On July 29, the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) issued the “Prepaid Access Final Rule” (the Final Rule), which applied anti-money-laundering requirements to certain prepaid cards, including some gift cards. More recently, FinCEN issued guidance about the new rule in the form of a collection of frequently asked questions. The new rule takes full effect on March 31, 2012, so all retailers should take steps now to ensure they are in compliance with the rule’s requirements by that date. This edition of Morgan Lewis Retail Did You Know? describes the Final Rule and its application to retailers’ gift card programs.

Background

The Final Rule was designed to eliminate a potential loophole in anti-money-laundering restrictions by requiring“providers” and “sellers” of certain prepaid access cards to develop and maintain an anti-money-laundering program.

The Final Rule

The Final Rule applies to both “providers” and “sellers” of prepaid cards. Unless an exception applies, the Final Rule requires retailers to implement internal procedures designed to minimize risks of money laundering, including requirements for (a) verifying customer identification, (b) filing necessary reports, (c) creating and retaining records, and (d) responding to law enforcement requests.

FinCEN has indicated that retailers with closed-loop gift card programs could structure their programs to avoid being “providers.” In particular, the Final Rule exempted closed-loop gift cards sold in or reloaded with amounts of  less than $2,000. Moreover, retailers can avoid being considered “sellers” under the Final Rule if they takeprecautions to avoid sales of gift cards worth more than $10,000 to any one person in the same day. This latter requirement generated some concern among retailers since many retailers make bulk sales of gift cards to third-party vendors. The language of the Final Rule suggested that such sales would need to be limited to $10,000 per day, or the retailers would be subject to the requirements and have to implement an anti-moneylaundering program.

However, FinCEN’s recently issued guidance makes it clear that the requirement does not apply to the sale of gift cards to other businesses for distribution or sale to end users/consumers by those businesses. In those circumstances, the risk of gift cards being used for money-laundering purposes is considered sufficiently low .

The Final Rule was initially set to go into effect on September 27, 2011, but industry representatives had expressed concerns that an IT lock-down on financial systems surrounding the back-to-school and holiday season would prevent making changes necessary to comply with or exempt themselves from the law. Responding to those concerns, FinCEN announced that it would not take compliance action against “sellers” or “providers” until March 31, 2012.

Practical Advice

Retailers should review their gift card programs to ensure they have the necessary limitations in place to avoid the need to develop anti-money-laundering programs. To accomplish this, retailers would need to limit their gift cards to values of $2,000 or less, and prevent sales of gift cards worth more than $10,000 to any one person in the same day.