCMLTFA to capture issuers of open-loop prepaid cards as reporting entities, and subject them to the regulatory due diligence requirements of client identification, record keeping and suspicious activity reporting.

The second part of this write-up series will capture the regulatory requirements for issuers of open-loop prepaid cards in detail.

How MNP Can Help

MNP is a leading national accounting, tax and business consulting firm in Canada with more than 75 locations and over 5,500 team members across the country. Our dedicated AML professionals have developed and evaluated hundreds of anti-money laundering compliance programs for prepaid card companies and other FINTRAC reporting entities to the satisfaction of the regulators and financial service partners.

We can help you with the following:

  • Develop your AML compliance regime;
  • Conduct an independent review of your AML compliance program;
  • Prepare and respond to regulatory examinations;
  • Conduct AML compliance training;
  • Act as an outsourced Chief Anti-Money Laundering Officer; and
  • Conduct transactions monitoring review.

1. Assessment: Prepaid Stored Value Cards: https://www.justice.gov/archive/ndic/pubs11/20777/index.htm
2. FATF’s Mutual Evaluation of Canada’s AML Regime  http://www.fatf-gafi.org/countries/a-c/canada/documents/mutualevaluationofcanada.html
3. According to the CBSA, monetary instruments include stocks, bonds, bank drafts, cheques and traveller's cheques- https://www.cbsa-asfc.gc.ca/travel-voyage/declare-eng.html#_s6

For more information, contact:

Corey Anne-Bloom, CPA, CA, CA.IFA, CFE, CFF
Eastern Leader/Partner, Forensics and Litigation
647.775.1772
[email protected]
Greg Draper, FCPA, FCGA, CFF, CAMS, ICD.D
Western Leader/Partner,  Forensics and Litigation 
403.537.7679
[email protected]
Jacklyn Davies, CPA, CA, DIFA
BC Leader, Investigative & Forensic Services
604.637.1597
[email protected]
Rob Fowlie, CPA, CA, CFE, IFA
Toronto Practice Leader/Partner, Forensics and Litigation 

416.515.3802
[email protected]
Claudius Otegbade, CFE, CFCS, CFI, CBP
Senior Consultant, Forensics and Litigation
647.475.4554
[email protected]
Mondiu Jaiyesimi, BSc., MSc., CAMS, CBP
Consultant, Forensics and Litigation 
647.475.4500
[email protected]