Asian Criminology DOI 10.1007/s11417-008-9051-6

Money Laundering and Terrorism Financing Risks of Prepaid Cards Instruments? Kim-Kwang Raymond Choo

Received: 31 October 2007 / Accepted: 11 March 2008 # Springer Science + Business Media B.V. 2008

Abstract Advances in information and communication technologies (ICT) have had, and will continue to have, wide-ranging influences on how the banking and finance industry operates. Making payments and transmitting money electronically or online are increasingly popular. An increased dependence on global electronic payment systems and the ability to move large amounts of money expeditiously across different jurisdiction, however, expose both payment processing companies and consumers to an evolving spectrum of threats such as fraud and money laundering. This article considers ways in which prepaid cards can be exploited by organised criminals and terrorists to launder their illicit proceeds of crime, and to transfer money anonymously and instantaneously over the globe for use by terrorist organisations. Risks identified in this article include recruiting card mules (e.g. international students) to purchase prepaid cards, and the mailing or shipping of prepaid cards out of the country without regulators being aware. To minimise risks of abuse by organised criminals and terrorists, legislation will need to adapt to deal with threats that organised criminals and terrorists seek to exploit. Future directions for research in relation to prepaid cards are also identified. Keywords Prepaid cards . Stored value cards . Money laundering . Terrorist financing . Organised criminals . Terrorist organisations . Card mules

Introduction As businesses continue to engage in electronic commerce, they will become increasingly globalised and interconnected. In recent years, the use of electronic transactions has increased considerably, and electronic payment systems (e.g. ATM and credit cards) are an increasingly important part of the retail payments system. In Australia, the volume and This research paper does not necessarily reflect the policy position of the Australian Government or the Australian Institute of Criminology (AIC). K.-K. R. Choo (*) Australian Institute of Criminology, GPO Box 2944, Canberra, ACT 2601, Australia e-mail: [email protected]

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value of cheque transactions in paper-based clearing systems fell from an average of 2.7 million per day in 2001 to 2.1 million in 2005, and from an average of A$8.3 billion per day in 2001 to A$6.3 billion in 2005 (APCA 2005). A correspondingly large increase in electronic banking has also been observed. This is hardly surprisingly as the financial incentive to do business electronically in today’s highly competitive market is significant, with the cost of an online transaction often being a fraction of a non-electronic transaction (De Young 2001). Lower transactions costs and convenient access to funds can further stimulate consumer consumption. Retail online spending, for example, has increased considerably with total sales in the United States in 2007 exceeding US$100 billion (Ames 2007). One of the more popular electronic payment systems is prepaid cards, such as gift cards issued by retail stores. The overall market for gift cards is projected to grow to nearly $88 billion in 2008, with the fastest growth occurring in corporate purchases of gift cards for employees and customers, and in “open” gift cards – like the American Express Gift Card that can be redeemed at multiple merchants, according to The Mercator Advisory Group, an independent research and advisory services firm exclusively focused on the payments industry. Corporate purchases will rise 72% from 2005 to 2008, growing from US$9 billion to US$15.5 billion. Open gift card sales are expected to almost quadruple from 2005 to 2008, growing from US$1.3 billion to US$5 billion, according to Mercator (American Express 2006). Developments in information and communications technologies (ICT) have created an ideal criminogenic environment as there are abundant opportunities, highly motivated offenders, and not a great deal of coordinated and effective regulation. The capacity to move large amounts of money expeditiously across different jurisdictions electronically, and the emerging trend of individuals using the internet to access public-domain services in preference to more traditional offline modes, will, for example, enhance the risks of money laundering. Although, to date, there is no reliable estimate of the extent of criminal exploitation of prepaid cards, it is important to improve awareness of the potential risks of vulnerability. The key issue to consider in this article is: “With the extensive use of prepaid cards coupled with the convergence of financial services and electronic payment technologies, will crime follow opportunity, particularly how prepaid cards can be exploited by criminals and terrorists?”

Prepaid Cards Prepaid cards1 are cards with data encoded in either a magnetic stripe or a computer chip that are preloaded with a fixed amount of electronic currency or value. These cash-based cards can be redeemed or transferred to individuals and/or merchants in a manner that is similar to spending physical currency or using account-based cards (e.g. debit cards, credit cards and charge cards). For example, to pay for purchases using prepaid cards: 1. Cardholder presents card to merchant at the counter. 2. Card is then inserted into the card reader or point-of-sale device issued by the program managers of the prepaid card program – the merchant’s digital cash register. Although the terms “prepaid cards” and “stored value cards” are often used interchangeably, prepaid cards in this article refer to both cards with a magnetic stripe or an embedded computer chip.

1

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For cards with monetary funds stored on the cards (i.e. cards with embedded computer chip), 3a. Validation is made based on information contained on the card: if the card is valid and has sufficient funds, then the appropriate value is deducted from the card and the transaction approved. Otherwise, other means of payment will be required to complete the purchase. For cards with monetary funds stored on centralised computer systems (e.g. cards with magnetic stripe), 3b.

Centralised computer systems must be contacted at the point of purchase to provide authorisation when payments are made.

Current uses of prepaid cards include:

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Delivery of pensions using reloadable prepaid cards Disbursements of child support payments to the custodial parent using reloadable prepaid cards Payments of government fees including toll fees using reloadable prepaid cards Tax refunds using non-reloadable prepaid cards Disbursements of social welfare benefits and disaster assistance using nonreloadable prepaid cards (Commonwealth Business Council & Visa 2004).

