Monday, June 13, 2016

Highway Troopers or Highway Robbers?

Which Gang Should you Really Fear?

Oklahoma has became the butt of jokes after the story about Highway Troopers and Oklahoma County District Attorney David Prater's Drug Interdiction Unit gets caught making a deal with a private company selling a system that will drain debit cards and prepaid cards on the side of the highway.  The story came out on the Internet locally, hit the TV stations and exploded across the world in a few days.

 The brunt of the criticism landed on the State Troopers but Oklahoma County D.A. David Prater also implemented the program which many feel is worse than the troopers as a lawyer ought to at least do lip service to the 4th Amendment.  The Oklahoma Department of Public Safety purchased sixteen ERAD devices capable of stealing data off any credit card, bank debit card, PayPal card, prepaid card, or store gift card. They can also steal the money on the spot or freeze the money for seven days if they bother with due process and a court hearing.   This is an expansion of Civil Asset Forfeiture, a supposedly legal process where the person isn't accused of a crime but his property is.   The property or cash or in this case bank account, is considered guilty and it is up to the owner of the property or cash to prove that the property or cash was not used in illegal acts.

The average forfeiture is around $800.00 so the vast majority of people realize it isn't worth spending thousands of dollars hiring an attorney or waiting for years to recover their property.   Proponents of the legalized theft say it is a tool to be used against drug dealers and money launderers yet if that was the case the average forfeiture would be much higher.  The process has been used to steal houses, impound dozens of cars at a charity fundraiser event in once case that had the idea to serve alcohol at a party, and there are many stories of innocent people that for whatever reason carried large amounts of cash.  One caller on a local radio show told of his deceased brother who had his $30,000.00 inheritance stolen after being stopped on a tail light issue.  The brother did not trust banks and after the police stole the cash he simply left the state and later committed suicide from dealing with the loss.

The contract between the ERAD company and the Oklahoma Highway Patrol cost $5000.00 plus $1500.00 for training materials and the private company gets a 7.7% cut of any cash stolen from motorists.   Highway Patrol spokesmen claimed that if a person had proof that the money on the gift cards actually belonged to them then the trooper would not seize the funds.  The problem is how many of us carry any sort  of proof that the debit cards, prepaid cards, or store gift cards in our possession are actually ours?  Sure, bank cards are going to have your name on them but the largest user of prepaid cards in Oklahoma is actually the state of Oklahoma, using them for various welfare programs to allow electronic deposit.   There are prepaid cards used by Health Savings Accounts, PayPal cards of course, and a lot of businesses use prepaid cards to pay their payroll because it allows quick and cheap electronic deposits.  Those cards don't carry a name on them.  Same with store gift cards or prepaid cards purchased instead of traveler's checks for a vacation or business trip.

A few weeks ago we needed to travel to Florida to inspect and purchase a high speed printing press.  All too aware of the risk in carrying large amounts of cash due to Civil Asset Forfeiture, I choose to take a PayPal debit card which is considered a prepaid card by law enforcement, and I thought I was being smart and safe. 

Homeland Security developed the ERAD scanners around 2012 in order to suppress drug cartels from moving money to other countries.  Then law enforcement saw dollars in their pocket and adopted the practice.  According to the company the balance on the card carrying a Visa, Master Card, or American Express logo can be checked, frozen, or seized.  The device disguises the balance check as an ordinary vendor to get past the debit card security measures. '

Prepaid cards or store gift cards will have the balanced stored on the card itself.  If the cop finds there is a large sum of money on the card or in the account he can use the ERAD device just like a point of sale terminal and either transfer the funds to a law enforcement bank account or he can put a freeze on the money for seven days.   The Troopers claim that bank accounts are off limits but the same technology works with a credit card as a bank debit card as a prepaid PayPal card so there is nothing to stop the officer from draining the bank account on the side of the road.

The device also stores the information on the card, card number, expiration date, balance, name of the person owning the account, name of the bank, so the liability of identity theft is huge.   The machine also prints out this information on a 2" wide paper tape similar to the standard POS registers or gas pumps.  This data along with any notes from the officer are stored in a data base and used to search for additional suspected illicit funding transfers by the card owner or account owner.

The company attempts to claim that prepaid cards are not bank accounts and are not protected by the Bank Secrecy Act and all the safeguards required of owners of Merchant accounts with Visa or Master Card.  Those are strict regulations, no printing of any of the card info except for the last four digits on a receipt.  Likewise you cannot store any information from the cards without copious security and safeguards.  The fig leaf for the company's excuse is that prepaid cards come from pooled accounts held by financial companies and are cash, not bank accounts and the roadside search of your wallet and credit cards is not a violation of the Fourth Amendment against unreasonable search and seizures.  They claim that since the purpose of a magnetic strip on a card is to store information then individuals have no privacy rights against cops reading the cards.  I wonder how their spokesperson would feel if someone pushed him up against a wall, removed his wallet, and used a reader on his credit cards?

The OHP claims the ERAD devices are to be used to combat identity theft and indeed cops can see if the persons name are on the prepaid card or gift card and of course they won't be.  They can also see if the account number on the credit card match the account number stored on the magnetic stripe.   But when was the last time a Highway Patrolman was called to investigate a stolen identity case?  Good luck getting the local police to open up a case over a few hundred dollars much less getting the state police to come off the highway to investigate a local crime.

But we did some research into the actual debit/stored value card industry and found out that some of these cards are indeed linked to bank accounts, thereby coming under the Bank Secrecy Act and FDIC regulations.  Prepaid cards or stored value cards started out as local cards used to pay subway fare or telephone calling cards.  They carry the balance on the card and the POS device deducts the sale from the balance and stores the new balance on the card.  There are no names associated with the card, anyone that gets hold of it can use the card IF he knows the PIN number.

Payroll cards, product rebate cards, givt cards, travel cards, cafeteria cards, and health savings account cards are considered pre paid cards as well as the EZ pay, EagleCash, and Navy Cash cards issued by the military..  Under FDIC regulations and laws implemented by those regulations the FDIC looks for separate accounts set up in the name of the holder of the card to determine who the owner of the account actually is. 

But in a lot of cases, the funds are held in one large account and doled out to anyone that has access to the system and has a positive balance on his card.  In these cases as long as the financial company keeps track of who owns what amount it is considered as a sub account and the FDIC protections and regulations "pass through" to the sub account holder. 

All that is needed is for the financial institution to disclose the existence of the pooled fund or disclose that a custodial relationship exists, something that any court in the land will say exists if person is owed money by a financial institution.  Second, the actual identities of the owners and the amount of the balance must be stored by the institution. 

The final leg of the stool is that the funds in the account must be owned by the actual owners of the card, again something that any court in the land is not going to deny in the case of a person in possession of a prepaid card without actual proof that the card is stolen.  If all three points are there then the FDIC says the person in possession of the card is the owner of the bank funds and FDIC protection passes through to them.  Displaying the FDIC logo on the card is encouraged but not required, in fact it is rarely done.

This information came from a 1996 opinion set down by the FDIC agency and their opinion was that all funds underlying stored value cards and other nontraditional access mechanisms are treated as "deposits" if the funds are held at an FDIC insured depository bank.  The basis of therule is that the access method is unimportant; it is merely a device for withdrawing funds.  All that matters are that the bank be FDIC insured and the money is earmarked for a particular person.

So the answer to the question is quite simple.  A card balance that has your name on it somewhere in the chain of card/bank/point of sale vendor is identifiable at several points in the chain.  It is a bank deposit by law, not cash that a money hungry police department can pilfer at will.