Washington Retail Insight

NRF Says Broadly Written Anti-Terrorism Proposal Could Discourage Merchants from Selling Gift Cards

By J. Craig Shearman
Washington Retail Insight
August 23, 2010

NRF is urging the Treasury Department to significantly revise proposed new rules intended to keep gift cards from being used for money laundering or to fund terrorism, saying some merchants could stop selling the highly popular cards if they are forced to track purchases, collect customers’ names and file “suspicious activity” reports at hundreds of thousands of stores across the nation.

“The proposed regulations would create unimagined burdens,” NRF Senior Vice President and General Counsel Mallory Duncan said in comments filed with the agency. “The prospect of having to maintain more than five years of records for each card sold in return for the minimal payment for the service is reason enough for the store owner to forego the sale of the product, leaving potentially interested customers inconvenienced and wanting.”

A draft proposal by Treasury’s Financial Crimes Enforcement Network would put traditional gift cards issued by retailers, which can typically be used only at the retailer’s own stores, in the same category as “wire money” and bank-issued general purpose “stored value” cards, which often carry a credit card brand and can be used in most stores, and can be redeemed for cash. All would be called “prepaid access” cards.

Retailers selling any of the cards would be subject to requirements of the Bank Secrecy Act and would have to register with FinCEN as “money services businesses.” While potential requirements for retailers are unclear, banks are required to collect names and addresses when a customer makes a transaction or series of transactions totaling $10,000 or more, and to file suspicious activity reports and take other anti-money laundering steps. Whether retailers would have to track smaller transactions in order to see if they add up to $10,000 is not specified.

The proposal does not clearly indicate a dollar figure that would trigger reporting requirements. But one exemption would carve out non-reloadable cards marked that their maximum amount cannot exceed $1,000.

The proposal would partially exempt retailer-issued “closed loop” cards that can only be used at a specific retailer or limited array of affiliated stores. But the exemption would be lost if the cards could be used outside the United States, or “if other persons and non-depository sources had access and could transfer the value of the funds.”

Duncan said the proposal’s definition of “closed loop” needs to be more precise because many retailers own stores that are part of one company but operate under multiple names. In addition, some stores, particularly restaurants, are franchise operations that might share a name but be individually owned. Without a precise definition, the rules “could invalidate a business’s entire gift card program,” he said.

The restriction on international use of cards is problematic because U.S. retailers’ gift cards are commonly used at store locations in neighboring Canada or Mexico and often can be used from overseas on retailers’ web sites. The restriction on transfers of value ignores the fact that “the whole point of a ‘gift’ is to transfer a good or service from one person to another,” Duncan said.

The proposal needs to be rewritten to better clarify the exemptions and to make a distinction between retailer-issued gift cards, which are merely a plastic form of gift certificates that cannot usually be redeemed for cash, and bank-issued cards that can be redeemed for cash, the letter said.

Requiring non-financial businesses such as retailers to comply with requirements of the proposal could cause “major disruptions in the operations of tens of thousands if not hundreds of thousands of business locations” and require billions of dollars worth of new point-of-sale equipment, Duncan said.

Duncan expressed concern that many retailers might not be aware of the proposal since official notice was given only in the government-printed Federal Register and among those who did see the notice, “virtually none of them would reasonably anticipate that proposed ‘Amendments to the Bank Secrecy Act Regulations’ definitions concerning ‘Prepaid Access’ would have any bearing whatsoever on their operations or merited even a moment’s consideration.” Rather than “make lawbreakers of unsuspecting businesses,” the agency should hold a series of field hearings to better publicize the proposal among small and medium-sized businesses, he said.

FinCEN said earlier this summer that prepaid access cards are an easy way for international criminals to circumvent requirements that quantities of cash exceeding $10,000 be reported when carried across U.S. borders. The agency said retailers need to be covered because they have face-to-face contact with card purchasers and are a valuable resource for capturing information at the point of sale.

© 2010 National Retail Federation