Traditionally, payments systems such as account-based cards (including credit and debit cards) were built around the banking and finance industry. Advances in ICT enable settlement and clearing to be done by different entities including non-banking and financial entities in the case of prepaid card systems. The value of the funds stored on prepaid cards, for example, can be transferred between cardholders and merchants using compatible electronic systems and networks, which may not involve banks (particularly in the case of closed and semi-closed system cards described in Table 1). The players in a typical prepaid card program include program managers, payment processing facilities, payments network and distributors. Program managers, owners of prepaid card programs who establish relationships with payment processing facilities (e.g. banks and payments networks) and distributors, and establish pooled account(s) at banks. Payment processing facilities are responsible for payment transactions for prepaid card programs and track and distribute funds in pooled accounts. Program managers may also choose to function as their own payment processors. Although banks may also function as program managers and/or distributors, banks are responsible for maintaining pooled accounts, settling payments, and issuing branded prepaid cards (also known as open system cards). The payments network is the “link” between payment processing facilities and the retailer and ATM, for authorisation of payment transactions. A distributor (e.g. banks and non-financial institution outlets) is responsible for selling prepaid cards. Source: US NDIC 2006

The market for prepaid cards has increased considerably over the years, particularly in terms of its availability and size. Chau and Poon (2003: p. 219) reported that “[b]y mid2001, nearly 70 percent of Hong Kong’s seven million residents used an Octopus card to make over six million daily transactions worth billions of dollars”. The numbers of Octopus cardholders had reportedly increased since 2001 (see Fig. 1). Octopus cards, contactless prepaid cards, can be used in almost all modes of public transportation in Hong Kong (e.g. ferries, trains and buses) and at 7–11 convenience stores,

Asian Criminology Table 1 Categories of stored value cards Types

Description

Anonymous?

Reloadable?

Open system cards

Typically Typically no Typically yes (e.g. ‘branded’ (e.g. (similar in via regular by American deposit appearance to Express) and traditional debit arrangement, connect to cards which are internet and at global debit and embossed with participating automated teller the cardholder’s merchant outlets) machine (ATM) name and the networks and expiry date) allow the cards to be used for multiple purposes and at multiple points of sale with different participating merchants Typically no Typically yes Semi-open Generally have system the same (similar in cards features as open appearance to system cards traditional debit cards which are but cannot be used to access embossed with the cardholder’s cash at ATMs (also known as name and the purchasing-only expiry date) cards) Closed Limited to only Typically yes Typically no and system buying goods sold at preset cards or services from denominations the merchant but some retail issuing the card gift cards such as Starbucks gift cards are reloadable SemiCan be used at Typically yes Typically no and closed selected group sold at preset system of merchants or denominations cards service providers Notes: a http://www.cashpassportcard.com/ b

http://www.nets.com.sg/consumers/netscashcard/index.php

c

http://www.davidjones.com.au/gift_card.jsp

d

https://www.flybuys.com.au

Monetary value stored on card?

Examples

Typically no – Visa cash transactions are passport carda, a reloadable authorised pin-protected online and in Visa-branded real time prepaid card, which allows cardholders to withdraw cash from Visa ATMs worldwide and use the cards at places where Visa debit cards are accepted

Typically yes – NETS as the value is CashCardb stored on the cards, issuing merchants do not replace or refund stolen or misplaced cards Typically yes

Proprietary store/ retail gift cards such as David Jones Gift Cardc

Typically yes

FlyBuys gift cardsd that can only be used at participating merchants

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Source: http://www.octopuscards.com/corporate/why/statistics/en/index.jsp [last visited 10 December 2007]

Fig. 1 The numbers tell a compelling tale

cafes, fast food restaurants to pay for food and other consumer items. The card can also be used in Macau and Shenzhen. The Singapore-based Network For Electronic Transfers (Singapore) Pte Ltd reported 6 million NETS CashCard (semi-open system cards) had been issued in Singapore with 4.5 million active cards in circulation. The number of NETS CashCard retail transactions in Singapore has reportedly increased to more than 8 million in 2003 from 3.8 million in 2001 (http://www.nets.com.sg/129corporate/achievement.php). A recent study by Mercator Advisory Group estimated that “$171.18 Billion was loaded on Closed Loop Prepaid Solutions in 2006, an increase of 13.9% over the 2005 spend of $160.29” (US $; Sloane 2007). This is, perhaps, not surprisingly considering the many benefits associated with prepaid cards.

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Cardholder/buyer anonymity: credit checks are not required when purchasing prepaid cards and for some cards, evidence of identification is also not needed. Convenience: prepaid cards can be purchased, reloaded (for open and semi-open card systems), redeemed and refunded at conveniently located participating merchant locations (e.g. supermarkets and convenience stores). A white paper published by the Commonwealth Business Council and Visa also argued that consumers with prepaid cards tend to spend more because their funds are more easily accessible (Commonwealth Business Council & Visa 2004). Affordable: Funds are immediately availability often at a lower cost than when using traditional banking services. Overdraft risk reduced: Reduces the risk of overdrafts while providing nearly immediate liquidity for consumers.

Prepaid cards can broadly be categorised into open systems (or open loop systems), semi-open systems, closed systems (or closed loop systems) and semi-closed systems. As illustrated in Table 1, monetary value can be stored either in the central computer system/ server or on the cards. Open system cards, typically issued by banking and financial institutions or other regulated organisations, allow high values to be loaded and kept on cards. Open system cards which are designed to facilitate cross-border remittance payments are also offered by

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offshore banks. Such systems often allow multiple cards to be issued per account so that friends and family in receiving countries can use the cards to access cash and make purchases, without additional information being provided or existing information confirmed. Electronic currency or values are usually stored on centralised computer systems in view of their high loading capacity. The Travelex Group Visa cash passport card in Australia, for example, has a maximum card balance value (at any one time) of A$10,000, a maximum amount that can be loaded onto the card during any 12-month period of A$45,000, a 24-h ATM withdrawal limit of A $6,000, and up to two cards able to be issued per Cash Passport fund. If the card is lost or misplaced, the cardholder can arrange for the outstanding balance on the cards to be sent to the nearest available location free of charge. The NETS CashCard, a semi-closed system card in Singapore can be used to pay any amount up to a limit of S$500 such as for paying fines, food and other small-value consumer items. Closed and semi-closed systems, on the other hand, are typically used for micropayments in view of their limited storage capacity. These cards can operate independently of banks and outside the traditional payments system and typically can be purchased without the need for any evidence of identification or prior account history. When the monetary value stored on the cards is depleted, the cards are discarded as these cards are typically non-reloadable. In the same way that legitimate businesses will look at market forces and new opportunities for prepaid cards, criminals will also explore new areas that can be exploited to maximise their profits and to evade the scrutiny of law enforcement agencies and regulators. The widespread availability of prepaid cards (particularly at non-financial outlets), the high loading and card balance value limits of open system cards, and the anonymity offered by closed and semi-closed system cards could be abused by organised criminals and terrorist groups for illicit financial transactions, money laundering and bulk cash smuggling particularly as value limits increase (see Choo et al. 2007). Prepaid cards have been identified as a potential tool for organised crime groups to launder their illicit proceeds of crime in several reports (see APG 2005; US FFIEC 2007; US NDIC 2006). A recent study on cross-border electronic funds transfer systems raises similar concerns. In virtually every investigation of these groups, the movement of the proceeds of the criminal acts from the U.S. back to Canada, whether by movement of bulk cash, funds transfers, or stored value cards, has been significant (FinCEN 2007a: p. 100).

