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Prepaid Cards

Definition

Prepaid cards are payment instruments funded in advance with a fixed or variable amount, allowing the holder to transact up to the available balance without direct access to a bank account.

They may be issued as closed-loop cards (usable only with a specific merchant or network) or open-loop cards (usable across card networks such as Visa, Mastercard, or RuPay).

In AML/CFT contexts, prepaid cards present elevated risk when anonymity, high velocity, cross-border usability, or weak KYC controls allow illicit actors to store, move, or withdraw value outside traditional banking oversight.

Prepaid instruments serve legitimate purposes such as financial inclusion, corporate expense management, travel, and merchant-specific programs. However, without appropriate limits and customer due diligence (CDD), they can be exploited for money laundering, terrorist financing, layering schemes, and value smurfing.

Explanation

Prepaid cards function as stored-value mechanisms where funds are loaded either once or repeatedly.

Depending on their design, they may support cash loading, online reloads, transfers between cards, ATM withdrawals, international usage, or conversion into digital or physical currency equivalents.

From an AML/CFT perspective, the risk arises mainly from:

  • The potential lack of verifiable customer identity, especially with anonymous or lightly verified cards.
  • The ability to load and withdraw cash, making them attractive for placement and layering.
  • The ease of distribution across borders through postal mail or digital issuance.
  • The limited visibility of underlying client behaviour when cards are sold via third-party distributors.

Regulators globally have imposed increasingly strict controls, especially on reloadable, cross-border, or high-limit prepaid cards.

Prepaid Cards in AML/CFT Frameworks

Prepaid cards intersect directly with AML/CFT regulatory expectations for traceability, transaction monitoring, and customer identification.

Their treatment often depends on risk classification such as anonymous vs. KYC-verified, reloadable vs. non-reloadable, and domestic vs. international.

Key AML/CFT linkages include:

  • Determining and verifying the identity of cardholders where required by thresholds or functionality.
  • Monitoring for unusual patterns inconsistent with typical prepaid usage.
  • Ensuring distributors and programme managers comply with CDD, record keeping, and suspicious transaction reporting.
  • Assessing cross-border usage and exposure to high-risk jurisdictions.
  • Implementing FATF Recommendation 10 (CDD), Recommendation 15 (new technologies), and Recommendation 16 (wire transfer and value transfer traceability).

Institutions must document their prepaid card risk assessment, including product, channel, geographic, and customer risks.

Key Components of Prepaid Card Programmes

Structural Features

Prepaid card programmes typically involve multiple parties and functions:

  • Issuer providing the regulated financial architecture and compliance oversight.
  • Programme manager handling operations, card design, marketing, and customer interactions.
  • Distributor or agent network selling physical cards and performing initial KYC when required.
  • Processor enabling authorisation, clearing, settlement, and monitoring.
  • Card network (open-loop cards only) facilitating domestic or international acceptance.

Types of Prepaid Cards

Common variants include:

  • Closed-loop cards (merchant-specific usage only).
  • Open-loop cards (network-branded and broadly accepted).
  • Reloadable cards supporting multiple top-ups.
  • Non-reloadable cards often used as gift cards.
  • Payroll cards used by employers to pay unbanked workers.
  • Travel cards enabling foreign currency spending and ATM withdrawals.
  • Virtual prepaid cards for online purchases and digital-only environments.

Risks & Red Flags Associated With Prepaid Cards

Prepaid cards carry inherent AML/CFT vulnerabilities due to portability, cash-loading capability, and potential anonymity.

Key risks include:

  • High anonymity in programmes with minimal or no KYC.
  • Cross-border withdrawals and spending patterns inconsistent with customer profiles.
  • Structuring of loads or repeated small-value top-ups designed to avoid thresholds.
  • Use of prepaid cards funded by illicit proceeds to move value across jurisdictions.
  • Purchase or loading by third parties unrelated to the cardholder’s profile.

Red flags may include:

  • Multiple prepaid cards purchased by the same individual within a short timeframe.
  • Large or frequent cash loads without economic justification.
  • ATM withdrawals across several countries shortly after card activation.
  • Customer refusal to provide identification when prompted.
  • Use of prepaid cards to fund virtual asset platforms or P2P wallets.

