New Front in Civil Forfeiture: Authorities Get Devices to Seize Funds Loaded to Prepaid Cards

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(See June 10 update below.)

The Oklahoma Department of Public Safety has purchased several devices capable of seizing funds loaded on to prepaid debit cards to aid troopers in roadside seizures of suspected drug-trafficking proceeds.

The portable card scanners are designed to be carried in law enforcement vehicles, allow troopers to freeze and seize money loaded onto a prepaid card, and to return money to an account whose funds were seized or frozen.

The vehicle-mounted scanners are also capable of retrieving and storing limited account information from other cards as well, such as banking debit cards, credit cards and “payment account information from virtually any magnetic stripe card,” according to the website and patent documents of the device manufacturer, Texas-based ERAD Group Inc. ERAD stands for Electronic Recovery and Access to Data.


State Contract with ERAD Group

The card readers could reignite debate over civil asset forfeiture in Oklahoma and across the nation. State and federal laws allow law enforcement agencies to seize property and cash believed to be involved in the illicit drug trade and then take ownership of the assets through a civil-court action.

Law enforcement officials say that civil asset forfeiture is essential in disrupting drug trafficking operations. Civil-rights advocates argue that the process violates individuals’ property and civil liberties and sometimes results in innocent people having money seized on the roadside without being arrested or charged.

The new devices will now allow law enforcement to not only seize money in physical possession of a person being stopped, but from a financial institution holding the money loaded onto a prepaid card as well.

Brady Henderson, legal director for ACLU Oklahoma, said the new tactic could easily run afoul of the Fourth Amendment and land the issue in court.

“I think this is likely to expand pretty radically the scope of civil asset forfeiture procedures,” Henderson said. “This is a capability that law enforcement has never had before and one that is very likely to land DPS in litigation.”

However, law enforcement officials say the devices are essentially part of the arms race between police and drug traffickers, who in recent years have been loading pre-paid cards with millions of dollars for transport as part of the drug trade, thus decreasing the likelihood of seizure by law enforcement.

“They’re basically using pre-paid cards instead of carrying large amounts of cash,” said Lt. John Vincent, public information officer for the Oklahoma Highway Patrol.

The contract signed by the state and ERAD Group, obtained by Oklahoma Watch, states that Department of Public Safety will pay a one-time $5,000 implementation charge and a $1,500 training charge for the devices.

ERAD Group will receive a 7.7 percent cut of all funds seized via the card readers. Vincent said the 16 prepaid card readers obtained by the department were installed in May.

The card readers will not be used to randomly swipe motorists’ gift or prepaid cards, Vincent said, but only in cases in which the trooper suspects criminal activity is taking place. The device logs which trooper is using the device when a card is swiped.

“If we have reasonable suspicion to believe there’s a crime being committed, we’re going to investigate that. If someone has 300 cards taped up and hidden inside the dash of a vehicle, we’re going to check that,” Vincent said. “But if the person has proof that it belongs to him for legitimate reasons, there’s nothing going to happen. We won’t seize it.”

A joint law enforcement drug interdiction team under the Oklahoma County District Attorney’s Office also has the devices, and Oklahoma City police officers who are part of the team use them, said Capt. Juan Balderrama, spokesman for the Oklahoma city Police Department.

Henderson said the devices were something that his organization has not run across before.

“You have effectively a way of instantly seizing a digital account from a traffic stop,” Henderson said. “That’s a capability I have never seen before.”

Judith Rinearson, a partner with the law firm Bryan Cave and a prepaid card-industry attorney, said in the past most individuals who used reloadable prepaid cards were unbanked or low income, but younger adults have begun using those cards as their primary financial transaction card.


Homeland Security Video on Prepaid Card Readers


How It Works

ERAD card scanners were first developed around 2012 for the science and technology arm of the U.S. Department of Homeland Security to combat the use of prepaid debit cards by drug cartels to transport drug money, according to a Homeland Security media release.

Since then, some law enforcement agencies around the country have adopted the technology.

According to ERAD Group’s patent for the device, law enforcement can determine the balance of money in an account associated with a prepaid card that is part of branded “open loop” networks such as Visa or MasterCard or “closed loop” cards that only allow purchases at a single company, such as gift cards.

