NEW YORK (MainStreet) – There’s one area of the credit card market that is growing by leaps and bounds – prepaid cards – and federal law enforcement officials say it’s a troubling trend that can be accounted for, at least in part, by criminals.

According to the Network Branded Prepaid Card Association, American consumers spent $37 billion on prepaid cards in 2010, about twice as much as 2009.

At the same time, the Federal Reserve Bank has been looking at the issue of prepaid cards and money laundering, which in 2007 led the Federal Reserve Bank of Philadelphia to release a report on the topic entitled “Prepaid Credit Cards: Vulnerable to Money Laundering?”

“A number of observers have also emphasized the potential that prepaid card applications have for more efficiently and effectively delivering financial services to the unbanked and underserved segments of society,” the paper states. “Unfortunately, many of the same features that make prepaid cards such a positive payment innovation have also attracted criminals interested in exploiting this new payment form to facilitate money laundering.”

In 2005 a group of government agencies collectively released a report called “Money Laundering Threat Assessment” (MLTA) that explained how “stored value cards” create a huge loophole in the cross-border cash transport laws that enable terrorists and drug dealers to bring large amounts of cash into the country without detection. Normally, people entering the U.S. have to declare any cash amount over $10,000. But prepaid cards enable criminals to bypass that restriction, usually by repeatedly “reloading” the card in $9,900 increments on a moment’s notice, and allow them much wider latitude in creating further, potentially more serious crimes.

"The MLTA emphasizes that the money laundering risk associated with prepaid cards lies in their easy transportability and the relative ease of moving and potentially accessing monetary value anonymously," the Federal Reserve said about the investigation. "The report further notes that prepaid card programs that do not require customer identification or that do not include rigorous monitoring of suspicious activity are most at risk for money laundering abuse."

Just ask the law enforcement officials who tracked the 9/11 Al Qaida terrorists how prepaid cards have changed the crime-fighting battlefield. U.S. authorities were more easily able to catch the moneymen behind the 9/11 attacks – in large part because of their transparency in moving money into the U.S.

According to a 2005 report from the Treasury Department "The 9/11 hijackers opened U.S. bank accounts, had face-to-face dealings with bank employees, signed signature cards and received wire transfers, all of which left financial footprints. Law enforcement was able to follow the trail, identify the hijackers and trace them back to their terror cells and confederates abroad."

"Had the 9/11 terrorists used prepaid ... cards to cover their expenses,” the report continues, “none of these financial footprints would have been available."

Today, the federal government is bringing the hammer down on prepaid credit card use, especially those “reloadable" cards that make it easy for criminals to keep pouring cash into the card without detection. In a word, federal authorities are now asking prepaid card providers to keep a running record of how each consumer uses the card, and how many transactions the consumer makes during a five-year period.

It’s way too early to say how effective the new rules will be, and how much of a burden it puts on an otherwise thriving industry (a rarity in this economy), but Uncle Sam has taken a cold, hard look at the gaping loopholes exploited by criminals and terrorists using prepaid cards, and he doesn’t like what he sees.

That means prepaid card users with illegal intent have a big, fat target on their backs, which won’t go away anytime soon.

If you're concerned about making sure you're using the right form of payment, check out MainStreet's 5 Places Never to Use Your Debit Card!

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