BOGOTA, Colombia – Forget bulk cash. Heavy and hard to hide, it's simply not the most convenient cross-border conveyance for a 21st-century money launderer.
A safer and increasingly attractive alternative for today's criminal is electronic cash loaded on what are called stored-value or prepaid cards. Getting them doesn't require a bank account, and many types can be used anonymously.
U.S. crimefighters consider the cards a burgeoning threat that regulators haven't adequately addressed.
In the past year, said John Tobon, a senior U.S. Immigration and Customs Enforcement agent, the cards have become the preferred means of paying couriers who transport illicit drugs across the U.S.
No one knows how big a role the cards play in moving the more than $20 billion in drug earnings that U.S. authorities estimate crosses from the U.S. to Mexico annually. Yet while anyone crossing that border with $10,000 or more in cash must declare it, prepaid cards are legally exempt.
"Law enforcement loses lives all over the world trying to keep (major criminals) unbanked, and these prepaid cards are offering them a great alternative to sneak into our financial system," said Tobon.
It was bank and wire-transfer records that enabled law enforcement to identify the 9/11 hijackers and their overseas cells. "Had the 9/11 terrorists used prepaid (stored-value) cards to cover their expenses, none of these financial footprints would have been available," a U.S. Treasury Department report observed.
Visually, the cards are barely distinguishable from credit or debit cards and the most versatile let users reload them remotely without having to reveal their identity, using cash, moneygrams, PayPal and other online payment services.
Some cards can process tens of thousands of dollars a month. Just load them up in Connecticut or Texas with, say, the proceeds of cocaine sales and collect the cash in local currency from an ATM in Medellin, Colombia or elsewhere in Latin America.
"I'm not so sure we have a sophisticated understanding of how to deal with this," said Richard Stana, who oversaw a report on prepaid access for the General Accounting Office, the U.S. Congress' research arm. "It's just a whole new way of doing business."
In one of the first cases to clue law enforcement to the threat, a Dallas-based company called Virtual Money Inc. provided the cards to crews who helped Colombian drug traffickers move at least $7 million to Medellin during three months in 2006, prosecutors say.
The money moved digitally, as most legitimate capital travels these days, but bypassed bank accounts, making its digital footprint harder to detect. Virtual Money allegedly violated U.S. banking law by not reporting transfers of above $10,000 or other activity suggesting illegal money movement.
David Zapp, a New York attorney for a defendant sentenced to 45 months in prison in the case, said his client was a small player in a scheme in which cards he was aware of had relatively low load limits of $1,000.
The trick was volume — and the ability to replenish the cards.
Some launderers probably had 400-500 cards, he said. "Sometimes they would sell the card or sometimes they would rent the card or sometimes they would use the card for their own clientele."
Law enforcement officials won't discuss the case because Virtual Money's president, Robert Hodgins, remains a fugitive. In 2008 the government seized his suburban Oklahoma City home, more than $250,000, and two cars.
Investigators said they were able to get an informant inside Virtual Money. Generally, cases tend to be difficult to build because money movements must be linked to a crime.
State and local police in the U.S. are only just waking up to the cards, so ICE created an explanatory pamphlet it is distributing far beyond Customs and Border Patrol agents.
"We're involved in a case much larger than Virtual Money," said Paul Campo, chief of the DEA's financial crimes unit. It is in the U.S. southwest, he said, adding that the DEA also has active cases in New England and the state of Georgia.
While offering more options to money launderers, prepaid cards also are changing the way ordinary law-abiding citizens and businesses and even governments handle money. Wal-Mart uses them to distribute payrolls, and U.S. government agencies to deliver benefits such as food assistance. Migrant workers use them to send money home.
In the U.S. alone, an estimated $107 billion moved on branded prepaid cards last year, according to Aite Group, a financial research firm. Globally, the Boston Consulting Group forecasts, transactions with reloadable prepaid cards will reach $840 billion a year by 2017.
The cards offer flexibility, privacy and a shield against ID theft. Cheaper varieties are sold at pharmacies, mall kiosks and check-cashing storefronts.