Common Methods & Techniques for Misuse

Criminals leverage prepaid cards for several laundering typologies:

  • Placement through cash-based loading: Where illicit funds are inserted into the system via reload networks.
  • Smurfing and structuring: Involving small-value loads across multiple cards.
  • Cross-border transport: Of high-value cards, enabling movement of stored value without physical cash.
  • Rapid load-spend-withdraw cycles: To layer and obscure funds.
  • Use in online marketplaces: To convert prepaid balances into goods that are resold for cash.
  • Funding virtual asset transactions: Where prepaid cards serve as a bridge to high-risk exchanges.

Examples of Prepaid Card Scenarios

Cross-Border Travel Card Misuse

A criminal organisation loads funds onto multiple prepaid travel cards in Country A, then uses the cards to withdraw cash in Country B.

The activity circumvents banking channels, creating a layering effect and obscuring the origin of illicit proceeds.

Anonymous Gift Cards Used for Online Fraud

Fraudsters purchase large numbers of non-reloadable gift cards using illicit proceeds.

These cards are then sold on secondary markets or used to purchase virtual goods, making transaction tracing difficult.

Payroll Card Diversion

A shell company issues payroll cards to nonexistent employees.

Criminals load illicit funds onto the cards under the guise of salary payments, then cash out through ATMs.

Fintech-Issued Virtual Prepaid Cards

A fintech with weak KYC controls issues virtual cards instantly.

Criminal actors exploit the digital onboarding gaps to route high-velocity payments associated with mule networks.

Impact on Financial Institutions

The risks associated with prepaid card products may lead to serious consequences for issuing banks, programme managers, and distributors:

  • Regulatory enforcement for non-compliance with prepaid CDD requirements.
  • Reputational damage due to association with anonymity-enabled money laundering.
  • Increased operational costs for monitoring, risk reviews, and escalations.
  • Potential restrictions or termination of programme operations in high-risk jurisdictions.
  • Financial exposure when prepaid products are abused for fraud or illicit value movement.

Institutions must ensure programme governance, third-party oversight, and real-time monitoring aligned with risk appetite.

Challenges in Detecting and Preventing Misuse

Several structural and operational factors make prepaid card AML/CFT risk difficult to mitigate:

  • Programmes relying on third-party distributors with inconsistent KYC practices.
  • Limited customer information for anonymous or low-verification tiers.
  • High transaction volumes and rapid load/spend cycles.
  • Fragmented oversight when issuers, programme managers, and distributors are located across different jurisdictions.
  • Difficulty applying behavioural analytics without traditional account histories.

Enhanced monitoring, strict tiered KYC models, and cross-entity data-sharing are critical countermeasures.

Regulatory Oversight & Governance Expectations

Regulators globally impose conditions on prepaid card programmes to strengthen transparency and prevent misuse. Key expectations include:

  • Mandatory identification and verification of customers beyond set thresholds.
  • Restrictions on anonymity, international use, and cash access for certain card types.
  • Record retention for transactions and customer information.
  • Clear delineation of AML responsibilities across issuers, programme managers, and distributors.
  • Ongoing monitoring and suspicious transaction reporting by all relevant parties.
  • Enhanced scrutiny for cross-border prepaid programmes and those involving digital issuance.

FATF Guidance on Prepaid Cards, Mobile Payments, and Internet-Based Payment Services remains a foundational reference for supervisory expectations.

Importance of Addressing Prepaid Card Risk in AML/CFT Compliance

Robust prepaid card oversight helps institutions:

  • Prevent anonymous or high-risk prepaid instruments from enabling criminal value movement.
  • Align with FATF and domestic regulatory expectations for traceability and customer identification.
  • Reduce exposure to regulatory sanctions and reputational harm.
  • Strengthen intelligence-led monitoring for prepaid activity patterns.
  • Maintain safe, compliant financial inclusion offerings without enabling exploitation.

Given the expanding role of digital issuance and fintech-driven prepaid models, institutions must continuously review product design, risk scoring, monitoring thresholds, and distributor governance.

Related Terms

  • Stored Value
  • Anonymous Card
  • Programme Manager
  • Cash Loading
  • Cross-Border Transactions
  • Smurfing

References

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