We are used to hearing about the use of cash in illicit trade, terrorism finance and tax evasion. Countless books and research papers have been written on the subject, and there are very strong opinions on both sides of the argument as to whether cash is a pathway to facilitating crime or an innocent artefact that is used by criminals no more often than other payment methods.
In an unusually themed analysis, S&P Global investigate the extent to which prepaid and gift cards are used in the black economy, with some alarming figures and examples showing how easily these payment methods are used to finance criminal activity.
Large and growing market
The growing popularity of prepaid cards is understandable. For millions of people across the world, particularly in countries with an underdeveloped financial infrastructure, they are the simplest route to participate in the modern economy, a way to cashless shopping and fast, digital transactions, and a lifeline for those excluded from mainstream financial services. The global prepaid card market is anticipated to reach $3.65 trillion of revenue by 2022, with a CAGR of 22.7% between 2016 and 2022, according to Allied Market Research.
Most reloadable debit cards use the networks of major card processors including Visa, Mastercard and Discover Financial Services to handle transactions. Between them, the three companies had some 388.7 million prepaid cards in circulation in 2018 from the 50 largest card issuers in the US alone. Those cards generated $197.71 billion in purchase volume, according to the latest data available from research firm The Nilson Report.
Issued by major banks and other reputable payment providers, these prepaid cards are being used to launder the proceeds of crime or fund terrorist plots, S&P Global Market Intelligence found. Victims of scams are pressured into handing over hundreds or thousands of dollars through gift cards from iTunes and Google Play. And there is a growing range of reloadable debit cards that allow holders of bitcoin and other cryptocurrencies to spend their funds in the real economy, with no real way of knowing whether those funds are the proceeds of illicit activity.
As anonymous as cash
Examples of criminal use of prepaid cards include terrorists using them to anonymously pay hotel bills and other expenses leading up to the 2015 Bataclan attacks in Paris, and the Mexican drug cartel led by Joaquin ‘El Chapo’ Guzman that routinely uses prepaid cards to move money across national borders.
Part of the appeal to criminals of prepaid cards is that they can be used to parcel large sums of money into small amounts, helping to avoid arousing anti-money-laundering (AML) alerts when the funds are paid into the banking system and the wider economy. This is a practice known as ‘smurfing’ amongst financial crime experts.
‘Criminal organisations that in the past would utilise money mules are now shifting to using prepaid cards,’ says John Tobon, deputy special agent in charge of Homeland Security Investigations in South Florida.
While regulators and lawmakers are aware of the criminal potential and try to limit the exposure, eg. by imposing the relatively low limits of the amounts that can be put on prepaid cards, the loopholes still exist.
For example, moving more than $10,000 in cash or other monetary instruments across a US border without declaring it – and with specific intent to conceal it from authorities – is a criminal offence carrying a maximum jail sentence of five years under the Bank Secrecy Act. Prepaid cards are not considered monetary instruments under the act, opening up a possibility to circumvent the law in cross-border smuggling.
Gift to criminals
Criminologists and other fraud experts are also keeping close watch on another form of prepaid cards – gift cards, such as those from Apple and Google. In the US, more than 38,000 reported crime cases in 2019 involved gift and other prepaid cards, accounting for $103 million of losses, up from $77.9 million a year previously, according to US Federal Trade Commission (FTC) data.
Apple’s iTunes gift cards accounted for the highest number of reported scams in 2018, at 23.7%, followed by Google Play at 18.3%, the FTC said. The government agency could not comment on why gift card fraud has increased, but said that the figures were based on reported incidents only and that the full scope of the problem could be greater.
Other countries are experiencing similarly high levels of prepaid and gift card fraud. Action Fraud, the UK police’s fraud and cybercrime reporting division, said it received 11,329 reports of fraud involving iTunes gift cards between April 2015 and March 2018, with some £6.6 million lost as a result. Individuals affected by the scam lost £579 on average.
Banks and other prepaid/gift card issuers admit that they are limited in what they can do to protect consumers when it comes to gift card fraud. Once the scammers get hold of the card’s data, it is virtually impossible to retrieve any of the money or find leads that could help the police to pursue the case.
Another dimension to the criminal use of prepaid cards is added by the growing prevalence of cryptocurrency transactions. All major crypto platforms such as Bitcoin, Ethereum and Ripple now offer prepaid cards. Around 30 crypto debit card products are available worldwide, according to UK-based McKay Research. These cards enable cryptocurrencies to be converted into a fiat currency to buy goods and services in shops where Visa and Mastercard are accepted.
Unregulated and traded anonymously, cryptocurrencies play a key role in criminal activity on the so-called dark web. An estimated $76 billion of illegal activity annually involves bitcoin – accounting for nearly half of all bitcoin transactions, according to a 2018 paper from the University of Sydney.
The ease with which cryptocurrency earned via illicit activities can be converted into ‘clean’ fiat money can make prepaid crypto cards a target for cybercriminals, fraudsters and other illicit actors. This is a great concern for the payment networks such as Visa and Mastercard that potentially exposes them to a breach of AML or know-your-customer (KYC) procedures if a prepaid crypto card company using their network were found to have facilitated crime.