Prepaid Access MIDWEST ANTI-MONEY LAUNDERING CONFERENCE Federal Reserve Bank of Kansas City March 5, 2014

Transcription

1 Prepaid Access 2014 MIDWEST ANTI-MONEY LAUNDERING CONFERENCE Federal Reserve Bank of Kansas City March 5, 2014

2 Discussion Points Emerging Technology Prepaid Access What is it and how does it work? Open vs. Closed Loop products Characteristics and features Prepaid Access Payment Chain Assessing and managing anti-money laundering (AML) risks

3 Emerging Technology Generally New products and services: Have changed how we do business less face-to-face transactions Internet/ P-2-P transactions/ digital check imaging/ mobile payments/ virtual worlds involving financial transactions Have impacted financial and social behaviors Who is offering the new product or service? A bank? A money services business? An unregulated entity? Have varying money laundering risks depending on their features and characteristics and how they are managed

4 Prepaid Access What is it? Pay-in-advance May be used like money Likely transferable Closed loop system: Starbucks card, mass transit cards Open loop system: general purpose reloadable cards

5 Prepaid Access Prepaid products require the consumer to pay in advance for future purchases of goods and services. Each payment is subtracted from the balance of the card or product until the total amount is spent. Bank Secrecy Act (BSA) regulatory definition: Access to funds or the value of funds that have been paid in advance and can be retrieved or transferred at some point in the future through an electronic device or vehicle, such as a card, code, electronic serial number, mobile identification number, or personal identification number.(31 C.F.R (ww)) Some products permit consumers to pay bills, make purchases, and withdraw cash from ATM networks.

6 Types Scope Open Loop May be used by an unlimited number of merchants Closed Loop Use is limited to a specific location, vendor, or system Storage Capacity Fixed Amount Purchased for a certain denomination Does not allow upgrades or reloads Reloadable Upgradeable Purchased for a certain amount Allows reloading after use, up to a certain denomination Allows for additional amounts to be added after purchase

7 Types - Continued Access to prepaid funds Cash Accessible May obtain funds through ATM network or point of sale (POS) Non-cash Accessible May not obtain funds through ATM network or POS Storage Capacity Network Based Access information contained in magnetic stripe (like a credit card) Chip Based Value stored on a remote database Access information code on computer chip embedded in the card

8 Technology Chip and Pin Vs. Magnetic Stripe Many countries outside the U.S. use the chip and pin (EMV standard) technology where a computer chip is embedded in the prepaid card and the consumer must also enter a personal identification number at the POS. Different POS readers and infrastructure are needed for this product than for the magnetic stripe prepaid products. The magnetic stripe prepaid card, common in the United States, contains account data recorded on the stripe that is reviewed by a magnetic reader at POS, like a credit card. These products clear and settle through or ride the rails of the network branded credit card system.

9 Open vs. Closed Loop Open Loop Prepaid Product: This is generally understood to mean a network branded general spend prepaid product that is accepted everywhere that Visa, MasterCard, American Express or Discover is accepted. Some open loop products are reloadable and function similar to traditional bank deposit accounts, often requiring the collection of customer information before activation. Many open loop products are anonymous but others can also be issued in the name of an individual.

10 Open vs. Closed Loop (continued) Closed Loop: This generally means a prepaid product used for a specific purpose or specific service. BSA Regulatory Definition - Closed loop prepaid access: Prepaid access to funds or the value of funds that can be used only for goods or services in transactions involving a defined merchant or location (or set of locations), such as a specific retailer or retail chain, a college campus, or a subway system. (31 C.F.R (kkk))

11 Prepaid Transaction Chain There is no one business model. Some participants may serve in multiple roles. A prepaid transaction chain may have limited participants or many along the chain. The terms for prepaid and for the participants are many and there is no agreed upon vernacular. Many participants along the transaction chain may hinder financial transparency

12 Participants in the transaction chain Program Manager: Runs the program s day-to-day operations. This entity may or may not also be the entity that creates the program and designs the features and characteristics of the prepaid product. Network: Any of the payment networks, including MasterCard, VISA, Discover and American Express, that clears, settles, and processes transactions. Distributor: Ships prepaid products to endpoints. Payment Processor: The entity that tracks and manages transactions and may be responsible for card account set-up and activation; adding value to products; and fraud control and reporting. Issuing Bank: A bank that offers network branded prepaid cards to consumers and may serve as the holder of funds that have been prepaid and are awaiting instructions to be disbursed. Seller or Retailer: A convenience store, drugstore, supermarket, or location where a consumer can buy a prepaid product.

13 Risk Factors Frequency daily or monthly limits? Dollar thresholds maximum loads? Anonymity Ability to reload International use Ability to transfer funds Ability to co-mingle funds Primary purpose and use of the card

14 Assessing Risk As when introducing any new product, banks should ensure their risk assessment is updated to accurately reflect BSA/AML risks associated with a new payment system. Existing or new customers? Online capabilities and non-face to face transactions? Existing or new geographies? 3 rd parties?

15 Assessing Risk (Continued) Understand the specific product/program. How will the bank and the partners manage the program? Responsibilities, checks, and controls. Usually contractual (pros and cons). How will the bank s name be used? Who has what information? Who sets limits and who enforces them? Involvement of other third parties.

16 3 rd Party Due Diligence Program Managers, Independent Sales Organizations, Agents, Marketers, Processors Company reputation? References? Financial information, banking relationship Ownership, principals, structure, beneficial owners Location of operations? Web-based? Site visit? Related parties? Other companies? Internet, open source information Who performs the due diligence? Limited or negative information

17 Suspicious Activity Monitoring Fraud, discontinuing access to bank s systems Across multiple processors or programs? Volume, compatibility of data Average loads, balances Common elements (address, tax ID number, ) Transaction locations, types, velocity Series of transactions over time MSB registration (provider or seller of prepaid access?)

18 Managing AML Risks Risk assessment different products pose different AML risks Establish transaction limits Eliminate Anonymity Determine customer vs. non-customer Develop customer identification procedures Monitor transactions Conduct appropriate due diligence on third party service provider Suspicious activity monitoring ( by, at, or through the bank )

19 Questions?