United States: Federal Regulators Clarify Bank CIP Obligations for Prepaid Cardholders

Banks and credit unions that issue reloadable, general purpose prepaid cards must apply Customer Identification Program (CIP) procedures to those cardholders, according to guidance issued by the federal banking regulators and FinCEN on March 21, 2016 (Guidance).1 The Guidance requires banks to treat these cardholders as "customers" for CIP purposes, even if the cardholders are not named on any account at the bank.

The Guidance aims to standardize the practice of those issuing banks that already treat prepaid cardholders as their customers when conducting CIP. That "best practice" is now a universal requirement for banks issuing general purpose reloadable (GPR) prepaid cards (i.e., cards that are not restricted to a single merchant or group of affiliated merchants). GPR programs are frequently run by third-party program managers that partner with an issuing bank and serve as the nominal accountholder at the bank, often "for benefit of" the cardholders. Because CIP requirements often focus only on the named accountholder, some issuing banks may have treated only the program manager as a customer, and thus, have not applied formal CIP procedures to the underlying cardholder.

The agencies' announcement coincides with increased attention on the money laundering and terrorist financing risks associated with prepaid access products. French authorities say the November 13, 2015 Paris attacks were financed in part using reloadable prepaid cards, and the EU has already announced plans to implement stricter AML rules on these products.2 EU rules on prepaid cards are stricter than US law in some respects,3 so US regulators may be considering further AML obligations for prepaid products in the near future. 

Background

CIP rules require banks, credit unions and certain other financial institutions to collect and appropriately verify identifying information for each "customer" opening a new "account."4 The rules define a bank "account" as "a formal banking relationship established to provide or engage in services, dealings, or other financial transactions, including a deposit account, a transaction or asset account, a credit account or other extension of credit."5

The FFIEC BSA/AML Examination Manual is silent on whether prepaid cardholders are "customers" opening "accounts" for CIP purposes.6 In other contexts (e.g., trusts, brokered deposits and omnibus accounts), FinCEN, banking and securities regulators have said many times that, at least absent indicia of higher money laundering risk, institutions are generally not required to look past the nominal accountholder to individuals who might be behind that account.7  

Summary of the Guidance

The crux of the Guidance is that issuing banks enter into a "formal banking relationship" with GPR prepaid cardholders, and therefore the cardholders are "customers" of the bank for CIP purposes. The Guidance states that general purpose prepaid accounts—which can include cards or other access devices—exhibit characteristics that are analogous to deposit accounts, such as checking or other types of "transactional accounts" if either (1) they are reloadable, or (2) they provide access to credit/overdraft.8 Because reloading a prepaid card is similar to funding traditional deposit accounts, reloadable cards constitute a "formal banking relationship" and the holder of the card is a "customer." Cards that are not reloadable are not "accounts" because they do not constitute a formal banking relationship. Temporary cards that can be converted to GPR cards (a common feature for cards sold at brick-and-mortar retailers, where gaining a customer's identification can be difficult) are not "accounts" until the reloadable feature is activated through a cardholder's registration.
 
The Guidance emphasizes that once an account is established by a cardholder, CIP is required on the cardholder even if the cardholder is not the named account holder and the cardholder's funds are held in an account titled in a third party's name (e.g., in the name of the program manager, possibly "for benefit of" the cardholders). Cardholders are also "customers" for CIP purposes even if the pooled account is set up as a trust, with the cardholders as beneficiaries (previously, FinCEN and the federal banking agencies had said that beneficiaries of a trust are not "customers" for CIP purposes.9).

The Guidance also addresses where specialized prepaid cards (e.g., payroll, government benefits) may require CIP. In general, these cardholders are considered "customers" for purposes of the CIP if the cardholders themselves can load funds independently and not through a program sponsor such as an employer or government entity.

According to the Guidance, banks may use third-party program managers or other third parties to conduct CIP on prepaid cardholders, but the bank is ultimately responsible for compliance with the CIP requirements. The Guidance states that third-party program managers are "agents" of the bank for CIP purposes. It adds that contracts between issuing banks and third-party program managers should include the following components:

  • delegation of CIP obligations;
  • a right for the issuing bank to obtain immediate access to all CIP information collected by the third-party program manager;
  • a right for the issuing bank to periodically audit the third-party program manager and monitor its performance; and
  • if applicable, a note that the relevant regulatory body has the right to examine the third-party program manager under the Bank Service Company Act.10