Money Laundering Concerns Although the actual amount of money being laundered will never be known with accuracy, money laundering transactions in Australia are estimated to involve between A$2 billion (Institute of Chartered Accountants 2006) and A$4.5 billion per year (AGD n/a). The IMF has further suggested that money laundering transactions are equal to approximately 2–5% of the global gross domestic product (GDP). Money laundering could, potentially, lead to a shift of economic power to organised crime groups, thus eroding our political and social systems. To disguise the origins of illicit proceeds, criminals can perform a series of business transactions, such as transferring electronic currency through a series of offshore companies and purchasing goods for resale, prior to integrating the ‘cleaned’ proceeds into the legitimate financial system. The money laundering process is typically segmented into three stages. 1. Placement: in which illegal funds or assets are introduced into the financial system or converted into monetary instruments (e.g. prepaid cards)

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2. Layering: in which the illegal origins of placed funds are disguised 3. Integration: in which disguised funds made available for investment in legitimate or illegitimate businesses. Placement In general, it is relatively easy to purchase prepaid cards as customers do not generally require a bank account in order to acquire them. Applications for prepaid cards can be accepted online, via fax or through non-financial outlets (e.g. local cheque-cashing outlets and convenience stores), which may not require any face-to-face verification of cardholder identity. Small- to medium-sized non-financial distributors are also unlikely to have an adequate, or any, risk-based anti-money laundering/counter terrorism financing (AML/ CTF) program in place, and may not carry out customer due diligence and have trained staff in the areas of money laundering detection. In cases where face-to-face verification of cardholder identity is required, evidence of identity may be difficult to verify, particularly at non-financial distribution outlets (e.g. verification of a foreign passport at a convenient store). A criminal can, therefore, easily purchase large quantities of stored value cards (perhaps with different issuers) using cash generated from criminal proceeds, or break down large amounts of cash into smaller sums to be loaded on different cards. It may then be possible to take these overseas without detection. Even if cards are located at entry ports, customs officials may be unable to ascertain how much value is loaded on each card. Individuals can also be recruited by organised crime groups to purchase prepaid cards using stolen credit cards. These individuals (‘card mules’) may be recruited through email messages, websites or newspaper advertisements that purport to be legitimate businesses seeking new staff. A recent case involved the arrest of a six-member syndicate in March 2007. Arrests were made by the Gainesville Police Department for allegedly using stolen credit cards to purchase large quantities of WAL-MART and Sam’s Club gift cards (US FDLE 2007). Box 1: Red flags indicator An excessively obstructive or secretive client may be a cause for concern. Customer asking questions or makes comments that raises suspicions (e.g. questions such as “Will these purchases be reported to the authorities?”). Large payments made in actual cash (especially if the cash is wrapped in currency straps) may be a cause for concern. Customer purchases a large quantity of prepaid cards particularly reloadable open system or semiopen system cards in an apparent effort to avoid triggering identification or reporting requirements – structuring. Customer purchases a large quantity of stored value cards of large denomination that does not commensurate with normal business activities. For open system card purchases at banks, customer makes a large number of prepaid card transactions using the banks services or third party online payment systems, which appears inconsistent with the stated business activities.

Layering Depending on the types of cards purchased during the placement stage, value can either be redeemed for merchandise or sent overseas.

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Closed or semi-closed cards can be redeemed for merchandise such as computers, gaming devices and large screen televisions. For example, in the arrest made by the Gainesville Police Department (above), the purchased cards were redeemed for merchandise (e.g. computers, gaming devices and big screen televisions) (US FDLE 2007). The redeemed merchandise can either be sent overseas or resold and the proceeds remitted to third-party accounts (minus a commission). A recent example involved the arrest of four Russians who, it was noted: [they transferred] the fraudulently-obtained money and goods back to Russia.... Using stolen identity and credit information, defendant CHUGAEV made on-line purchases of PayPal cards, gift cards, computers, and other merchandise, and requested that the items be shipped to United States addresses under the control of his associates. Those associates quickly withdrew cash from the credit cards, then deposited the cash into bank accounts, and allowed CHUGAEV to withdraw the stolen money in Russia using ATM cards associated with the bank accounts. The computers and other merchandise were repackaged ... in the United States and mailed on to Russia, where the stolen goods were resold (US DoJ 2007). Prepaid cards can also be “purchased for currency, transferred from one person to another and resold (since beneficiaries’ names are not required). Often, a firm independent of a bank processes all card transactions through a “pooled” bank account held in the name of the firm managing the card program” (US FFIEC 2007: p. 206). The use of pooled accounts also increases the difficulty in monitoring any specific cardholder’s activity. Regarding open or semi-open cards, due to the worldwide acceptance of such cards (as most of the open system cards have access to the Plus and Cirrus/Maestro networks), card mules (recruited by organised crime groups to repatriate criminal proceeds) can be instructed to mail the purchased stored value cards to countries with lax anti-money laundering legislation where funds can then be withdrawn from the local ATMs (including white label ATMs – machines that offer only cash dispensing services). As pointed out by FINTRAC (2007: p. 24), white label ATMs “can be ‘self-loaded’ with illicit funds, increasing the potential for money laundering. The involvement of organized crime was a key characteristic of disclosure cases involving white label ATMs this year”. Prepaid cards can also be easily taken through border controls because of their size, often in wallets which may not be subject to scrutiny. The cards can also be subsequently reloaded with additional funds, which allow cardholders immediate access to the funds. In another case, the alleged mastermind of an international theft ring deposited money into several prepaid cards and sent six of the cards to Russia where his co-conspirators retrieved the money from ATM machines (FinCEN 2007b: p. 25). Box 2: Red flags indicator Customer makes payments using a multiple payment methods or a large number of prepaid cards. Customer purchasing pattern does not make economic sense (e.g. an individual customer pays for numerous laptops using several cards). The merchandise particularly high-value and low-volume goods such as consumer electronics being shipped appears inconsistent with the exporter’s stated business activities or the merchandise is shipped to a jurisdiction designated as high risk for money laundering activities. Prepaid cards particularly open or semi-open system cards (particularly with a large denomination) being sent over the post or found on travellers that appear inconsistent with the stated business activities (similar to bulk cash smuggling).

