The cashless economy steadily grew and eventually skyrocketed when the pandemic hit. For this reason, businesses respond with more sophisticated anti-money laundering measures.
The world continues to shift to more technological advancements. Businesses also apply these advancements in their systems to their benefit. Consequently, the cashless economy steadily grew and eventually skyrocketed when the pandemic hit. For this reason, businesses respond with more sophisticated anti-money laundering measures.
In April 2020, the results of a study done by Mastercard concluded that contactless transactions grew by 40%. Just last February 2021, statistics showed that 2.8 billion people worldwide used cards in their transactions. As of 2020, the global digital payments industry has a market value of USD 5.4 trillion. Researchers expect the industry valuation to increase to USD 6.6 trillion in 2021, marking a 40% increase, according to a study by Finaria.it.
As this trend continues, prepaid cards rise in popularity. Since they cannot be tracked in a similar way to debit and credit cards assigned to a specific user, scammers attempting to launder money prefer these.
Prepaid Cards
Even though prepaid cards existed since the 1990s, they recently gained more and more popularity. When you search for a list of prepaid cards available, you find a lot more options to choose from than when businesses initially introduced them.
Prepaid cards recently gained more traction because more people see them as a better option in catching up to the cashless economy. These cards function similarly to debit and credit cards. Still, these cards are unique in that they can be preloaded and reloaded with cash. Additionally, unlike credit and debit cards, these can be purchased by someone else on behalf of the recipient of the prepaid card.
Why do people prefer to use prepaid cards over debit or credit cards? First, while they perform the same functions, prepaid cards offer more accessibility than debit or credit cards. Prepaid cards offer the ability to avoid setting up a bank account or submitting any documents to use them.
Another benefit of having a prepaid card is its ability to be utilized for other things like paying bills. Additionally, many merchants accept prepaid cards in cashless transactions, even internationally. Lastly, it helps consumers become more conscious of how much they spend. Their purchasing power depends on the amount of money preloaded onto the card.
Prepaid Cards and Money Laundering
Unfortunately, prepaid cards attract more than just consumers. They also attract criminals who take advantage of the many benefits of prepaid cards and use them for criminal activities. Specifically, they use them for two things: money laundering and fraud.
The same benefit that attracts consumers to use prepaid cards makes them susceptible to money laundering: their accessibility. This accessibility allows criminals to easily purchase a copious amount of prepaid cards in different locations.
After purchasing the cards, the criminals use them to break down illegally acquired money into smaller amounts (“smurfing”). They then pre-load the smaller amount to the prepaid cards. Since prepaid cards are accepted internationally, they transfer them overseas to withdraw these funds.
These prepaid cards provide anonymity due to their nature, allowing criminals to get away with laundering. Some criminals go the extra mile to maintain anonymity and hire money mules to purchase and transport these cards for them.
Prepaid Cards and Fraudulent Activity
Another way that criminals use prepaid cards for malicious intentions is using these prepaid cards to purchase materials like expensive software or computers. Then, they resell them to beneficiaries for a higher price. There are some instances in which they used prepaid cards to buy legally available materials for drug manufacturing in drug cartels.
Cases of money laundering with prepaid cards rose over the past few years. Last 2017, an infamous gift card scam occurred in Florida. A criminal used stolen credit card information to purchase 45,000 gift cards. Afterward, they resold them for a total of USD 9 million.
In the United Kingdom, 11,329 reported cases of fraud involving iTunes gift cards resulted in a £6.6 million loss. In the United States, more than 38,000 reported money laundering cases in 2019 involving prepaid cards cumulated in USD 103 million in losses.
Anti-Money Laundering (AML)’s Response to Prevent Money Laundering
The continuous growth rate of money laundering cases alarms consumers and businesses alike. As a result, different jurisdictions and governing bodies urge businesses and companies to look for red-flag indicators to spot potential criminal activity. Some of these indicators include:
- Clients who ask suspicious questions about their prepaid cards.
- Clients who purchase prepaid cards in suspiciously large quantities or clients who have huge prepaid transactions.
- Frequent activity of cash reloading on the prepaid card but from a third party.
- Funds immediately transferred after reloading.
- Prepaid cards only used for transfers and not purchases.
These jurisdictions also continuously tighten their anti-money laundering regulations to prevent money-laundering risks. Europe implemented the 6th Anti-Money Laundering Directive (AMLD), which expanded the current AML legislation scope, importantly including cyber-crime in the scope. The 6th AMLD also clarified regulatory details and included that those who aid criminals in the act of money laundering are also now considered criminals. Additionally, they increased the severity of existing criminal punishments, extending the minimum sentence to 4 years.
The United States implemented the Bank Secrecy Act (BSA) and certain provisions in the USA Patriot Act. These help detect and prevent money laundering and terrorist financing. Section 352 of the USA Patriot Act strictly requires financial institutions like prepaid card providers to establish AML programs which must include: the development of internal controls, designation of an AML officer, an employee training program, and scheduled independent audits.
Protect Your Company Against Money Laundering
Even with these regulations implemented, you must remain vigilant in protecting your company against these risks. One relatively new but innovative way to protect your company is by combining AI and human resources for an additional protective layer against fraud and money laundering.
The benefits of having a robust AI-powered AML compliance program include:
- An AI-powered AML compliance program enhances the customer experience by making it more efficient.
- AI-powered AML compliance programs give you an additional layer against criminals who use cryptocurrency for money laundering.
- An AI-powered AML compliance program increases collaboration and data sharing on fraud data through a collaborative network, making your company or business more aware of the tactics criminals use in money laundering.
While money laundering cases continue to rise at an alarming rate, you can avoid being a part of the victim statistics. Fortunately, tried and tested strategies exist, that you can implement to ensure your company’s safety against money laundering crimes.