Secret documents reveal potential dark side of prepaid debit cards
23 Sep 2020

The collapse of Choice Bank, an obscure entity in Belize, went largely unnoticed in 2018.

But Americans were among the uninsured depositors filing claims in its failure, totaling $100 million. Some said they were startled to learn that their money was trapped in a small bank in Central America. They thought they were doing business with a U.S.-based company called Payoneer.

“Losing out on money that I’m not expecting to lose is very upsetting, even still,” said Mara O’Halloran, a Pennsylvania mother of two who said she is out thousands of dollars as a Choice Bank depositor.

Not everyone was shocked by the Choice Bank collapse. Years before, an array of banks were raising questions to regulators about its practices. In 2014, for example, Bank of America characterized Choice Bank as “an issuer of prepaid cards for program managers with inherently high risk.”

That and other warnings about Choice Bank emerged in a cache of 2,100 secret suspicious activity reports filed with the Treasury Department’s Financial Crimes Enforcement Network, known as FinCEN, from 2011 to 2017.

The leaked documents are part of the FinCEN Files, a collaborative project with the International Consortium of Investigative Journalists, BuzzFeed, NBC News and more than 400 other journalists around the world. The project examined a cache of suspicious activity reports filed by banks with FinCEN, as well as other investigative documents. The documents were obtained by BuzzFeed.

The reports citing Choice Bank provide a rare glimpse into problems that can arise for customers of so-called financial technology companies partnering with risky offshore banks.

The failure of Choice Bank also shows the potential dark side of prepaid cards, which are used by millions of people globally and whose total card spending exceeded $7 trillion in 2018. The cards ease money transfers across borders and enhance global commerce, their advocates say.

But the anonymity allowed by the cards increases their appeal to money launderers and drug traffickers, analysts contend. People can deposit funds gained through illicit activities in loosely regulated offshore banks and then use prepaid cards obtained from companies partnering with the banks to spend the money in the U.S.

‘Suspicious activity reports’

Financial institutions conducting business in the U.S. must file suspicious activity reports to FinCEN, an agency that fights money laundering, terrorist funding and other financial crimes. In confidential reports, the institutions detail — and often rescind — transactions among clients or other banks they suspect are problematic.

The reports, known as SARs, aren’t by themselves proof of wrongdoing. The information is raw and unverified, which is why regulators keep them secret. The vast majority of SARs don’t result in any action by regulators, experts say. FinCEN uses them to pursue investigations.

A 2015 report filed by Deutsche Bank, for example, noted that Choice Bank “appears to facilitate wire activity for secretive clients operating in the world of offshore financing which presents a higher risk for potential money laundering activities.” NBC News couldn’t determine whether FinCEN investigated the Choice Bank reports.

Many Choice Bank customers, like Mara O’Halloran, came to it by way of a startup called Payoneer, a company that allows customers to send and receive money internationally. New York-based Payoneer, which says it operates in 200 countries and serves 4 million people, was a program manager for prepaid Mastercards issued by Choice Bank; the cards let customers receive payments and withdraw their money at ATMs worldwide.

Like many other Payoneer customers, O’Halloran liked the convenience of the prepaid card, which worked like an electronic wallet. “A bank account without the hassle,” she said. The customer puts money in the bank and the bank puts money on the card, which the holder can use to make purchases, transfer money or get cash from ATMs.

It also meant O’Halloran didn’t have to deal with a traditional U.S.-based bank. She works in the adult entertainment industry as a webcam model, and traditional banks have sometimes shut down accounts of people they believe are in the industry as “high risk.”

But the arrangement changed in late 2016 for some Payoneer customers. Under the change, Payoneer shifted from being a fiduciary to the customers, meaning it had to put their interests first, to being a service provider to Choice Bank. That meant customers would have to ask Belize-based Choice Bank to solve any problems. When Choice Bank failed in 2018, customers had to try to get their money back from the liquidator appointed by the central bank of Belize rather than get help from Payoneer.

Two and a half years after the Choice Bank failure, its liquidator is making final distributions to depositors and creditors — roughly 80 cents on the dollar, according to an August report. But some depositors said they haven’t filed claims because they didn’t know how.

In online posts and in correspondence with NBC News, some former Payoneer customers described having had as much as $50,000 in the bank when it failed.

Payoneer was also hurt in the failure, although it didn’t say how much money it lost. Its spokesman declined to say whether Payoneer officials felt responsible for the losses incurred by its former customers.

Offshore banks and ‘fintech’ companies

Choice Bank opened its doors in 2007 in Belize City as an international bank, meaning only foreigners could open accounts there. Those kinds of “offshore” entities can be less scrupulous than domestic institutions about scrutinizing whom they do business with, industry sources said.

Choice Bank had close ties to Payoneer. Payoneer’s founder became a shareholder in the bank in 2010, documents show. While that stake was sold two years later, according to a person briefed about the matter, Payoneer continued to do business with Choice Bank until it failed.

In recent years, companies like Payoneer — part of a new and burgeoning sector called financial technology, or “fintech” — have won over millions of customers by offering efficiency and savings in the global financial arena.

According to a 2019 report from the Conference of State Bank Supervisors, fintechs account for 55 percent of the $1.4 billion in transactions conducted by all “money services” businesses, meaning everything from PayPal to grocery store check cashing firms.

But fintech companies aren’t subject to the stringent rules that apply to banks. An International Monetary Fund report in July said the regulatory gulf poses risks to financial stability, citing “possible disruption of traditional business models, and the interconnectedness of traditional financial institutions with lightly supervised fintech companies.”

The industry’s promise took a beating this summer in the flameout of Wirecard, a German bank and fintech darling that filed for insolvency amid accusations of accounting fraud and fabrication of $2 billion in assets.

Banks, however, had begun raising questions about Wirecard years earlier, the FinCEN files show. A 2014 report about Wirecard transactions filed by Bank of New York Mellon said it had “confirmed that most of the wires represented payments to online casinos, pornography websites, and billing payment processing companies.” Bank of New York Mellon also noted that it had closed an account Wirecard had at the bank in 2009 because of problematic transactions.

Seth Eisen, a Mastercard spokesman, declined to comment extensively about specific customers, including Wirecard and Choice Bank. But he said in a statement: “Mastercard maintains a formal and rigorous rules enforcement process. We actively monitor our network for violations of law and non-compliance with our rules, including through the use of advanced artificial intelligence technology.”

Many fintech companies, including Payoneer, have compliance departments and invest in oversight systems to protect themselves and their clients.

A spokesman for Payoneer said its compliance practices are vigorous.

“Payoneer’s compliance program meets the highest industry standards and is audited regularly by leading global auditors and financial regulators in multiple jurisdictions,” he said in a statement. “Payoneer has never been found to have violated any of its anti-money laundering obligations by FinCEN or any regulator or authority anywhere in the world. Any implication to the contrary is misleading and mischaracterizes the facts.”

In 2018, the IRS concluded an audit of Payoneer’s anti-money laundering compliance program and identified no violations. The audit covered five months of 2016.

By Gretchen Morgenson and Kit Ramgopal, NBC News, 22 September 2020

Read more at NBC News

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