2.2 Vulnerabilities of Alternatives to Cash
Illicit actors also use various monetary instruments in conjunction with, or as a replacement to, cash. Both bearer negotiable instruments and prepaid cards for instance offer similar benefits to cash, including anonymity and accessibility. They can store large amounts of value in a compact physical size that makes them potentially vulnerable to abuse by illicit actors who use them instead of cash to make physical cross-border transportations of value. Illicit actors seeking to avoid an LFI’s identification and verification requirements can exploit the ease of payment offered by bearer negotiable instruments and prepaid cards for the purpose of moving their proceeds—thus obscuring the origin of the funds—and converting them to payments for other goods or services. This may also include obtaining funds in one jurisdiction and having access to cash withdrawals in another jurisdiction. Additional characteristics and associated vulnerabilities of bearer negotiable instruments and prepaid cards are discussed below.
2.2.1 Bearer Negotiable Instruments
Bearer negotiable instruments are financial instruments of whatever form, whether in the form of a bearer document, such as traveler’s cheques, promissory notes and cheques, payment orders, or other forms that can be attractive to illicit actors as alternatives to cash. Bearer negotiable instruments provide the opportunity to move large amounts of funds in bearer form without the bulkiness of cash. They are transferable documents that provide unconditional guarantees of cash payments either on demand or at a future date. The individual who issues a negotiable instrument is known as the ‘payer’ or ‘issuer,’ and the person who receives a negotiable instrument is known as the ‘bearer’ or ‘payee’.
Bearer negotiable instruments often include the instruction 'pay to the bearer', meaning the bearer would be the person in physical possession of the instrument. The risk, in this scenario, is that the holder is a criminal and/or not the intended payee of the negotiable instrument. Bearer negotiable instruments are also unique in that they can also be easily transferred from one party to another, which effectively obscures the paper trail on the ‘payer’ or ‘issuer’, and enables illicit actors to distance the proceeds of crime from the illegitimate source. LFIs should seek to mitigate these risks by continuing accepting cash and third party cheques as long as the due diligence measures regarding the person presenting the cheque have been duly conducted by the LFI.
2.2.2 Prepaid Cards
Prepaid cards can be used as an alternative to cash in that they provide access to funds that have been paid in advance. Funds can be claimed or transferred through an electronic device, such as through a card, code, electronic serial number, mobile identification number, or personal identification number within either an "open" or "closed" loop system:
• “Open loop” prepaid cards can be used for purchases at any merchant where that brand of the card is accepted and offers access to cash at any automated teller machine (“ATM”) that connects to the affiliated ATM network. Some prepaid cards may be reloaded, allowing the cardholder or third-party (such as an employer) to add value to the card. For example, a travel card can allow cardholders to top up at various locations, including online and at kiosks, and then allows cardholders to utilize the card to purchase local travel as well as goods or services at various participating stores.
• “Closed loop” prepaid cards generally can only be used to buy goods or services from the issuing merchant of the card or a select group of merchants that participate in that specific network. These cards generally do not allow for cash access, although they can often be re-sold through third-party websites in exchange for other closed loop cards or payments. For example, a chain of coffee shops may offer reloadable cards that can only be used to purchase goods at the coffee shop.
Prepaid cards can be abused by illicit actors seeking to launder money and finance terrorist activities. For instance, both open and closed loop prepaid cards can be utilized in conjunction with, or as a replacement to, bulk cash smuggling. Specifically, drug traffickers have been known to convert cash derived from narcotic sales to prepaid debit cards, which they then use to purchase goods and services or send to narcotic suppliers, who in turn use the cards to withdraw cash from an ATM. In addition, funds can be loaded onto prepaid cards in support of terrorist activities, such as purchasing various products and services whether buying a terrorist a plane ticket or providing other resources (e.g. car rental or hotel) to support a terrorist group.
When assessing the risks associated with prepaid cards, LFIs should consider the specific risks posed by the features and functionalities of the monetary instrument. If the cardholder is anonymous, or if the holder or purchaser provides false information on their identity for instance, the money laundering and financing of terrorism and illegal organisations risks are higher. In addition, LFIs should evaluate the risks associated with cash access, and the volume and velocity of funds that can be loaded and retrieved on prepaid cards. Further risk factors include type and frequency of loads and transactions, geographic location where the transaction activity occurs, value limits, distribution channels, and the nature of funding sources.