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Integration Prepaid cards including closed and semi-closed systems cards can be used as a means of payment by criminals. For example, precursor chemicals used in the production of illegal drugs, could be paid for using prepaid cards, or real estate investment or life insurance policies could be paid for with value kept on open system cards. Prepaid cards can also be used as a means of payment for services rendered. In one case, for example, a former employee of the deputy registrar for the Ohio Bureau of Motor Vehicles was prosecuted in connection with selling fraudulent Ohio drivers’ licences in 2005. It was reported that she was paid using US$10 phone cards (US ICE 2005). Box 3: Red flags indicator Living standards of employees (or public officials) exceed their known lawful income or if they control or possess pecuniary resources or property, that are disproportionate to their present or past known sources of income, and when they are unable or unwilling to account for the discrepancy. Transactions incompatible with the customer's normal activity or are beyond the customer's apparent financial means are causes for concern (e.g. a lump sum payment for real estate or life insurance in cash).

Terrorism Financing Concerns The ability to transfer money anonymously and instantaneously over the globe is a key element in sustaining the operational needs of terrorist organisations. Financial systems are used by terrorist organizations as a fiscal sanctuary in which to store and transfer the funds that support their survival and operations. Terrorist organizations use a variety of financial systems, including ... debit and other stored value cards, online value storage and value transfer systems (US NSC 2006: p. 17) It is also important to note that terrorist financing in some countries may be predominantly carried out without the use of financial institutions – carried out using cash that relies on networks of trusted members of terrorist organisations. Methods used in terrorism financing can be similar to money laundering although funding for terrorist activities can originate from both legitimate sources (e.g. charity donations and legitimate commercial enterprises) as well as illegitimate sources. Although the motivation differs between traditional money launderers and terrorist financiers, the actual methods used to fund terrorist operations can be the same as or similar to those methods used by other criminals that launder funds. For example, terrorist financiers use currency smuggling, structured deposits or withdrawals from bank accounts; purchases of various types of monetary instruments; credit, debit, or stored value cards; and funds transfers (US FFIEC 2007: p. 9). An individual, who may be prohibited from opening a bank account in Australia owing to their being named on the Department of Foreign Affairs and Trade list or other embargo lists, could recruit card mules or their accomplices who are not listed on any blacklists in order for them to purchase open system cards on their behalf. Alternatively, open system cards could be obtained using stolen or false evidence of identification. A recent report by

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Ombudsman Victoria (2007: p. 8), for example, highlighted the ease in obtaining false evidence of identification:

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25% of reported frauds to AFP involve the assumption of false identities Organised crime is exploiting weaknesses in the Victorian driver licence security arrangements to obtain fraudulent identity documents VicRoads customer enrolment practices for driver licensing do not meet best practice, with significant weaknesses in the proof-of-identity authentication process VicRoads has not placed sufficient emphasis on training its staff or staff employed by its external service providers about identity fraud or how to identify fraudulent documents (Ombudsman Victoria 2007 pp. 8–9, 28).

The cards could then be reloaded to their maximum allowed limit at any one time (e.g. A $25,000 for Visa Cash Passport) with the assistance of card mules or their accomplices. In order to avoid triggering reporting requirements, the amount for each reloading transaction would need to be less than the threshold amount required for mandatory reporting (i.e. structuring). In general, amounts involved in cases of terrorism financing have been substantially less than that in money laundering cases.

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A recent newspaper article suggested that “[t]he British subway attacks on July 7, 2005, cost somewhere between $8,000 and $20,000 ...the total spent by the hijackers before the Sept. 11, 2001, U.S. terror attacks was less than $1 million” (Bolan 2007). Brisard (2002 as cited in Bedi and Acharya 2005: p. 18) estimated that the operational cost of the October 2002 Bali bombing incident in Indonesia to be US $74,000.

Consequently, structuring is less likely to be detected by regulators and law enforcement agencies. The financial profiles of the September 11 terrorist hijackers compiled by the FBI (AUSTRAC 2007) suggested that (1) debit cards were used by hijackers, (2) overseas travellers’ cheques were (partially) paid into their U.S. accounts, and (3) cash transactions were below the reporting requirements. Prepaid cards could then either be mailed or physically taken overseas, where cash could then be withdrawn from local ATMs for use by terrorist organisations.

Legislative Framework Money laundering and terrorism financing activities have significant and adverse economic and social consequences. To detect, prevent and combat money laundering and terrorism financing, countries such as Australia, Singapore and United States have introduced antimoney laundering and counter terrorism financing (AML/CTF) legislation, which also apply to non-banking and financial institutions that issue, sell, redeem and reload prepaid cards. In the United States, for example, money services businesses (i.e. non-banking and financial institutions) including businesses that are solely an issuer, seller, or redeemer of stored value for an amount greater than US$1,000 for any person on any day in one or more transactions are

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required to register as money services businesses (MSBs) with FinCEN (see 31 CFR 103.41),

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are subject to the full range of Bank Secrecy Act (BSA) regulatory requirements such as the anti-money laundering program rule, suspicious activity and currency transaction reporting rules and various other identification and recordkeeping rules (US FFIEC 2007: p. 276).

Australia In order to enhance Australia’s capacity to detect, prevent and combat money laundering and terrorism financing and to bring Australia in line with international best practice in detecting and deterring money laundering and terrorism financing, the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (Cth) (AML/CTF Act) was enacted. The AML/CTF Act covers industry sectors with obligations under existing legislation, including the banking and finance sector and other persons or businesses providing designated services. Industry sectors are considered ‘reporting entities’ under the AML/ CTF Act when they provide ‘designated services’ defined in Section 6 of the AML/CTF Act. Although prepaid cards were not regulated under the Financial Transaction Reports Act 1988 (Cth), issuing and reloading prepaid cards are now listed as designated services under the AML/CTF Act. Whether the entity providing the designated service is a ‘reporting entity’ will also be determined by whether the (designated) service is provided:

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at or through a permanent establishment of the person in Australia by a resident of Australia at or through a permanent establishment of the person in a foreign country (foreign branch), or by a subsidiary of a company that is a resident of Australia at or through a permanent establishment of the subsidiary in a foreign country (foreign subsidiary).