Implications and Open Questions 

The Guidance fills in a potential gap in FinCEN's prepaid access regulations because in certain circumstances those regulations did not apply to GPR programs controlled by issuing banks. FinCEN's regulations generally state that the entity with "principal oversight and control" over a qualifying prepaid program is a "provider of prepaid access," a type of Money Services Business (MSB).11 FinCEN requires MSBs to implement AML programs and follow other AML requirements. However, because banks by definition cannot be MSBs,12 FinCEN has said that there is no "provider of prepaid access" where the issuing bank has primary oversight and control over the program.13 The Guidance ensures that where there is no "provider" of prepaid access under FinCEN's rules, the issuing bank must fulfill a similar role by applying CIP procedures to GPR cardholders.

While it may close a gap in the application of FinCEN's regulations to certain prepaid programs, the Guidance also raises some challenges.

  • The regulators' position on this issue was published as Guidance, and therefore is effective immediately. It remains to be seen whether examiners will allow for an adjustment period for those banks that have been taking a different approach.
  • Issuing banks that have not yet applied CIP procedures to GPR cardholders may encounter challenges complying with the Guidance. For example, the Guidance does not address whether banks may continue servicing GPR cards held by cardholders who have not been processed through their CIP procedures. If regulators were to require suspension of card use or reload functions for these existing accounts, unexpected hardship to customers could result.
  • Finally, the reasoning in the Guidance for extending CIP obligations to GPR cardholders could be applied in other contexts. Many FinTech companies use pooled accounts and bank partnerships to provide payment or other financial services to their customers. If these services allow customers to load funds or perform other bank-like functions, they too may be deemed to create a "formal banking relationship" that may require the partner bank to apply CIP procedures to those underlying customers.

See OCC Bulletin 2016-10, Interagency Guidance to Issuing Banks on Applying Customer Identification Program Requirements for Holders of Prepaid Cards (Mar. 21, 2016).
See Alexander Starr, In Wake of Attacks, France Moves to Regulate Prepaid Bank Cards, NPR (Nov. 24, 2015).
3 In Europe, in some cases, identification is required to obtain non-reloadable cards, see Prepaid cards used by Paris attackers to rent hotel rooms, Hindustan Times (Nov. 29, 2015), ("In Europe it is currently possible to use without showing identification non-rechargeable cards for payments of up to 250 euros ($265) or up to 2,500 euros per year for rechargeable cards."), while in the United States there is no requirement to show identification for non-reloadable cards.
See e.g. 31 C.F.R. §1020.220(a)(1) (banks); 31 C.F.R. §1023.220(a)(1) (broker-dealers).
5 31 C.F.R. §1020.100(a)(1).
See  FFIEC Bank Secrecy Act/Anti-Money Laundering Examination Manual, p. 47-55 (Customer Identification Program) and p. 227-234 (Prepaid Access).
See, e.g., Joint Final Rule, Customer Identification Programs for Banks, Savings Associations, Credit Unions and Certain Non-Federally Regulated Banks, 68 Fed. Reg. 25,090, 25,094 (May 9, 2003) (CIP on trusts and brokered deposits).
8 Overdraft cards are not common, so, as a practical matter, the Guidance mainly applies to reloadable cards.
See Final Rule, Customer Identification Programs for Banks, Savings Associations, Credit Unions and Certain Non-Federally Regulated Banks, 68 Fed. Reg. 25,090, 25,094 (May 9, 2003) ("For example, in the case of a trust account, the "customer" would be the trust.").
10  See 12 U.S.C. §1867(c).
11 The prepaid access rules are complex and are subject to many exemptions. In general, however, companies that issue or sell "closed-loop" prepaid access of less than $2,000 per device per day—such as store-branded gift cards only usable at particular retailers—are not covered by the prepaid access rules. General purpose, or "open-loop" prepaid access under $1,000, is generally exempt if it was not reloadable (without prior customer verification) and could not be used internationally or support peer-to-peer transfers. See 31 C.F.R. §1010.100(ff)(4)(iii)(D) (providing full details of these exceptions).
12  See 31 C.F.R. §1010.100(ff)(8)(i).
13  See FIN-2012-R003, Application of the Prepaid Access Rule to Bank-Controlled Programs (May 23, 2012). FinCEN's regulations also deem MSBs as "sellers" of prepaid access, but often a GPR program does not have "sellers" because retail merchants sell only "temporary" prepaid cards that, before activation, lack reloadability or other features that would subject them to FinCEN's rules.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Katrina Carroll
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions