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Take On Payments, a blog sponsored by the Retail Payments Risk Forum of the Federal Reserve Bank of Atlanta, is intended to foster dialogue on emerging risks in retail payment systems and enhance collaborative efforts to improve risk detection and mitigation. We encourage your active participation in Take on Payments and look forward to collaborating with you.

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June 21, 2010


Will the migration to mobile payments be tempered by potential money laundering risks?

Generally, mechanisms that hold value, store it, and transfer it anonymously create a potential money laundering risk. The mobile phone in the United States today is slowly beginning to function as a conduit for payments while possibly providing users a certain degree of anonymity. Researchers predict that almost half of all mobile phone users worldwide will migrate to mobile payments by 2014.

Mobile phones serve as a means for accessing financial services, and, in some parts of the globe, mobile payments are providing access to financial services where traditional banks could not. Arguably, monitoring the movement of money via mobile transactions, particularly with a prepaid mobile, can be challenging. According to a senior trial attorney with the Department of Justice, users who provide false identification at the time of purchase or service providers who maintain poor records thwart the mechanisms that could track the origination or transfer of funds, making the mobile payments channel vulnerable to use by money launderers. In fact, the Bureau of International Narcotics and Law Enforcement Affairs of the U.S. Department of State released an article identifying the potential for mobile payments to be used as vehicles for money laundering.

But how much do we know about the money laundering risks potentially associated with mobile payments?

Emerging payments technology: Smurfing goes digital
Money laundering is generally described as having three sequential elements: placement, layering, and integration. However, not all money laundering transactions involve all three elements. Keeping up with shrewd money launderers who look for ways to exploit the payments system can be challenging. Smurfing is one basic technique of money laundering. Essentially, criminals move large sums of money by breaking the funds down into smaller amounts to avoid triggering currency reporting requirements and thereby lessen the risk of detection by authorities. Smurfing requires some ingenuity, but mostly it requires a small army of people, or smurfs, willing to go from one bank to the next to make the small, daily deposits.

In recent years, a variation of smurfing known as digital value smurfing (DVS) has emerged. DVS also involves the breakdown of large sums of money into smaller sums, but the money launderer moves the money electronically. DVS is considered the next generation of smurfing because as the shift from paper to electronic payments grows, digital smurfers can exchange cash for digital value in the form of stored value cards or possibly stored value on the mobile phone. Unlike traditional smurfing, which requires multiple smurfs to move numerous sums of money between financial institutions, a single smurf can do all the work by operating with multiple accounts, including mobile payment bank accounts, prepaid mobile phone accounts, or Internet payment accounts.

If smurfers are able to transfer stored value funds from one mobile phone to another or to other devices without using a bank for the transfer, they would bypass financial reporting requirements. They could also seriously hamper law enforcement's and the banks' monitoring and detection efforts. Could this convergence of financial services and telecommunications impede anti-money laundering efforts?

Making mobile payments more secure
Responding to the global growth in mobile payments, some vendors are providing improved security solutions for mobile money transfers, while other service providers have set limits on the number and amounts of mobile payment transactions and sources of funding and have employed comprehensive "know your customer" programs. Money laundering detection and prevention is an ongoing and difficult undertaking, one that must keep pace with advances in technology that promote fast and efficient movement of funds.

The rapid global growth of mobile payments presents ostensible opportunities for the adoption and enforcement of anti-money laundering compliance requirements in the mobile space. On May 26, 2010, a bill was introduced that would institute an identification requirement for the purchase of prepaid mobile devices, closing the anonymity gap and enhancing the monitoring and detection of potential payments activities. Examining the potential for money laundering risks in mobile payments is the best way to ensure that this new payments channel is not abused, all the while permitting its continued growth and adoption.

By Ana Cavazos-Wright, senior payments risk analyst in the Retail Payments Risk Forum at the Atlanta Fed

June 21, 2010 in mobile payments , prepaid | Permalink

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