Service providers that do not have one of these geographical links to Australia are not considered a ‘reporting entity’ under the AML/CTF Act. Entities providing these designated services are subject to the full range of AML/CTF regulatory controls such as statutory reporting of suspicious activity, recordkeeping and developing and implementing a risk-based AML/CTF program.

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Section 41 of the AML/CTF Act mandates all reporting entities to give the CEO of Australian Transaction Reports and Analysis Centre (AUSTRAC), Australia's antimoney laundering regulator and specialist financial intelligence unit (FIU), reports about suspicious matters within three business days after the day on which the reporting entity forms the relevant suspicion if paragraph (1)(d), (e), (f), (i) or (j) applies; or 24 hours after the time when the reporting entity forms the relevant suspicion if paragraph (1)(g) or (h) applies. Section 81 of the AML/CTF Act mandates all reporting entities to have an antimoney laundering and counter-terrorism financing (AML/CTF) program in place by 12 December 2007. The AML/CTF program includes both general provisions concerning risk management as well as specific requirements concerning customer identification.

Penalties for non-compliance with regulatory obligations can range from criminal and civil fines (e.g. civil fines of up to A$11 million for companies) to custodial sentences.

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Banks and major financial institutions recognise the importance of sound ongoing customer due diligence policies and procedures (e.g. Know Your Customers) in reducing their reputational risk (e.g. maintain their brand and reputation in a competitive world market sensitive to the threats of international terrorism or organised crime), legal risk and financial risk; and have monitoring systems in place to prevent exploitation of prepaid cards (e.g. monitoring of reloading above a threshold value). In terms of customer identification at point of purchase or where value is reloaded onto prepaid cards, major banks and financial institutions employ technologies to detect forged identification documents and to carry out enhanced customer due diligence for cardholders who reload prepaid cards frequently, have cash access, and/or use their cards outside of Australia. In relation to monitoring prepaid card usage and detecting suspicious patterns or high risk situations, real-time monitoring transaction using monitoring technologies is used. These technologies can be broadly categorised into the following.

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Rules-based systems: assess individual transactions against a set of predefined rules based on value thresholds and other criteria. Pattern recognition systems: use sophisticated techniques such as neural networks, link analysis, peer group analysis, time sequence matching and name recognition technologies to monitor for a library of known patterns and scenarios. Hybrid systems: allow a combination of rules writing with monitoring against a library of known patterns.

Each of these could be adapted for use with prepaid card systems. For example, these systems can be used to identify the ‘stockpiling’ of prepaid cards by a single individual or group of individuals. Singapore The principal legislation enacted to combat money laundering in Singapore is the Corruption, Drug Trafficking and Other Serious Crimes (Confiscation of Benefits) Act (Cap 65A) - CDSA2. The CDSA criminalises the laundering of proceeds derived from drug trafficking and 292 other serious offences and also allows for the confiscation of such proceeds (including corruption). For example,

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Sections 43 and 44 make it an offence to knowingly assist to retain benefits of drug trafficking and benefits from criminal conduct respectively; punishable by a fine not exceeding S$200,000 or to imprisonment for a term not exceeding 7 years or to both Sections 46 and 47 make it an offence to knowingly assist to conceal or transfer benefits of drug trafficking and criminal conduct respectively; punishable by a fine not exceeding S$200,000 or to imprisonment for a term not exceeding 7 years or to both.

In the second sitting of the parliament on 19 September 2007, clause 17 of the Corruption, Drug Trafficking and Other Serious Crimes (Confiscation of Benefits)(Amendment) Bill raises the fine for money laundering offences under Sections 43, 44, 46 and 47 to a fine not

2

The CDSA was amended in 2006 to expand the list of money laundering predicate offences from 189 to 297 offences.

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exceeding S$500,000 or to imprisonment for a term not exceeding 7 years or to both for individual offender or a fine not exceeding S$1 million for non-individual offender. Section 8 of the Prevention of Corruption Act (Cap 241), a presumption statutory obligation to explain unexplained wealth, states that “Where in any proceedings against a person under section 5 or 6 [of the same Act], it is proved that any gratification has been paid or given to or received by a person in the employment of the Government or any department thereof or of a public body by or from a person or agent of a person who has or seeks to have any dealings with Government or any department thereof or any public body, that gratification shall be deemed to have been paid or given and received corruptly as an inducement or reward as hereinbefore mentioned unless the contrary is proved”. This effectively shifts the burden to public officials to account for their assets. Such a provision criminalises illicit enrichment - when the living standards of public officials exceed their known lawful income or if they control or possess pecuniary resources or property, that are disproportionate to their present or past known sources of income, and when they are unable or unwilling to account for the discrepancy3. This provision can be an effective tool against money laundering offences (see red flag indicator “Living standards of employees (or public officials) exceed their known lawful income or if they control or possess pecuniary resources or property, that are disproportionate to their present or past known sources of income, and when they are unable or unwilling to account for the discrepancy” in Box 3). An effective AML/CFT system also requires that certain structural elements, not covered by the AML/CFT assessment criteria, be in place. The lack of such elements, or significant weaknesses or shortcomings in the general framework, may significantly impair the implementation of an effective AML/CFT framework.... These elements should include in particular: ... c) Appropriate measures to prevent and combat corruption, including, where information is available, laws and other relevant measures, the jurisdiction’s participation in regional or international anti-corruption initiatives (such as the United Nations Convention against Corruption1) and the impact of these measures on the jurisdiction’s AML/CFT implementation (FATF 2007:2). The Terrorism (Suppression of Financing) Act (Cap 325) - TSOFA, the principal legislation enacted to combat terrorism financing activities in Singapore, not only criminalises terrorism financing but also mandates anyone to provide information pertaining to terrorism financing activities to the authorities.

