Prepaid credit cards are found everywhere. By the checkout counter at your grocery store and deli, at your bank and pharmacy, and even on websites. They are increasingly a popular alternative to cash or paper checks, and a nice option for the "unbanked" segment of the population. Payrolls are being disbursed by these cards as are some government entitlement programs.
The Fraud
Prepaid (stored value) cards are convenient for everyone . . . particularly money launderers. They are completely anonymous and transportable across borders and not subject to normal regulatory controls.
The Flaw
They are not subject to Suspicious Activity Reporting and vigorous due diligence that our banking system relies on to catch crooks.
Prepaid credit cards exist in two forms, and both rely on remote databases that must be accessed to process a transaction such as MasterCard or visa.
- Closed-loop prepaid cards are usable only at a certain store or service, such as Target or Starbucks or the Chicago Transit Authority. In general, they are not reloadable, although that is rapidly changing as the technology improves.
- Open-loop prepaid cards are the ones that pose the anti-money laundering compliance threat. They can usually be reloaded and they can be used anywhere debit or credit cards can be used.
The Fix
Banks and other issuers of the cards have been actively working to protect their product lines from abuse, but the inherent risks are still there.
Improved regulatory control could be imposed upon these instruments, just as it is on all other banking/monetary systems.