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Expanding Federal Regulation of Prepaid Cards

Joel D. Feinberg, Partner, Sidley Austin LLP

David E. Teitelbaum, Partner, Sidley Austin LLP

Agenda

• Financial Crimes Enforcement Network (“FinCEN”) Final Rule Regarding Stored Value and Providers and Sellers of Prepaid Access (“Prepaid Rule”)

– Published - July 29, 2011

– Effective - September 27, 2011

– Partial Delayed Effective Date – March 31, 2012

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In General

• The Prepaid Rule will impose new AML requirements on two new categories of money services business (“MSB”), providers of prepaid access and sellers of prepaid access.

• FinCEN’s stated goal in issuing the Prepaid Rule is to address regulatory gaps that have resulted from the proliferation of prepaid innovations over the last 12 years that increase the potential for using prepaid access to further money laundering, terrorist financing and other illicit transactions.

• The Prepaid Rule does not establish new requirements or change existing BSA requirements applicable to banks.

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Stored Value v. Prepaid Access

• The Prepaid Rule renames the term “stored value,” a defined term under prior FinCEN rules, as “prepaid access”without narrowing or broadening the meaning of the term.

• Prepaid access is defined as access to funds or the value of funds that have been paid in advance and can be retrieved or transferred at some point in the future through an electronic device or vehicle, such as a card, code, electronic serial number, mobile identification number or personal identification number.

• The key aspects of this definition are that: (1) funds have been paid in advance; and (2) those funds can be retrieved or transferred in the future.

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Prepaid Programs

• The Prepaid Rule defines a “prepaid program” as “an arrangement under which one or more persons acting together provide(s) prepaid access.”

• The Rule does not distinguish between programs designed for consumer use and corporate use or that are funded by consumers or businesses.

• However, the Rule provides several exemptions.

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Prepaid Program Exclusions

• Closed-loop prepaid access devices that have a maximum value of $2,000 or less on any day.

– Closed loop prepaid access means access to “funds or the value of funds that can be used only for goods or services in transactions involving a defined merchant or location (or set of locations), such as a specific retailer or retail chain, a college campus, or a subway system.”

• Prepaid access to funds provided by a federal, state, local, territory and insular possession or tribal government agency.

• Prepaid access to funds from a pre-tax flexible spending account for health care and dependent care expenses from a Health Reimbursement Arrangement as defined under the federal Internal Revenue Code, for healthcare expenses.

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Prepaid Program Exclusions (cont’d)

• Prepaid access to employment benefits, incentives, wages or salaries (payroll cards), or prepaid access with a maximum value of $1,000 or less at all times (e.g., no more than $1,000 can be loaded or withdrawn in a day); if, in either case, the prepaid access device does not permit (1) funds or value to be transmitted internationally, (2) transfers between or among users within a prepaid program, such as person-to-person transfers or (3) loading additional funds or value from a non-depository source, such as a retail reload location.

– FinCEN has stated that the payroll card exemption applies only to arrangements in which the employer, and not the employee, can add to the funds.

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Providers of Prepaid Access

• A “provider of prepaid access” is “the participant within a prepaid program that agrees to serve as the principal conduit for access to information from its fellow program participants.”

• The participant designated as the provider of prepaid access must register with FinCEN as an MSB.

• As part of the registration process, each provider of prepaid access must identify each prepaid program for which it serves as the designated provider.

• The Prepaid Rule also will require providers of prepaid access to maintain a list of its agents for each prepaid program.

• Banks that act as “provider” are exempt.

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Providers of Prepaid Access (cont’d)

• Under the Prepaid Rule, FinCEN may determine on a “facts and circumstances” basis, which entity is the provider of prepaid access if the parties to a prepaid program do not self-identify a provider.

• In such case, the provider will be determined by FinCEN to be the party with principal oversight and control.

• The Rule provides a non-exclusive list of five activities that indicate principal oversight and control: – (1) organizing the prepaid program; (2) setting the terms and

conditions of the prepaid program and determining that the termshave not been exceeded; (3) determining the other businesses that will participate in the prepaid program, which may include the issuing bank, the payment processor, or the distributor; (4) controlling or directing the appropriate party to initiate, freeze or terminate prepaid access; and (5) engaging in activity that demonstrates oversight and control of the prepaid program.

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Sellers of Prepaid Access

• A seller of prepaid access is defined as “[a]ny person that receives funds or the value of funds in exchange for an initial loading or subsequent loading of prepaid access if that person (1) sells prepaid access offered under a prepaid program that can be used before verification of customer identification…; or (2) sells prepaid access (including closed loop prepaid access) to funds that exceed $10,000 to any person during any one day, and has not implemented policies and procedures reasonably adapted to prevent such a sale.”

• If the prepaid access is sold under an arrangement that fits into one of the prepaid program exemptions, or if the customer must go through the identification process before the card is activated, then there is no seller of prepaid access.

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AML Requirements

• The Rule revises the BSA regulatory regime to impose the following requirements on providers and sellers of prepaid access:

– MSB Registration. Providers of prepaid access are required to register with FinCEN as MSBs and identify in the registration each prepaid program for which they are the provider of prepaid access. Sellers of prepaid access are treated as agents of the providers, and are not themselves required to register.

– SARs. Providers and sellers of prepaid access are subject to SAR requirements.

– AML Program. Providers and sellers of prepaid access are subject to AML program requirements commensurate with their activities, including policies, procedures and internal controls.

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AML Requirements (cont’d)

– Customer Identification and Recordkeeping. Providers and sellers of prepaid access must, as part of their AML program, establish procedures to verify the identity of a person obtaining prepaid access under a prepaid program and obtain indentifying information, including name, date of birth, address and identification number. Sellers have the same obligation for a person who obtains prepaid access in excess of $10,000 in a day.If both the provider and seller of prepaid access are required to collect identifying information, they may agree as to which entity will collect the information (although both remain responsible for compliance).

– Transactional Reporting. Providers of prepaid access are required to maintain access, for five years, to transactional records generated in the ordinary course of business that would be needed to reconstruct prepaid access activation, loads, reloads, purchases, withdrawals, transfers and other prepaid-related transactions.

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Effective Dates and Enforcement Issues

• The Rule generally becomes effective on September 27, 2011 for providers of prepaid access, except for a new registration requirement, which will become effective March 31, 2012.

• The Rule becomes effective on March 31, 2012 for sellers of prepaid access.

• In addition, for both providers and sellers of prepaid access, FinCEN will not initiate any compliance matter or enforcement action prior to March 31, 2012 for violations of the Rule; nor will FinCEN assess any civil money penalties for violations of the Rule that occur prior to March 31, 2012.

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Questions?

THANK YOU

Joel D. FeinbergSidley Austin LLP1501 K Street, NW

Washington, DC 20005jfeinberg@sidley.com

(202) 736-8473

David E. TeitelbaumSidley Austin LLP1501 K Street, NW

Washington, DC 20005dteitelbaum@sidley.co

m(202) 736-8683

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