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Section 3: It is an offence for any person who directly or indirectly, collects property, provides or invites a person to provide, or makes available property or financial or other related services (a) intending that they be used, or knowing or having reasonable grounds to believe that they will be used, in whole or in part, for the purpose of facilitating or carrying out any terrorist act, or for benefiting any person who is facilitating or carrying out such an activity; or (b) knowing or having reasonable grounds to believe that, in whole or in part, they will be used by or will benefit any terrorist or terrorist entity.

This effectively shifts the burden to the defendant – mainly public civil servants – who has to prove to the Court that the unexplained wealth is not given or received corruptly. One might argues that such a provision violates the presumption of innocence and also the right of silence for defendants as defendants are required to give evidence, either oral or documentary, to exculpate themselves (e.g. see Parliament of Canada 2007 and Wilsher 2006).

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Section 4: It is an offence for any person who directly or indirectly, collects property, provides or invites a person to provide, or makes available property or financial or other related services (a) intending that they be used, or knowing or having reasonable grounds to believe that they will be used, in whole or in part, for the purpose of facilitating or carrying out any terrorist act, or for benefiting any person who is facilitating or carrying out such an activity; or (b) knowing or having reasonable grounds to believe that, in whole or in part, they will be used by or will benefit any terrorist or terrorist entity. Section 5: It is an offence for any person who use property, directly or indirectly, in whole or in part, for the purpose of facilitating or carrying out any terrorist act; or (b) possess property intending that it be used or knowing or having reasonable grounds to believe that it will be used, directly or indirectly, in whole or in part, for the purpose of facilitating or carrying out a terrorist act. Section 6: It is an offence for any person who deal, directly or indirectly, in any property that he knows or has reasonable grounds to believe is owned or controlled by or on behalf of any terrorist or terrorist entity, including funds derived or generated from property owned or controlled, directly or indirectly, by any terrorist or terrorist entity; (b) enter into or facilitate, directly or indirectly, any financial transaction related to a dealing in property referred to in paragraph (a); or (c) provide any financial services or any other related services in respect of any property referred to in paragraph (a) to, or for the benefit of, or on the direction or order of, any terrorist or terrorist entity.

The above offences are punishable by a fine not exceeding S$100,000, or to imprisonment for a term not exceeding 10 years, or both Existing AML/CTF legislations (i.e. CDSA and TSOFA) place key obligations on businesses and individuals. These statutory reporting mechanisms that oblige financial organisations and individuals to declare suspicious transactions may serve as a useful tool in detecting potential offenders.

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Section 39(1) of the CDSA: Any person, regardless whether a person is classified as a reporting entity, in the course of his business or employment is required to file a suspicious transaction report as long as there are reasonable grounds to suspect that any property represents the proceeds of, or was or is intended to be used in connection with, an act which may constitute drug trafficking or criminal conduct.

Failure to disclose such knowledge, suspicion or other related information constitutes a criminal offence, which is punishable by a fine not exceeding S$20,000 under Section 39(2) of the CDSA.

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Section 8(1) of the TSOFA: Every person in Singapore and every citizen of Singapore outside Singapore who (a)

has possession, custody or control of any property belonging to any terrorist or terrorist entity; or (b) has information about any transaction or proposed transaction in respect of any property belonging to any terrorist or terrorist entity, shall immediately inform the Commissioner of Police of that fact or information. Failure to disclose such information amounts to an offence which is punishable by a fine not exceeding $50,000 or to imprisonment for a term not exceeding 5 years or both under Section 8(3) TSOFA.

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Respective regulatory bodies in Singapore issue notices and guidelines that shall serve as a guide for the reporting entities in the conduct of their operations and business activities to ensure that due diligence is exercised when dealing with customers, persons appointed to act on the customer’s behalf and beneficial owners. In the November 2007 notice to holders of stored value facilities issued by the Monetary Authority of Singapore, holders of relevant stored value facilities in the conduct of their operations and business activities are required to exercise due diligence when dealing with their customers, beneficial owners of those customers and other persons appointed to act on those customers’ behalf. Examples include:

& & & &

establishing the identity of customer purchasing or obtaining a refund and verifying the customer’s identity using reliable and independent sources establishing the existence of beneficial owner, if any, and taking reasonable measures to obtain information sufficient to identify and verify the identity of each beneficial owner conducting the business in conformity with high ethical standards, and guard against undertaking any transaction that is or may be connected with, or which may facilitate money laundering or terrorism financing cooperating with the relevant law enforcement authorities in Singapore in preventing money laundering and terrorism financing (MAS 2007).

Hong Kong The principal legislation enacted to combat money laundering in Hong Kong is the Drug Trafficking (Recovery of Proceeds) Ordinance (Cap 405) - DTROP - and the Organised and Serious Crimes Ordinance (Cap 455) - OSCO. Collectively, both the DTROP and OSCO are known as the Ordinances. The OSCO also allow authorities to confiscate proceeds of crime by creating a schedule of offences (known as Schedule 1) which would be classified as organised crime, once they were linked to the activities of triad societies or other organised crime groups which set out to commit such offences in repetition and others which otherwise planned to endanger life, to inflict serious injury or to inflict serious loss of liberty. Another related legislation to combat money laundering is Section 10 of the Prevention of Bribery Ordinance. This presumption statutory obligation to explain unexplained wealth makes it an offence for civil servant (a)

to maintain a standard of living above that which is commensurate with his present or past official emoluments or (b) is in control of pecuniary resources or property disproportionate to his present or past official emoluments. The defendant would have to provide a satisfactory explanation to the court as to how he was able to maintain such a standard of living or how such pecuniary resources or property came under his control, and this effectively shifts the burden to the defendant, who has to prove to the Court that the unexplained wealth is not given or received corruptly. Corruption is also in the list of predicate offences for money laundering. The United Nations (Anti-Terrorism) Measures Ordinance (Cap 575) - UNAMO is the principal legislation enacted to combat terrorism financing activities in Hong Kong. Section 7 of the UNAMO makes it an offence for any person to provide or collect, by

