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Travelers to U.S. can expect new intrusion: prepaid card check

Federal regulations would require declaration of cards' value at border crossing

By

Welcome to the United States. Now show us your cards -- your credit cards, your debit cards and, especially, your prepaid payment cards.

International travelers, both Americans and foreigners, who arouse suspicions when they arrive at U.S. airports, seaports and border crossings soon may have to open their wallets and allow their cards to be scanned by U.S. Customs and Border agents.

It is part of a developing crackdown on the use by drug cartels and, potentially, by terrorists of prepaid cards to launder enormous amounts of money and smuggle it into and out of the United States. With that in mind, elements of the U.S. Department of Homeland Security are in the final stages of developing new financial disclosure rules that some international travelers may find particularly intrusive and invasive.

Travelers to U.S. can expect new intrusion: prepaid card check
WELCOME TO AMERICA,
NOW SHOW US YOUR CARDS

New border-crossing rules would impose a new intrusion on those entering the U.S.: declaring the value of their prepaid cards.

Before long, when incoming travelers fill out that familiar blue and white Customs Declaration form, they will have to include the value of their prepaid cards when determining if they are carrying more than $10,000 in reportable "currency or monetary instruments." Those "instruments" now include cash, checks, money orders, travelers checks, etc., but not prepaid cards. That is about to change.

Furthermore, because visual inspection by a customs agent of a plastic card might not determine whether it is a credit card or a debit card -- neither of which is of interest under these proposed regulations -- or very-much-of-interest prepaid card, the traveler might have to produce all of his or her cards for scanning by recently developed whiz-bang devices.

Many legal specialists and privacy experts are not pleased.

'Extraordinarily unfair'
"This is not just a burdensome hassle, it's extraordinarily unfair," said attorney Judith Rinearson, a payment system specialist at the international law firm of Bryan Cave in New York City and regulatory counsel for a prepaid payment card trade group. " We know that many students, immigrants and unbanked persons use and rely on prepared cards as their primary means of making payments and managing their finances. Why does someone with a debit card or a credit card not have the same onerous requirement?

"And what about a prepaid cardholder's right to financial privacy?" she said. "Why should they be singled out and treated disparately from users of other payment products? Why should law enforcement have access to their account balances without a subpoena or other due process?"

We hear you, federal regulators say, but we have to do something. It's a matter of national security, so we're bringing out the scanners.

"Branded, open-loop prepaid access [cards] can be indistinguishable from credit and debit cards, making it difficult for border agents and other law enforcement authorities to identify prepaid access [cards]," the U.S. Treasury Department's Financial Crimes Enforcement Network (FinCEN) said in explaining why the scanning will be required if the traveler and any accompanying cards provoke concern.

A prepaid primer
"Branded open-loop prepaid access cards?" "Monetary instruments?" "FinCEN?" Yes, as is always the case with federal regulation, this is an inherently complicated subject, so let's take it one step at a time:

  • Prepaid payment cards, also known in the financial industry as "stored value cards," are those slivers of plastic that look like credit or debit cards but -- under the hood -- are quite different. With credit cards, you get billed later. With debit cards, the cost of your transaction is pretty much immediately deducted from your bank account. But "prepaid cards" are just that -- prepaid. You pay for them with cash or other means and you access the stored value at some other time, either all at once or incrementally.
  • Open-loop prepaid cards can be used virtually anywhere that credit and debit cards are accepted. American Express, Visa, MasterCard, Discover and many other firms sell such prepaid cards. In some cases, these cards can be reloaded and used again and again. Because of these features, open-loop cards are particularly vulnerable to abuse by smugglers, terrorists and other bad actors. And they are swiftly growing in popularity, accounting for nearly $227 billion in sales this year and an expected $281 billion in 2013, according to the Network Branded Prepaid Card Association, a trade group.

Closed-loop prepaid cards are bought the same way as open-loop cards, but they only can be used at businesses run by the merchant that issues the cards. Basically, they are gift cards. Buy one at Macy's, you can use it only at Macy's. Though less popular in the underworld, they also can be abused by smugglers and others.

Stored value cards have been used and are being used by Mexican drug cartels to smuggle their drug revenues back to Mexico.

-- Sen. Susan Collins
Senate Committee on Homeland Security

Question: How would this abuse work? Answer: With dismaying ease. Rather than trying to cross the border with a suitcase full of illicit cash, a courier for, say, a Mexican drug cartel, can simply use that cash in the U.S. to buy a couple of decks of prepaid cards, easily carry them into Mexico and convert them back into cash using an ATM or through a number of other techniques. A terrorist entering the U.S. can do the same thing, buying the prepaid cards overseas and turning them into cash after he or she arrives.

The federal rules now being finalized regarding prepaid cards are intended to plug this widening loophole in the nation's financial reporting system.

Banks, credit card companies, investment firms and other financial operations already are required to report to the feds "suspicious activity" involving a customer's bank accounts, credit and debit card transactions, and so on. But prepaid cards have been exempt from these reporting rules.

"Stored value cards have been used and are being used by Mexican drug cartels to smuggle their drug revenues back to Mexico," Sen. Susan Collins, a member of the Senate Committee on Homeland Security and Governmental Affairs, said in introducing legislation related to the new rule. She said that up to $24 billion is smuggled into Mexico each year from the U.S., much of it using prepaid cards.

