Secret documents reveal potential dark side of prepaid debit cards
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.
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