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any means, directly or indirectly, funds with the intention that the funds be used; or knowing that the funds will be used, in whole or in part, to commit one or more terrorist acts (whether or not the funds are actually so used). Although Section 8 of the UNAMO has yet to come into operation, this section makes it an offence for any person, except under the authority of a licence granted by the Secretary, make any funds or financial (or related) services available, directly or indirectly, to or for the benefit of a person who the first-mentioned person knows or has reasonable grounds to believe is a terrorist or terrorist associate. Contravention of both sections 7 and 8 constitutes a criminal offence and shall be liable on conviction to a fine (of an unlimited amount) and imprisonment for 14 years. In Hong Kong, “multi-purpose cards” that can be used to purchase goods and services provided not only by the issuer, but also by third parties who are willing to accept the cards for payment (i.e. semi-closed, open and semi-open systems cards) are regulated under the Banking Ordinance. For example, section 14A of the Banking Ordinance makes it an offence for a person other than an authorised institution which is approved under section 16(3A)(a) to issue or facilitate the issue of multi-purpose cards. Although “single-purpose cards” used to purchase goods and services provided only by the issuer of the card (i.e. closed system cards) are not regulated under the Banking Ordinance or currently designated under the Clearing and Settlement Systems Ordinance (CSSO), the retail payment industry reportedly adopts a self-regulatory approach by issuing codes of practice (HKMA 2007).

Challenges Cost Anti-money laundering/counter terrorism financing (AML/CTF) compliance is, however, relatively expensive. In the recent Global Anti-Money Laundering Survey 2007, respondents – employees with AML responsibilities drawn from the top 1,000 global banks by tier 1 capital – indicated that the average AML costs increased by 58% over the last three years, which is more than banks had expected when the same survey was carried out three years ago (KPMG 2007). In another recent survey, more than half of the respondents (senior executives from 21 financial institutions with asset size ranging from US$25 billion to more than US$1 trillion) named budgetary limits as the reason why efforts had not been increased (Fortent 2007). As pointed out by Tsingou (2005: p. 15), ‘[t]he burden of compliance is more significant for smaller, local institutions, where ‘know your customer’ and reporting requirements are less automated’. The prohibitive (AML compliance) costs, unlikely to be affordable by small- to medium-sized non-financial distributors, might have the unintended consequence of driving the small players underground or driving providers (and users) of prepaid cards to a less restrictive and less costly jurisdictions (regulatory arbitrage). The process of disintermediation currently experienced in prepaid card programs (whereby physical contact between organisations and their clients is replaced by virtual contact) also compounds the challenge of customer identity verification at distribution outlets particularly small- to medium-sized non-financial distributors.

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International Students Targeted as Card Mules Countries such as Australia, Singapore and United States are popular destinations for international students seeking higher education. In Australia, for example, the international education industry is reportedly “Australia’s fourth largest export industry contributing $11.3 billion to the Australian economy in 2006/07” (Banks et al. 2007: p. 2). Australia Bureau of Statistics reported that in 2005, there were at least 247,900 visitors arriving from countries in the Asian region for the educational purpose (see Table 2). Organised crime groups are likely to target international students and recruit them as card mules to repatriate criminal proceeds as illustrated in an example case reported in the 2005–2006 Asia/Pacific Group on money laundering yearly typologies report (although this case involved purchasing cashiers’ cheques instead of prepaid cards) A criminal organisation responsible for laundering drug money in Country A used students to purchase multiple cashiers’ cheques. These cheques were then glued into magazines that were sent, via a courier service, to Country B. The reason provided by the students at the financial institutions/money service businesses was that the money came from a grant provided by a Country B company. A total amount of CA$3 million (US $2,691,300.00) went through the courier service using this technique (APG 2006:9) Another recent example of international students involved in cross-border movements of physical currency includes the arrest of a 23-year-old Chinese student. In August 2007, the student was reportedly charged with one count of failing to report movement of more than A$10,000 in Australian currency into Australia under Section 53 of the Anti-Money Laundering and Counter Terrorism Financing Act 2006 (Cth) (Australian Customs 2007). International students should be educated on the consequences of their ‘card muling’ activities as they are liable to prosecution for money laundering activities. Potential signs of the existence of card muling operations include being informed by the recruiting individual or agency that commissions or other forms of non-monetary payments will be paid after they assisted in purchasing or redeeming large numbers of prepaid cards.

Table 2 Visitor arrivals for education purposes in 2005

Adapted: ABS 2007: p. 110

Country of residence

Number of arrivals

China (excluding Hong Kong) Hong Kong India Indonesia Japan South Korea Malaysia New Zealand Singapore Thailand Total

63,600 22,500 16,700 18,600 25,600 29,900 24,200 11,300 20,000 15,500 247,900

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Reporting Obligations In Australia and Singapore, there are currently no reporting obligations in relation to the mailing or shipping of prepaid cards out of the country although there are reporting obligations for cross-border movements of physical currency and bearer negotiable instruments.

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Anyone travelling into or out of Australia or mailing/shipping currency may have reporting obligations under Part 4 of the AML/CTF Act in respect of cross-border movements of physical currency (carrying, mailing or shipping) and cross-border movements of bearer negotiable instruments (carrying). In the second sitting of the Singapore parliament on 19 September 2007, clause 11 of the Corruption, Drug Trafficking and Other Serious Crimes (Confiscation of Benefits)(Amendment) Bill puts in place measures for the reporting of cross border movements of physical currency and bearer negotiable instruments for the purpose of detecting, investigating and prosecuting drug trafficking offences and serious offences.

Illicit proceeds could, therefore, be smuggled out of Australia and Singapore without regulators being aware (see FinCEN 2007b: p. 25). Concerns about the lack of reporting obligations for prepaid cards in the United States were also raised in a recent American Bankers Association banking journal article (Cocheo 2007). Reporting obligations should, arguably, be extended to anyone mailing or shipping prepaid cards out of Australia in order to minimise risks of abuse by criminals and terrorists. Need for Further Research To date there are little reliable data on risks of this kind. This has resulted in research on money laundering and terrorism financing using electronic payment systems such as prepaid cards not being well-developed, especially in comparison to other traditional banking systems. There is, therefore, a need for further analysis of the prepaid card industry to determine possible ways in which the industry could be better regulated (e.g. how the laws apply to prepaid cards and the ways in which regulated entities will have to respond to the problem). Another issue that needs exploring is the question of detection and analysis of prepaid cards by customs officials. Acknowledgements The author wishes to thank Dr Russell G Smith and the anonymous referees for their feedback on earlier drafts of this article. Despite their invaluable assistance, any errors remaining are solely attributed to the author.

