Credit Cards- ML Risks & Methods

Credit Cards (so called Plastic money) are the most commonly used for daily commercial purposes. They offer different features and benefits to cater to the diverse needs of consumers. A credit card is a financial product that allows the cardholder to borrow money from the issuer to make purchases or withdraw cash. When a cardholder uses a credit card, the issuer pays the merchant for the purchase and the cardholder is then responsible for repaying the issuer for the amount borrowed before the billing cycle ends. The cardholder will also have to pay any additional fees or interest charges if there is any delay or may have some transactions fees if it occurs in foreign location/currencies.

There are several types of payment cards used for various financial transactions.

1.Credit Cards: Credit cards allow cardholders to make purchases on credit, up to a predetermined credit limit. The amount has to be paid during the billing cycle. The card issuer may extend a line of credit to the cardholder, and the amount spent must be repaid within the billing cycle, if missed the cardholder usually pays with interest, by the due date mentioned on the billing statement. Concept: Buy now – pay later.?

2. Debit Cards: Debit cards are linked directly to the cardholders bank account. When a transaction is made using a debit card, the funds are immediately deducted from the linked account. Unlike credit cards, debit cards allow users to spend only the available balance in their account. Concept: Buy now – Pay now.

3. Charge Cards: Charge cards are similar to credit cards, but they require the cardholder to pay the balance in full each month. Unlike credit cards, charge cards do not have a predetermined credit limit, but the full balance must be settled by the due date to avoid penalties.

4. Prepaid Cards: Prepaid cards are loaded with a specific amount of money in advance, allowing users to make purchases up to that preloaded amount. These cards are not linked to a bank account and do not offer credit. Once the loaded amount is depleted, the card needs to be reloaded to continue using it. Prepaid access can be an open loop or closed loop.

• Open-loop prepaid cards can be used for purchases at any merchant that accepts cards issued for use on the payment network associated with the card.
• Closed-loop prepaid cards are typically limited to buying goods or services from the merchant issuing the card. Concept: Pay now – Buy later

5. ATM Cards: ATM cards, also known as bank cards or cash cards, allow users to access their bank accounts through automated teller machines (ATMs) for various transactions such as cash withdrawals, balance inquiries, and fund transfers. Concept: use card to access your bank account remotely

6. Smart Cards: Smart cards, also called chip cards or EMV cards, have an embedded microchip that securely stores data. These cards provide enhanced security and can be used for various types of transactions, including contactless payments. Concept: one card- multipurpose use

?Methods of Money Laundering through Credit Cards

Money laundering through credit card usage poses several risks. There are numerous ways that credit cards can be used for ML, which is the process of concealing the proceeds of illegal activity as legitimate funds.

Many countries still allow their card holders/customers to deposit cash to pay the outstanding amount for card payment. This poses a significant amount of money laundering risks.

1.?Cash advances: large cash advances on a credit card, specifically when the card has a low credit limit, or may signal that the card is being used for ML.

2.?Several small purchases: Making a series of small purchases or taking cash loans on a credit card that are just below the reporting threshold may be a sign of ML. Making pre-payment of such loans- This can be part of "structuring." In placement stage of ML.

3.?High-risk merchants: Purchases made at high-risk merchants, such as gold dealers, casinos,?luxury goods retailers, or arts may be a red flag for ML activity.

4.?Lack of activity: A credit card that is rarely used, but has a large balance, may be a sign that the card is being used to launder money.

5.?Suspicious shipping addresses: Purchases made with a credit card that are shipped to a different address or different location other than the card holder's billing address or location considered as high-risk jurisdiction may be a red flag for ML.

6.?Inconsistencies in information: Contradictions in the evidence provided on a credit card application, such as inconsistency in the name or address, may indicate that the card may be used for ML.

7.?Structuring: Involves making small purchases or cash advances on a credit card in order to avoid triggering financial reporting requirements.

8.?Card cracking: This involves using stolen credit card information to make purchases or withdraw cash. The proceeds from these transactions are then funneled back to the individual or organization responsible for the credit card fraud.

9. Layering: This involves using credit cards to make a series of complex transactions in an effort to obscure the origin of the funds.

10.Smurfing: Involves using a network of individuals, each of whom makes small purchases or cash advances on a credit card in order to avoid triggering financial reporting requirements.

11.Shell companies: Felons may use shell companies, which are companies without active business operations, to open credit card accounts and make purchases.

12.Fraud: Criminals may also use stolen credit card information or create false credit cards to make purchases as part of an ML scheme.

Risks associated with credit card ML.

1.?Concealing Illegal Profits: Criminals and terrorist groups can exploit credit cards as a means to hide their illegal gains. They may engage in fraudulent financial transactions and ML through credit cards, payment service providers, and banks.

2.?Transaction Laundering: also known as electronic ML, is an extension of traditional ML. It involves using approved merchant accounts to process payments for undisclosed businesses that often sell illegal products or services. This method allows illicit transactions to occur under the guise of legitimate transactions.

3.?Difficulty in detection: The evolving landscape of payment systems, such as PayPal, Google Pay, and digital wallets, along with the growing volume of e-commerce activities, creates difficulties in detecting fraudulent financial transactions and money laundering through credit cards. Financial institutions need robust AML policies to identify and act on credit card ML red flags.

4.?Bad Reputation and Trust: ML incidents involving credit cards can damage the reputation and trust of financial institutions, payment service providers, and merchants. Customers may lose confidence in the security and integrity of credit card transactions, leading to potential financial losses for businesses and increased regulatory scrutiny.

5.?Weak AML controls: ML through credit cards can be facilitated by exploiting perceived weaknesses in the anti-money laundering (AML) controls implemented by payment service providers, banks, and electronic payments platforms. Insufficient AML policies or ineffective monitoring systems increase the risk of money laundering activities going undetected.

6.?Detection challenges: The increasing availability of various payment systems and the growth of e-commerce pose challenges in detecting fraudulent financial transactions and ML through credit cards. The complex nature of online transactions makes it difficult to identify and prevent illicit activities effectively.

7.?Shift to digital payments: The shift from cash payments to digital payments, including credit cards and digital wallets, has contributed to the growth of electronic transactions. This shift is driven by the e-commerce and m-commerce booms. However, the increased adoption of digital payments also increases the potential for money laundering risks associated with credit card usage. It can also involve other payment methods, such as digital wallets and cryptocurrencies.

It's important for financial institutions, payment service providers, and regulatory bodies to collaborate, remain vigilant and in implementing effective/robust AML measures to detect and prevent money laundering risks associated with credit card users.

Money laundering risks associated with credit card users primarily stem from the use of credit cards as a vehicle for illicit financial activities. Criminals and terrorist groups may exploit credit cards and other digital payment methods to conceal the proceeds of illegal activities. Hence it is very important that all financial institutions must focus on sharing, disseminating risks associated with ML/TF in form of trainings.

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