In May 2009, the Financial Crimes Enforcement Network (FinCEN), a bureau of the U.S. Department of the Treasury, asked for input from the prepaid card industry concerning the definition of stored-value.
FinCEN sought clarification of the term in order to revise the Bank Secrecy Act (BSA) regulations that cover the obligations of money services businesses (MSBs) in reporting possible instances of terrorist financing, money laundering and other financial crimes.
"The proposed changes are intended to more clearly delineate the scope of entities regulated as MSBs, so that determining which entities are obligated to comply will be more straightforward and predictable," FinCEN said.
As part of the possible changes outlined in its notice of proposed rulemaking (RIN 1506-AA97, found at http://edocket.access.gpo.gov/2009/pdf/E9-10864.pdf), FinCEN desires to revise the definition of MSB so that issuers - as well as sellers or redeemers - of stored-value products will fall into the same broad MSB category for purposes of regulating their anti-money laundering (AML) practices.
FinCEN specified that MSBs in the prepaid card industry play a critical role in helping unbanked consumers access financial services via electronic payments. Since the prepaid card industry has grown so large, FinCEN is concerned that sellers and redeemers of stored-value should be subject to the same BSA and AML requirements as issuers of stored-value.
"Law enforcement, FinCEN and other federal regulators have repeatedly stressed the need to prevent transactions that typically flow through these businesses from going underground, which would diminish transparency with respect to these transactions," FinCEN said.
In response to FinCEN's query, the Network Branded Prepaid Card Association drafted a letter that outlined how it believes stored-value should be defined.
The letter, which can be accessed at www.nbpca.com/docs/NBPCA-Notice-of-Proposed-Rulemaking-RIN-1506-AA97.pdf, said the definition of stored-value should only include "instruments that represent monetary value, as is the case under the current definition."
The NBPCA's point is that cards that do not provide access to funds, such as point-based rewards cards and electronic coupons, should not be covered under the definition. Regulating those products would "significantly increase compliance costs" for card issuers and program managers to no great benefit, since these products pose little risk of being used to facilitate money laundering or fund terrorist operations, the NBPCA said.
Furthermore, FinCEN asked if stored-value should be considered money transmission. The NBPCA believes not, since prepaid cards do not contain monetary funds, but instead function as access devices. "Any rule which would designate some stored value products as money transmission would cause unnecessary confusion without enhanced effectiveness," the NBPCA said.
The NBPCA understood the question to also mean whether an issuer of a stored-value product can be defined as a money transmitter, which would include that issuer in the MSB category and subject it the BSA regulations. To that question, the NBPCA answered no.
"This would cause very serious issues for the industry, but would do little to assist law enforcement," the NBPCA said.
The burdens of regulatory compliance that would be foisted on issuers, as well as sellers and redeemers of stored-value products, might force businesses such as retailers to discontinue selling prepaid cards to the public.
In its letter, the NBPCA took the opportunity to debunk a few common misperceptions about prepaid cards. Among them were that prepaid cards:
In response to the first myth, the NBPCA said issuers, sellers and redeemers of open-loop, network-branded prepaid cards must follow legal requirements set forth by the USA Patriot Act, the BSA and by other regulatory entities. In addition, program managers, processors and other third-party service providers are subject to oversight and audit by issuing banks as well as bank regulators, the NBPCA said.
As for the second myth, the NBPCA noted that, with the exception of cardholders of low-value gift cards, prepaid card users are required to provide identification and verification during the card activation process. Finally, the NBPCA maintains that load limits on prepaid cards issued by its members in the United States generally range from $2,500 to $10,000. And the typical amount loaded on a general purpose reloadable prepaid card is less than $250.
In conclusion, the NBPCA's position is that stored-value products should be evaluated by FinCEN using the same criteria as that of other financial products and services, namely by assessing the degree to which each product is at risk of abuse by money launderers and terrorist financiers.
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