An October report by the 34-nation FATF, the Financial Action Task Force that sets global anti-money laundering standards, cites just a half dozen laundering cases involving prepaid cards in their short history — each involving from $200,000 to $5 million and most in the U.S. Yet Tobon says they have in the past year or so become the preferred method for paying smugglers to move drugs across the U.S.
"Their payment is being given to them on these cards," said Tobon, who runs ICE's illicit finance and crime proceeds department.
In Colombia, the financial investigations agency chief says he fears drug traffickers are repatriating huge sums from Europe and Asia with high-limit prepaid cards obtained there.
"You enter (Colombia) carrying five cards in your pocket and that's a quarter million dollars," said Luis Suarez. "And of course they can be reloaded remotely."
There are technical differences between stored-value and prepaid cards: The former have a chip that contains the sum they hold, the latter use a magnetic stripe for verification and store the sum on a central computer.
But more important is the cards' versatility.
The most flexible are those, typically branded by Mastercard or VISA, that can be used on ATM networks, online and in stores. There are also varieties that can only be used at specific retail outlets and are not reloadable.
Some can be used anywhere credit or debit cards are accepted but not at ATMs; these made up the majority of 280 cards seized last year in three unrelated traffic stops in New Mexico, ICE said. Some had been issued by Wal-Mart.
The Treasury wants to require any business selling cards that can be used internationally to keep customer identity records and report suspicious transactions. That would affect more than 43,000 U.S. sellers including mom-and-pop groceries and stores such as Wal-Mart.
The prepaid card industry is balking, saying such rules would hike administrative costs that would eventually land on consumers.
The proposed Treasury rules would not, however, make it mandatory to declare cards loaded with more than $10,000 at border crossings, an idea advocated by law enforcement agencies and Sens. Diane Feinstein of California and Charles Grassley of Iowa of the Senate Caucus on International Drug Control.
To do so would require installing card-swiping machines at international airports, where cardholders could be submitted to spot checks.
The threat of plastic money-laundering is hardly limited to the U.S.
Industry regulation and enforcement can be very lax abroad, depending on the country.
"It's just the Wild West, pretty much you can do what you want to do," said Campo of the DEA. A big concern is high-load, anonymous cards being offered for sale over the Internet.
The "GMT Offshore Prepaid Mastercard," claiming an annual load limit of $240,000, includes "no link to your name or bank account," according to its website. It says the card costs $500 plus subsequent transaction fees and is "issued by an offshore bank and administered in Panama."
Efforts to reach the advertiser were unsuccessful. Phone messages left at a Los Angeles number were not returned.
"If I wanted to I could just take a million dollars in cash in Dubai, walk into the bank and deposit it ... load the card and move the money from Dubai to wherever I want to," said Campo.
At the Central Bank of the United Arab Emirates, Saif Hadef al-Shamsi said prospective prepaid cardholders must present "reliable proof of identity" such as a passport copy or national ID card in person. But there is no limit to the number of prepaid cards an individual can obtain and banks are not required to report customers with multiple cards, the official added.
In a 2008 FATF-sponsored review, the UAE was found wanting in regulations that would ensure customers were not using false identities to obtain prepaid cards.
Dubai has already been the stage for an episode of prepaid card abuse. They were used by suspected Israeli agents to cover their tracks when they assassinated a commander of the Palestinian militant group Hamas in the Persian Gulf state last year.
Around the world, prepaid cards are hardly the only newfangled gift to the criminal mind. Internet-only payment services are on the rise while mobile phones are already in wide use electronic wallets in the Philippines, large parts of Africa and elsewhere.
The rules proposed by FinCen, the U.S. Treasury's Financial Crimes Enforcement Network, would create a new category called "prepaid access" that includes such methods. As always, the regulators are a few steps behind the criminals.
The trail left by the hit team in Dubai highlights the challenges of preventing sophisticated abuse. The card was issued by Iowa-based MetaBank, which said it did its due diligence but was dealing with customers who used fraudulent passports.
By FRANK BAJAK
May 22nd, 2011
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