Banks and telecoms on alert over money laundering

Banks and telecoms companies act together to address a loophole in regulation of their new product lines which could enable money laundering to take place.

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The UAE's banking and telecommunications industries are banding together to close a regulatory loophole that could enable money laundering through prepaid cards and eventually mobile phones.

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Last Updated: May 19, 2011

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Prepaid cards function like debit cards but are topped up with cash payments similar to a prepaid mobile phone, rather than being linked to a bank account. In some cases,they are accompanied by lines of credit. However, it is impossible for the Central Bank to monitor who is transferring funds to prepaid cards with cash.

Raghu Malhotra, the general manager for the Middle East at MasterCard Worldwide, warned of the potential for money laundering.

"If the prepaid banking source is another bank account, that's a clear funding source," Mr Malhotra said. "But with prepaid you can also go and top up by cash, and then you don't know the source."

Governments are particularly alert to money laundering because funds gained through illegal means, such as drug trafficking or other crime, can gain a veneer of legitimacy when deposited in a bank account and moved through the financial system.

In a report published in 2006, the US department of justice's national drug intelligence centre wrote: "Prepaid stored value cards - a product experiencing explosive growth - provide an ideal money-laundering instrument to anonymously move monies associated with all types of illicit activity, without fear of documentation, identification, law enforcement suspicion, or seizure."

Mr Malhotra said that to combat this trend, MasterCard applied restrictions on its prepaid cards.

"Depending on what customer you're talking about, we'll put standards like ticket size and how much can you load at a time," he said. "You can't just come in and say 'here's US$300,000 [Dh1.1 billion], load it up'."

The concern is particularly pressing because local banks are more aggressively marketing prepaid cards as a means of maintaining fee income without violating new Central Bank regulations on personal lending and credit cards.

In addition, purchases made by mobile phone - also known as m-commerce - along with mobile remittances and prepaid cards have resulted in banks and telecoms companies becoming increasingly interlinked. Both must be especially vigilant, said Ali Abbas, a regional consultant for Euromonitor International.

"They're going to have to work in partnership, especially in this 'next big thing' which is mobile commerce," Mr Abbas said.

Increasingly, mobile phone services for payments and remittances have attempted to strip out the need for a bank as an intermediary, and some bankers feel prepaid cards and mobile banking could eventually merge.

But such is the concern over illicit financial transfers that Etisalat, the telecoms giant, has hired an anti-money laundering compliance officer.

"This is a norm for banks, but not for telecoms operators," said Rashed al Abbar, the director of m-commerce at Etisalat, speaking at a forum in Abu Dhabi this week.