Regulators Intervene against Fraud and Money Laundering Risks in Use of Pre-Paid Credit Cards

International regulators have been busily engaged for some time in the process of looking at the methods by which payments are made to forex companies by clients, and the risk associated with credit card transactions. While credit card transactions are under the spotlight, they are still able to meet regulatory requirements as the ownership and origin of funds can be verified and are held with the card issuer.

This does not apply to pre-paid credit cards, that are now being used in a number of jurisdictions to fund Forex accounts, and are in some cases becoming ubiquitous. This has caused regulators in the UK to point out to online OTC companies that they will be faced with severe penalties if receiving funds by this method especially if the origin of the funds cannot be determined. Even if no fraud is committed, inspection of records by regulators could result in a prosecution being upheld if the origin of the funds is not able to be recorded.

There has been dialog recently in North America surrounding the NFA's proposal to ban all deposits by credit card to US forex companies, quite a draconian approach, however this has yet to come to fruition. In addition, third party e-wallet providers such as Moneybookers and Neteller, are increasingly returning funds back to clients if the risk is considered too high. Payment by credit card however is less risky than pre-paid credit cards in the eyes of the UK regulators.

A Deep Dark Hole Named Anonymity

Many clients of retail forex companies continue to use credit cards to fund their accounts, and according to Forex Magnates’ research, there is an increasing amount of pre-paid cards used for this purpose.

For regulated firms, the Joint Money Laundering Steering Group (JMLSG) guidelines are that proof of the beneficial owner of funds paid for investment purposes is required, which is impossible with pre-paid cards.

Furthermore the possibility of fraudulent transactions being carried out with pre-paid cards is very high and in the UK, the FCA rules require systems and controls to be in place to prevent fraud which is impossible with pre-paid cards.

Trevor Clein, Director of Compliance MRLO at Delta Financial Markets explained to Forex Magnates “Fraud does not actually have to have taken place, but even if there is a possibility of fraud, a regulated firm would be in breach for doing business in such cases, and could be liable for heavy fines.”

With the Popularity Comes the Risk

The increase in popularity and usage of pre-paid credit cards is a result of an increase in the amount of retail business from Asia and Africa, where such cards are commonplace.

Mr Clein explains how “they are popular in Asia and Africa, where people without bank accounts can take cash into a bureau and load up a pre-paid card which can then be used for internet purchases including funding of Forex Trading accounts. MoneyBookers and PayPal are similar to pre-paid cards but there are controls on those ones, as MoneyBookers is FCA regulated, and PayPal does not allow any transactions to or from forex companies.”

Globally we are seeing a shift toward becoming more of a cashless society and pre-paid cards provide a solution, but are expensive and carry high charges. The downside is that they can easily be used for money laundering and fraud and they are not as secure as proper credit or debit cards. This is an interesting circumstance and could call into question whether virtual currencies such as Bitcoin will ever be acceptable as a means of funding accounts.

Canadian forex company OANDA recently added Bitcoin to its Currency Converter earlier this year, but the company’s VP of Trading Courtney Gibson explained quite categorically to Forex Magnates that it has no future plans to accept Bitcoin as a method of funding accounts, perhaps indicating that such methods of funding other than those by which identity can be verified may never become a viable method of payment and present too high a risk of abuse by fraudsters.