Research and Statistics

Proposed Treasury rules take hard line against prepaid card fraud


New rules aimed at fighting crime and terror financing could impact gift card buyers, experts warn.

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The government’s efforts to crack down on criminal financing could make it tougher for consumers to buy gift cards, some experts warn.

suspicious activity reports

Under proposed rules from the Treasury Department’s Financial Crimes Enforcement Network, prepaid card providers and sellers would have to fill out Suspicious Activity Reports (pictured above) on customers for suspicious transactions, such as those totaling more than $2,000.

Amid concerns that so-called stored value cards and devices offer a way for criminals and terrorists to quietly move funds internationally, the government is looking to step up its efforts to combat the misuse of these products.

As a result, newly proposed rules from the Treasury Department’s Financial Crimes Enforcement Network (FinCEN) look to better identify prepaid card users by placing requirements on nonbank providers and sellers of these products. The rules, which were mandated by the Credit CARD Act of 2009, require more data collection and reporting from businesses, and some experts say they could make prepaid card buying a challenge for some consumers.

“It’s potentially going to put a very significant burden on the store to comply,” says Terry Maher, partner with Baird Holm and general counsel to the Network Branded Prepaid Card Association (NBPCA) trade group. “It may make the products less available to consumers who rely on them.”

Starting June 28, the public will have 30 days to comment on the rules, which require nonbank prepaid card providers to:

  • File suspicious activity reports (SARs) with the government on suspicious activity of more than $2,000. Suspicious Activities Reports are Treasury Department forms already required of banks, casinos, poker rooms, securities and futures firms and others in the money services business. More than 5.6 million have been filed since they were first mandated in 1996 (see chart). The proposed rule would add nonbank card providers to the ranks of those required to file forms with the government when their suspicions are aroused.
  • Collect customer information anytime a card is reloaded at someplace other than a bank.
  • Maintain transaction information.

Prepaid card providers and sellers would include retailers such as Wal-Mart and Target, as well companies like, which specialize in producing the cards.

Following the comment period, the final rules could end up looking somewhat different from the current proposal, and it could take up to two years for those final changes to take effect. However, prepaid card changes are coming.

What the rules could mean to consumers
So how could these rules impact consumers who buy and use stored value cards? It likely won’t impact you if you’re just buying a $25 iTunes gift card or a $50 gift card to Outback Steakhouse — unless you buy a lot of them. This rule chiefly focuses on cards that:

  • Don’t have the value clearly labeled on them.
  • Are reloadable at places other than banks.
  • Can have a maximum lifetime value of more than $1,000, including reloads.
  • Can be used anywhere — especially if they can be used internationally.
  • Can have the value transferred to another card.
  • Are purchased in large amounts or seem otherwise suspicious.

In short, the goal is to keep gift cards out of the hands of terrorists, not holiday shoppers. “Most of the changes that come from these changes would be pretty transparent to the consumer,” says Ben Jackson, a senior analyst with Mercator Advisory Group. He notes that prepaid card sellers may ask for ID more often at the time of purchase, for example.

NBPCA’s general counsel Maher thinks the rules could potentially do much more than that. “Will this impact the convenience and availability of products to consumers, especially to low and moderate income consumers?” he asks. Maher says that with a burden to comply, additional training needed for employees and potential delays at the register, stores such as CVS could decide to stop selling prepaid cards altogether. That could force unbanked consumers — those that don’t have a traditional checking or savings account — to use cash instead of plastic.

As for other changes, payments expert Judith Rinearson, a partner with the international law firm of Bryan Cave, says prepaid card users may experience the following:

  • Finding a card that can be used outside the United States will become more difficult and costly, with a higher level of review and oversight required.
  • Retail gift cards that can be used outside the United States, even if it’s just at a store’s Canadian location, will probably cease being offered.
  • It will be more difficult to find general purpose reloadable cards that can hold more than $1,000 because a retailer is likely going to resist collecting and retaining identification data.
  • Issuers of these cards may offer $1,000-only cards at retailers and will then allow upgrades to higher dollar cards only after the consumer provides more identification.
  • It will be tougher and likely more expensive to obtain prepaid cards that allow for card-to-card transfers.
  • Cards that are subject to the more stringent anti-money laundering requirements will likely become more expensive overall, due to increased regulatory, record-keeping and monitoring obligations.

There are other concerns, as well. “I worry about things like giving sensitive information to staff in those fairly ‘open’ retail environments where you have lots of employees and access,” says Debra Geister, senior director, AML and Compliance Services with LexisNexis Risk Solutions in New London, Minn. “This may be a bit of a barrier to the sale of these instruments.”

Mercator analyst Jackson, however, says the rules are unlikely to force businesses to abandon their sales of prepaid products. “I don’t think this is going to be the thing that will push gift cards out of the mom and pops,” he says.

“For the most part, I don’t see where it’s going to be the consumer so much that’s affected as it’s going to be the program managers who run these types of prepaid card programs,” Jackson says.

Targeting terrorists, not Average Joes
But again, the goal of these rules is to make life difficult for potential terrorists, not for the average gift card shopper or small business owner. They’re intended to help the regulations catch up with an industry that’s exploded in terms of popularity and innovation in the past 10 years. “If these gaps are not addressed,” the Treasury said in its proposed rules, which amend the Bank Secrecy Act, “there is increased potential for the use of prepaid access as a means for furthering money laundering.”

“FinCEN’s goal is to make it more difficult for criminals to misuse these systems and products. We’re always concerned about any mechanism that could provide criminals [the ability] to quickly move large amounts of money, without leaving much of a trail,” says Steve Hudak, FinCEN’s chief of public affairs. “We do recognize the value and convenience that these products present for millions of consumers, and we’re trying to strike the right balance between protection and convenience.”

What activities prompt the most Suspicious Activity Report filings?
Below is a list of activities that prompt filings of Suspicious Activity Reports (SARS) by businesses and how many reports were filed for that reason for each year from 2003 through 2009.
Suspicious Activity200320042005 2006 2007 2008 2009
BSA/Structuring/Money Laundering155,468214,797303,318302,818347,398382,338376,718
Counterfeit Credit/Debit Card 1,3921,7592,2432,4562,7282,4192,368
Credit Card Fraud 21,08625,14927,86131,22232,57539,71141,548
Debit Card Fraud 1,5782,6793,3563,8304,7445,2425,397
Identity Theft 3,16515,49121,95028,65630,95839,47636,093
Terrorist Financing 495987958736687506545
Yearly total for categories above
Grand total for 2003-2009 (incl. categories not shown): 4,547,312
Source: The U.S. Treasury’s Financial Crimes Enforcement Network

See related: Study: Terrorists pay with credit cardsThe credit card-terrorism connection, 2009 gift card comparison tableCredit card reform arrives in the form of the Credit CARD Act, Faisal Shahzad’s alleged terrorist plot paid for with cashDid credit cards fund — or foil — latest terror plot?, Tracking terrorists’ credit cards when ‘funding is the mainstay of jihad’, Supreme Court rulings unlikely to embolden terrorists

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