Anti-Money Laundering Red Flags for Prepaid Cards

Posted August 10, 2016 by Christian Focacci & filed under AML General.

The AML risks associated with prepaid cards have been known for some time, and with more than $623 billion loaded on gift cards and other types of prepaid cards in the United States in 2015 there continues to be a challenge for AML professionals to identify illicit activity in this sector.

Below are three separate lists of AML red flags related to the use of prepaid cards from the Network Branded Prepaid Card Association (NBPCA), the Financial Actions Task Force (FATF), and the Wolfsberg Group. As highlighed in the below FATF paper,

“Red flags will be indicators of suspicious activity where a product’s actual use deviates from its intended use or does not make economic sense. For example, cash withdrawals in foreign jurisdictions will be expected where the product is a prepaid traveller card, but unusual where the product is marketed to minors. Red flags should therefore not be applied unthinkingly, but tailored to the product’s characteristics.”

Similar to most types of AML red flags, the majority of issues can either be grouped under transactions that do not make sense or fit the account profile, and red flags that involve discrepancies with the KYC of the customers.

Prepaid Red Flags the Network Branded Prepaid Card Association (NBPCA)

A customer with an excessive number of cards (based on program parameters)
A customer who is unwilling to provide information required by the CIP
A customer who presents unusual or suspicious identification documents that the financial institution cannot readily verify
A customer who requests a shipment of cards outside of the United States
A customer uses different tax identification numbers with variations of his or her name
A customer who is reluctant to provide the information needed for a mandatory report, to have the report filed, or to proceed with a transaction after being informed that the report must be filed
A Cardholder that coerces or attempts to coerce a bank employee to not file any required record keeping or reporting forms
High dollar deposits followed by numerous small withdrawals
A Cardholder who makes multiple value loads on the same day at different load locations
Large number of failed authorizations
Transactions posted to the card account without corresponding authorizations
Transactions occurring in more than one state or country on the same day
Repetitive transactions occurring at the same time for the same amount each day or each week
Transactions consistently occurring outside of the Cardholder’s residential area
Unexplainable transactions with no logical purpose
Repeated transactions outside of the Cardholder’s normal activity
Multiple transactions slightly below reportable thresholds

Prepaid Red Flags from the Financial Actions Task Force (FATF)

Discrepancies between the information submitted by the customer and information detected by monitoring systems
Individuals who hold an unusual volume of NPM (“New Payment Method” e.g. prepaid cards) accounts with the same provider
A large and diverse source of funds (i.e., bank transfers, credit card and cash funding from different locations) used to fund the same NPM account(s)
Multiple reference bank accounts from banks located in various cities used to fund the same NPM account
Loading or funding of account always done by third parties
Numerous cash loading, just under the reporting threshold of USD 10 000 (i.e., structured loading of prepaid cards), of the same prepaid card(s), conducted by the same individual(s) on a number of occasions
Multiple third party funding activities of a NPM account, followed by the immediate transfer of funds to unrelated bank account(s)
Multiple loading or funding of the same accounts, followed by ATM withdrawals shortly afterwards, over a short period of time
Multiple withdrawals conducted at different ATMs (sometimes located in various countries different from jurisdiction where NPM account was funded)
NPM account only used for withdrawals, and not for POS or online purchases
Atypical use of the payment product (including unexpected and frequent cross-border access or transactions)
Large number of bank accounts held by the same prepaid card company (sometimes in different countries) apparently used as flow-through accounts (may be indicative of layering activity)
Prepaid card company located in one country but holding accounts in other countries
(unexplained business rationale which could be suspicious)
Back and forth movement of funds between bank accounts held by different prepaid cards companies located in different countries (may be indicative of layering activity as it does not fit the business model)
The volume and frequency of cash transactions (sometimes structured below reporting threshold) conducted by the owner of a prepaid card company do not make economic sense

Source: Money Laundering Using New Payment Methods

Prepaid Red Flags from the Wolfsberg Group

Information mismatch from application
Application information/address/customer differs from pre-screened applicant
Inability to verify card holder identity information
Inability to provide government issued identification details
Primary/secondary user name appearing on applicable government watch/sanctions lists
Change of address to high-fraud area or to problematic jurisdiction, shortly after the card issuance or credit line increase
Frequent and unusual use of the card for withdrawing cash at ATMs
Structuring payments/Overpayments: balances on cards may move into regular credit where card holders pay too much or where merchants give credits to an account. Money laundering may be facilitated via refunds of the credit balance
Unusual cash advance activity and large cash payments: the monitoring of incoming cash is critical, as excessive cash payments are often an attribute of money laundering. Credit balance accumulation resulting in refunds (CBRs) should be monitored as they can be used
as part of a scheme to launder funds
Cross Border: cash withdrawn via cards in another jurisdiction permits easy (and potentially high-value) cross-border movement of funds with a limited audit trail
Unusual purchase of goods or services in countries regarded by an institution as posing a heightened risk for money laundering;
Excessive payments on private label credit cards via gift card from the merchant
Purchases at merchant on personal cards which are significantly out of pattern with historical spending behavior;
Merchant credits without offsetting merchant transactions
Excessive customer service calls
Abnormal customer contact behavior (e.g., frequent changes of address)
Multiple and frequent cash payment or money orders; large, cross-border wire transfer payments
Where Issuers have access to this information, Settlements/partial settlements from unrelated third parties
Where Issues have access to this information, unrelated checking/current account paying multiple credit card accounts
Excessive/ongoing large credit refunds