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Asian Criminology Asia-Pacific Group on Money Laundering (APG) (2006). The Asia/Pacific group on money laundering (APG) yearly typologies report 2005–2006. http://www.apgml.org/documents/docs/6/APG%20Yearly% 20Typologies%20Report%2005–06_PUBLIC.pdf. Australia Attorney-General’s Department (AGD) n/a. Why are anti-money laundering and counterterrorism financing reforms required? Fact sheet http://www.ag.gov.au/www/agd/agd.nsf/Page/Antimoneylaundering_Factsheets. Australian Bureau of Statistics (ABS) (2007). Australian social trends 2007. ABS cat. no. 4102.0. http:// www.abs.gov.au/. Australian Customs (2007). Student charged for attempting to import excess currency. Media release 1 August. AUSTRAC (2007). United States Federal Bureau of Investigation (FBI) profile of terrorist bank accounts. http://www.austrac.gov.au/aml_elearning/html_version/html/files/FBI_%20Account_Descriptions.pdf. Australian Payments Clearing Association (APCA) (2005). Annual report 2005. http://www.apca.com.au/ Public/apca01_live.nsf/WebPageDisplay/PUB_AnnualReport. Banks, M., Olsen, A., & Pearce, D. (2007). Global student mobility: An australian perspective five years on. http://www.idp.com/research/images/GSM_Brochure_Oct07.pdf. Bedi, R., & Acharya, A. (2005). AML/CFT - New policy initiatives. PwC-IDSS thought leadership series July:1–30. Bolan, K. (2007). Terrorists using prepaid cards to transfer money, inquiry hears. Vancouver sun 4 October. http://www.canada.com/ottawacitizen/news/story.html?k=40500&id=360c19d5-8cc5-441f-95ba33a0623035fc. Chau, P. Y. K., & Poon, S. (2003). Octopus: An e-cash payment system success story. Communications of the ACM, 46(9), 129–133. Choo, K. K. R., Smith, R. G., & McCusker, R. (2007). Future directions in technology-enabled crime: 2007– 09. Research and public policy series no.78. Canberra: Australian Institute of Criminology. http://www. aic.gov.au/publications/rpp/78/. Cocheo, S. (2007). Prepaid dilemma: Industry balances utility of stored-value cards with risk of abuse. ABA banking journal October:46–50. Commonwealth Business Council & Visa (2004). Payment solutions for modernising economies. http:// www.yearofmicrocredit.org/docs/Visa_White_Paper_2004.pdf. De Young, R. (2001). The internet’s place in the banking industry. Chicago Fed letter no. 163. http://www. chicagofed.org/publications/fedletter/2001/cflmar2001_163.pdf. Financial Action Task Force (FATF) (2006). Report on new payment methods. http://www.fatf-gafi.org/ dataoecd/30/47/37627240.pdf. Financial Action Task Force (FATF) (2007). Methodology for assessing compliance with the FATF 40 Recommendations and the FATF 9 Special Recommendations. http://www.fatf-gafi.org/document/51/ 0,2340,en_32250379_32236920_34297139_1_1_1_1,00.html. Financial Crimes Enforcement Network (FinCEN) (2007a). Feasibility of a cross-border electronic funds transfer reporting system under the Bank Secrecy Act. http://www.fincen.gov/news_release_cross_border.pdf. Financial Crimes Enforcement Network (FinCEN) (2007b). The SAR activity review trends. Issue 12 October. FINTRAC (2007). FINTRAC Annual Report 2007. http://www.fintrac.gc.ca/publications/nr/2007–10–25-eng. asp. Fortent (2007). Survey of senior anti-money laundering professionals reveals asia and trade finance as key money laundering concerns. Press release 22 October. Hong Kong Monetary Authority (HKMA) (2007). Annual report 2006. http://www.hkma.gov.hk. Institute of Chartered Accountants (2006). Money laundering worth up to 5% of global GDP. News release 26 May. KPMG (2007). Global anti-money laundering survey 2007. http://www.kpmg.com/Services/Advisory/Other/ AML2007.htm. Monetary Authority of Singapore (MAS) (2007). Prevention of money laundering and countering the financing of terrorism - holders of stored value facilities. MAS notice PSOA-N02 5 November. Ombudsman Victoria (2007). Investigation into VicRoads driver licensing arrangements. Melbourne VIC: Victorian government printer. Parliament of Canada (2007). Bill C-48, An act to amend the criminal code in order to implement the United Nations convention against corruption. Proceedings of the Standing Senate Committee on Foreign Affairs and International Trade Ottawa Issue 15. http://www.parl.gc.ca/39/1/parlbus/commbus/senate/ Com-e/fore-e/15cv-e.htm?Language=E&Parl=39&Ses=1&comm_id=8. Sloane, T. (2007). 4th Annual prepaid closed loop market assessment. Boston MA: Mercator Advisory Group.

Asian Criminology Tsingou, E. (2005). Global governance and transnational financial crime: opportunities and tensions in the global anti-money laundering regime. http://www2.warwick.ac.uk/fac/soc/csgr/research/workingpapers/ 2005/wp16105.pdf. United States. Department of Justice (US DoJ) (2007). Four Russians indicted in identity theft and fraud ring. Media release 1 March. United States Departments of Treasury, Justice, and Homeland Security (2007). 2007 National Money Laundering Strategy. http://www.treasury.gov/press/releases/docs/nmls.pdf. United States Federal Financial Institutions Examination Council (US FFIEC) (2007). Bank Secrecy Act/AntiMoney Laundering examination manual. http://www.ffiec.gov/pdf/bsa_aml_examination_manual2007.pdf. United States Florida Department of Law Enforcement (US FDLE) (2007). Arrests made in gift card fraud case totalling more than $8 million in losses. News release 19 March. United States Immigration and Customs Enforcement (US ICE) (2005). ICE arrests 9 in Ohio fraud driver’s license scheme. News release 24 February. United States National Drug Intelligence Center (US NDIC) (2006). Prepaid stored value cards. 31 October. United States National Security Council (US NSC) (2006). National strategy for combating terrorism. http:// www.whitehouse.gov/nsc/nsct/2006/. Wilsher, D. (2006). Inexplicable wealth and illicit enrichment of public officials: A model draft that respects human rights in corruption cases. Crime, law and social change, 45(1), 27–53.