Shutting down a terrorist opportunity
Even worse, government officials have been worried for some time that these prepaid cards could make financial resources easily -- and furtively -- available to terrorist operatives of al-Qaida and other groups.

"The 9/11 hijackers opened U.S. bank accounts, had face-to-face dealings with bank employees, signed signature cards and received wire transfers, all of which left financial footprints," the U.S. Government Accountability Office said in a report on the potential dangers of prepaid cards. "Law enforcement was able to follow the trail, identify the hijackers and trace them back to their terror cells and confederates abroad. Had the 9/11 terrorists used prepaid cards to cover their expenses, none of these financial footprints would have been available."

And so, the government says, new reporting requirements must be placed on those carrying prepaid cards of significant value into or out of the country.

To address prepaid cards that might be carried out of the United States, the Treasury already has proposed new rules that require banks, credit card operations and other firms to file "suspicious activity reports" on large purchases and certain other transactions regarding these cards.

Had the 9/11 terrorists used prepaid cards to cover their expenses, none of these financial footprints would have been available.

-- GAO report, 
"Moving Illegal Proceeds"

To address the carrying of prepaid cards of significant value into the country, the new disclosure and scanning requirements soon will be in place at our international airports and seaports.

At the moment, however, the government and a host of interested parties are working on a variety of issues and trying to sort out numerous complications:

  • First, customs agents will have no interest in your credit cards or debit cards, the government says, aside from trying to distinguish them from the prepaid cards that are of interest.
  • Also, you will not be asked for your PIN codes or other card-related codes, even if your disclosure forms or the card scanners arouse suspicions. You will, obviously, be subject to other inquiries, however. This is especially true if you are carrying a large amount of "reloadable" prepaid cards.
  • Though this is still being worked out, you likely will be asked to disclose only the original amount of value placed on the prepaid card or for an estimate of the remaining value. This is a key concern of some industry officials.

"Consumers are unlikely to know, or have access to, their prepaid card balance when filling out a currency and monetary instrument report," Randi Adelstein, a vice president of MasterCard Worldwide, told FinCEN. "Unlike cash or traveler's checks, the value of which is indicated on the face of the instrument, the balance associated with a prepaid card cannot be readily determined by physical inspection of the device itself."

Rinearson agreed, noting that the balance on a prepaid card almost always is a moving target that generally is invisible to the holder and that the regulation will prove particularly confusing to international visitors to the United States.

"Just like a debit card, the balance on a prepaid card may go up or down even while it's in your wallet, because -- for example -- you can direct deposit your salary or benefits to the card," she said.

"So a consumer flying on a plane to the U.S. and filling out one of those currency reporting forms won't really know for sure what the balance is, and whether it's more or less than $10,000, until she lands and calls or goes online to check the balance," Rinearson said. "And if she's carrying additional cards, such as gift cards, she's going to need to check the balance on all of them, because she has to aggregate the amount on all her prepaid cards when she reports the balance."

Financial industry divided
Overall, the financial industry is divided in its response to the government's plan. Some prepaid card issuers and their trade representatives are expressing guarded support.

I have to admit that I keep hoping someone with authority will take a closer look at this and realize that, though well intended, the proposed regulation is flawed and just won't work.

-- Judith Rinearson
Attorney, Bryan Cave

The American Bankers Association: "While there are clear differences between traditional monetary instruments and prepaid access devices, ABA accepts the proposal as a feasible response to the congressional mandate [to tighten reporting requirements]. Nevertheless, we recommend that FinCEN monitor the utility of this reporting obligation and hold law enforcement accountable for demonstrating that the value of this new reporting requirement exceeds its costs."

Others, not so much.

The Network Branded Prepaid Card Association: "The NBPCA supports efforts to make the smuggling of proceeds of illegal activity into and out of the United States more difficult. However, we believe the approach suggested [by the government] ... is unworkable and will do little to accomplish this goal as currently drafted."

"I have to admit that I keep hoping someone with authority will take a closer look at this and realize that, though well intended, the proposed regulation is flawed and just won't work," said Rinearson, who counts NBPCA as one of her clients.

900,000 enter US per day
Nevertheless, U.S. Immigration and Customs Enforcement, whose border agents will have to deal with the new rules and with travelers not happy about the new procedures, said it is getting ready. Every day, at 329 ports of entry and 139 Border Patrol stations, these agents process more than 900,000 people who are entering the United States.

"This rule recognizes that these [prepaid card] products in fact represent the evolution of other reportable monetary instruments like money orders and travelers checks," James Dinkins, an Immigration and Customs Enforcement official, told FinCEN.

He said his agency is developing "a handheld reader with features that will, among other things, allow law enforcement to quickly and accurately differentiate between a traveler's debit, credit and prepaid products."

Dinkins said that federal agencies, anticipating imminent approval of the new reporting requirements, are developing "an enforcement strategy that will strike a balance between national security and the delivery of important services to millions of people that utilize prepaid access devices for a wide variety of legitimate purposes."

Earlier story: Proposed Treasury rules take hard line against prepaid card fraud

Published: November 13, 2012



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