Banks in cash card warning

Fears of abuse by forgers and money launderers

CENTRAL banks, including the Bank of England, are concerned that Mondex, the new electronic cash card launched amid massive publicity last week in Swindon, could be abused by forgers and money launderers.

While the backers of Mondex - a joint venture between National Westminster, Midland and British Telecom - enthuse that it may one day replace coins and notes, critics in the banking industry fear it is too close to cash for comfort.

Mondex, invented by NatWest, uses smart cards, which have computer chips embedded in them and are variously referred to as "stored value cards", "electronic purses" or "prepaid cards." The extra computing power enables Mondex to code the cards to carry value withdrawn from bank accounts until it is spent in shops or vending machines, much like telephone cards.

Unlike existing credit and debit cards, the system is anonymous, does not leave a full audit trail and allows transactions between individuals. While all those characteristics are shared with cash, central banks think the risks could be magnified when the medium is a single card rather than a wallet full of notes.

Some of the dangers of the type of cash cards used by Mondex were highlighted in a report to the European Monetary Institute (EMI), the precursor of a European central bank, by a working group including Brian Quinn, the head of the Bank of England's supervisory section.

"The risk of someone introducing forged money into the system could increase further in the future if . . . card holders can by-pass the clearing process and exchange purchasing power directly from one card to another," it said.

And although none of the central banks have pointed the finger at the British experiment by name, one governor delivering a recent speech on the subject in his native language reportedly dropped into English to declare: "Purse to purse, No!"

Similar systems being tried in other countries require all transactions to go through a central clearing system where records are kept.

"Central banks are afraid of purse-to-purse payments," said Filipe dos Santos, the general manager of the Society for Interbank Services, Portugal's central clearing system, which is testing a fully accountable cash-card system on 300,000 subscribers. "We must always assume it is eventually possible that criminals will outsmart us."

Christine Woillez, Visa International's senior vice-president in charge of stored value cards, also identified audit trails as one of the three advantages her company's product - scheduled to be rolled out to 1 million customers at the Olympics in Atlanta, Georgia, next year - has over Mondex.

The other cash-card operators fear crooks will try to abuse their systems by forging the electronic signals that load a card with value, or by telephoning codes across international borders instead of lugging suitcases full of bank notes through customs.

Michael Keegan, the deputy chief executive of Mondex, admitted there is a debate underway among Europe's central banks but insisted his company will win the argument. "The regulators are going to need to adapt how they regulate," he said.

Mondex plans to limit the value that can be carried on any one card to make it more awkward for money laundering. The cards have a technical limit of about pounds 10,000 but US electronic fund transfer legislation requires that any transmission of more than $10,000 (pounds 6,250) be reported. Cards used in the Swindon trial are limited to a value of pounds 500.