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How Gift Cards, Loyalty and Mileage Programs Fuel Money Laundering Schemes

An exclusive article by Fred Kahn

Gift cards and loyalty programs, what you may think of as harmless tools for discounts and travel perks, are increasingly becoming key players in the world of money laundering and move billions every year. With their ability to quickly shift funds across borders and disguise the true origin of illicit money, these seemingly innocuous products have become the go-to method for criminals looking to launder billions of dollars. Whether it’s gift cards from major retailers or loyalty points from airlines, hotels, and credit cards, criminals are exploiting these systems to funnel ill-gotten gains into the legitimate financial system, undetected.

Recent reports show that criminals funnel an estimated $2 trillion into the financial system each year, and a significant portion of that money travels through digital and reward-based channels like gift cards and loyalty programs. While financial institutions have stepped up their monitoring in response to rising financial crimes, criminals are getting more creative in how they exploit these systems. This article delves into the tactics behind how gift cards and loyalty programs are used in money laundering, offers notable examples, and provides insight into how businesses and institutions can guard against such misuse.

Minimal Identification Requirements: Gift cards can be purchased without significant identification, particularly in smaller amounts or online. This makes them ideal for criminals trying to move money without attracting attention.
Resale and Exchange: Once criminals have acquired gift cards, they can resell them at a discount through online platforms or exchange them for goods and services. These goods can then be resold for cash or used to further launder money.
Cross-Border Use: Gift cards are accepted globally, which allows criminals to quickly move funds across borders, often with little oversight from financial institutions.

In a high-profile case from 2019, U.S. authorities seized millions of dollars’ worth of gift cards tied to a money laundering operation. The criminals used gift cards to turn the proceeds from scams into easy-to-transfer assets, highlighting just how widespread this method has become in large-scale laundering operations.

The Role of Loyalty Programs in Money Laundering

Loyalty programs—ranging from airline miles to retail rewards—are also being exploited to launder illicit funds. These programs reward customers with points or miles, which can be redeemed for products, travel, or other perks. However, they offer money launderers a way to move and obscure illicit money without the transparency of traditional financial transactions. Here’s how they work in the context of money laundering:

Accumulating Points with Illicit Funds: Criminals may use stolen or illicit funds to book travel or make purchases that accrue loyalty points or miles. By doing so, they “clean” the money through the rewards system.
Redeeming Points for Goods or Cash: Loyalty points can be redeemed for valuable goods, airline tickets, or hotel stays, which can then be resold, turning illicit funds into seemingly legitimate assets.
Reselling Points: Some criminals resell their accumulated loyalty points to third parties, exchanging them for cash or products. This makes it easier to integrate illicit money into the economy, often without leaving a trail.

In a case from 2020, a criminal group was caught using stolen credit card information to rack up loyalty points. These points were used to book travel and accommodation, which were then resold at discounted rates, demonstrating how loyalty programs can be leveraged for money laundering on a global scale.

How Criminals Layer Funds with Gift Cards and Loyalty Points

Money laundering typically follows three stages: placement, layering, and integration. Gift cards and loyalty points play a crucial role in the layering phase, where criminals attempt to conceal the illicit origin of funds by moving them through various channels.

Placement: The illicit funds are first introduced into the financial system. Criminals may use money gained from illegal activities to buy gift cards or accrue loyalty points.
Layering: This phase involves moving the money through multiple transactions to make tracing difficult. Criminals will often redeem or resell gift cards and loyalty points, layering the funds as they go.
Integration: In the final stage, the laundered money is integrated into the legitimate economy. This can be done by converting the points or gift cards into goods or cash, which can be further used or resold.

For example, in 2021, a large criminal network was found to have used both gift cards and loyalty points to launder millions of dollars. These funds were moved across different platforms and jurisdictions, making it difficult for authorities to trace the flow of money. Ultimately, the criminals redeemed the points and sold high-value products to complete the integration phase.

Red Flags and Prevention Measures

To prevent gift cards and loyalty programs from being exploited in money laundering activities, businesses and financial institutions need to be alert to certain red flags:

Unusual Purchase Patterns: Large or frequent purchases of gift cards, especially if made with multiple payment methods or from suspicious accounts, should be flagged.
High Volume Point Redemptions or Transfers: A customer redeeming a significant number of loyalty points in a short time, especially if used to purchase high-value items, is a red flag.
Resale or Transfer of Gift Cards or Points: Rapid resale or transfer of gift cards or loyalty points, particularly at a discount, is a common sign of illicit activity.
Cross-Border Transactions: A sudden increase in international transactions involving gift cards or loyalty points should prompt further investigation, as it may indicate funds are being moved across borders.

To mitigate the risk of these activities, businesses can implement several preventative measures:

Enhanced KYC and AML Screening: Strengthening Know Your Customer (KYC) protocols, particularly for customers purchasing large quantities of gift cards or booking travel, is essential for identifying suspicious behavior.
Transaction Monitoring Systems: Financial institutions should use advanced systems to monitor transactions for unusual patterns, such as rapid exchanges or reselling of gift cards and loyalty points.
Limitations on Transactions: Setting limits on the purchase or redemption of gift cards and loyalty points can help prevent large-scale laundering operations.
Employee Training: Training employees to recognize the signs of money laundering and encouraging them to report suspicious activity is key to preventing exploitation of these systems.

Conclusion

Gift cards and loyalty programs, once thought to be innocent consumer perks, have become crucial tools in the world of money laundering. Their ability to move funds easily across borders, combined with their lack of regulatory oversight, makes them prime targets for criminals looking to disguise the origins of illicit money. By understanding how these systems are exploited, businesses and financial institutions can put stronger controls in place to detect and prevent money laundering. As technology evolves and criminals adapt their methods, staying ahead of these threats is essential to maintaining a secure and compliant financial system.