What’s in your Wallet?

Stephen Middlebrook, the General Counsel at FSV Payment Systems, Inc., in Jacksonville, Florida, wrote the article: What’s in your wallet? Could it be the Department of Homeland Security? Middlebrook’s article discusses a current hot topic in the financial services industry. Moreover, the article states that the Department of Homeland Security (DHS) has plans to stop certain people at the border and scan the payment cards in their wallets, check the cardholder’s balances and, in certain cases, seize the funds on the card. The DHS initiative is related to regulatory changes proposed by the Financial Crimes Enforcement Network (FinCEN).

But DHS’s new program to stop individuals at the border in order to scan their payment cards, obtain information from their financial institutions, and potentially seize funds associated with the cards could raise serious legal questions. It has the potential to invade the privacy of travelers and, in the process, violate federal law. Recipients of state and federal benefits along with other people who cannot afford a bank account will be called out at the border, subjected to additional scrutiny, and potentially turned into inadvertent law breakers. Financial institutions may incur significant liability because of the government’s illegal actions.
Middlebrook’s article also discusses how prepaid cards are similar to debit cards, but rather than being tied to a checking account, they draw funds from a prepaid balance placed with the issuer by the cardholder or a third party such as an employer or government agency. The cards can be used to make purchases at retailers and some also allow for access to cash at ATMs. Government and private employers have embraced prepaid cards as a way to pay benefits and wages while avoiding the expense and burden of cutting paper checks.

But for a number of years, law enforcement has expressed concern that prepaid cards could be used by criminals to launder the proceeds of illegal activity and remove it from the country, although no significant cases involving prepaid cards have been prosecuted. In response and according to Middlebrook, both FinCEN and banking regulators have strengthened their rules regarding prepaid products and increased oversight of institutions that offer such products. In addition, banks, processors, and other entities involved in prepaid have significantly stepped up their anti-money laundering (AML) programs, adopting more stringent customer identification and transaction monitoring programs to prevent criminal use of their products. As a consequence, the risk potential for prepaid has been lowered significantly over the past few years. A January 2013 study by the Federal Reserve Bank of Atlanta reviewed a number of prepaid programs to evaluate the potential they could be used for money laundering and concluded: “Given both the regulatory and industry measures in place for mitigating money laundering risks associated with U.S.-issued GPR prepaid cards, these products are no longer the attractive instruments for money laundering that they once might have been.” While law enforcement may still have concerns about misuse, those fears have not materialized and the risk that prepaid cards will be used for money laundering purposes continues to decrease over time.
But what are your thoughts for the following questions:

• Can these harms be justified for a program that is unlikely to identify or prevent significant amounts of money laundering?

• Should DHS be required to address these legal and operational deficiencies before it moves forward with the program?

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