Wednesday, October 01, 2008

New Australian Report Adds to Concerns Over Stored Value Instruments

Counterterrorism Blog: New Australian Report Adds to Concerns Over Stored Value Instruments: "Yesterday, the Australian Institute of Criminology, a research and knowledge center on crime and justice, released a report, "Money laundering risks of prepaid stored value cards," which identifies "the misuse of prepaid stored value cards to keep the proceeds of crime and move them across borders without alerting law enforcement and financial intelligence units." The report adds to the growing body of concern among governmental officials worldwide over the use by criminals and terrorists of stored value instruments (SVIs), of which "hard cards" are but a subset. Almost three years ago, the first "U.S. Money Laundering Threat Assessment" described SVIs as "an emerging cash alternative for both legitimate consumers and money launderers alike." Jonathan Winer wrote in January 2007 of the first BSA enforcement action against a financial institution for failing to notice a pattern of money laundering using phone cards. This year, the 2008 edition of the International Narcotics Control Strategy Report, released by the State Department, included a new section on the threat of mobile payments. Numerous officials across the U.S. government, including the Pentagon's counterinsurgency and special operations units, are devoting increased time and attention to understanding the technologies involved and to developing recognition and risk mitigation strategies. Several high-level briefings have been held this year with experts from financial institutions and information technology firms, with the results and "lessons learned" communicated back through the commands and into the field, including the provision of new technology to infantry to read hard cards captured from terrorists.

The technologies available for storing value are expanding far ahead of international regulators' abilities. They include smart cards and specialized chips in cell phones, but the value need not be stored in a physical medium; instead, the card or chip could access a secure account on the internet (a "cloud account"). Current U.S. banking regulations govern only those stored value instruments provided by financial institutions and already subject to BSA/Patriot Act regulation, while SVIs issued during the course of business . But numerous non-financial institutions are also offering stored value cards as a means of paying for goods and services. Stephen Spoonamore, an expert on the technology side of the issue, tracks criminal enforcement cases in which SVIs have been captured during an arrest and provided several examples. In one case this year, suspects arrested in a raid in Brooklyn had purchased $250-300,000 in cards to personally carry money home to friends and relatives and avoid the cash reporting requirement at the border. In 2007, drug-related raids in the Las Vegas area resulted in the seizure of over 18,400 cards with a total value of approximately $6.5 million. Many of the cards were issued by retailers, which are not subject to BSA/Patriot Act regulation because they're not "financial institutions."

The market for stored value instruments is huge; the Australian report estimates gift card volume alone at almost $88 billion globally this year. I've already written on the need to update the BSA and Title III of the Patriot Act in new legislation, and this is one area which was almost unknown to the Congress and regulators in 2001. Spoonamore suggests several "tech fixes" which could reduce the risk of improper use without further legislation. As the Australian report points out, the "Violent Crime Control Act of 2007," introduced in Congress in 2007, included a provision mandating new regulations over SVIs, but no Congress did nothing about the bill. The next Administration and Congress should examine this issue in detail and consider mandating a new cost-effective and risk-based regulatory structure over all SVIs."

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