When the card is scanned by the officer to check the account balance, the system disguises the balance request as a typical vendor request to prevent alerting suspects that law enforcement is checking the card, the patent states.

Once the card’s account balance is determined, the officer can use the device to freeze the funds, preventing withdrawal or use of the money in the account, or seize the funds by having them transferred to a law enforcement financial account, the patent states.

Although the device does not allow funds from non-prepaid cards to be frozen or seized, it can provide the officer information about those cards such as the card number, the name on the card, expiration date and the card issuer.

That data, along with any accompanying notes, is then saved in a case management database for future use, allowing law enforcement agencies to search for additional illicit funding by analyzing other card seizures, transactions and trends associated with the card issuer. The agencies also identify any accounts linked to the seized card, the patent and contract documents show.

T. Jack Williams, ERAD Group president and one of the leading magnetic stripe card consultants for federal and state law enforcement, said the device has three main purposes: intelligence, forensics and asset seizure.

“The seizure stuff is really secondary, even tertiary,” Williams said.

Williams declined to say exactly how many law enforcement agencies across the country now ERAD Devices.

“I can tell you it’s in the hundreds,” Williams said.

Williams said freezing or seizing funds from prepaid cards is not the same as freezing or seizing funds from bank or debit cards, since prepaid cards come from pooled accounts held by financial companies and are not protected by the Bank Secrecy Act.

“Prepaid cards are cash, they are not bank accounts,” Williams said.

According to a slide presentation delivered by ERAD’s Williams in early May at the West Coast Anti-Money Laundering Forum, using the card readers to obtain information on cards’ magnetic strips do not run afoul of the U.S. Constitution’s Fourth Amendment protections against unreasonable search and seizure and warrantless searches.

Citing an Oklahoma case in which 83 Walmart gift cards were seized after the cards were loaded with drug funds, Williams’ presentation states that because prepaid cards are treated like currency, they can be seized like currency. “Individuals do not have privacy rights with magnetic stripe cards” because the information on the strip “literally has no purpose other than to be provided to others to read,” the presentation said.

Henderson, of the ACLU, said usually in freezing or seizing money from financial accounts, “there are all kinds of steps where courts get involved so that there’s a check and balance there. All of that would be eliminated in this situation. It’s a situation where you have an instant freeze with zero due process.”

Sen. Kyle Loveless, R-Oklahoma City, said he, too, was concerned with the constitutional and due process implications of the ERAD devices.

“Until this, we didn’t even know these things were in existence,” Loveless said. “It’s scary to know that technology even exists and that government agencies are using it without an arrest without a warrant.”

Last legislative session, Loveless introduced legislation to change aspects of the state’s civil asset forfeiture laws. The move triggered sharp criticism by law enforcement officials, and the legislation died in committee.

Before the session, Loveless said he was told by law enforcement that the presence of large sums of money packed into a vehicle was an indicator of possible criminal activity .

“It seems to me this new technology is taking the argument away – ‘we don’t have the cash here, but it’s somewhere,’” Loveless said.

However, Vincent, of DPS, said the devices are not only for seizure of suspected illicit funds. Although no seizures have yet been made with the devices, troopers have been able to use the card readers to uncover cases of identity theft, he said.

“The asset forfeiture part will definitely help us as far as we have people trying to courier large amounts of money, but it also, and is probably is seen more as, helping with identity theft, credit card fraud and all of that,” Vincent said. “This isn’t solely about asset forfeiture. This isn’t about money. We’re not in the business of making money. We’re in the business of solving crimes.”

Update, June 10: A state legislator has requested that an interim study and hearing be conducted on the use of card-reader devices by law enforcement and other aspects of civil asset forfeiture. “News of ERAD usage has prompted renewed calls in my district to examine the civil asset forfeiture process, with due process and safeguards against unreasonable searches and seizures as the main concern,” Rep. Mark Lepak, R-Claremore, said in his written request. “The idea here is to get both sides in the room.” A decision on interim studies will be made during the summer and hearings will be held later in the year.

Correction: An earlier version of this story incorrectly said that the Oklahoma City Police Department has card-reader devices. Department officers who are part of a joint interdiction team under the district attorney’s office use the devices, but the Oklahoma City Police Department doesn’t own any.