Banks, retailers, and other companies that issue prepaid debit cards or gift cards in large amounts will soon find themselves in the middle of a regulatory battle against drug dealers and terrorists.

Efforts to curb international money laundering and fund transfers to rogue nations under sanctions are leading officials to implement new controls over increasingly popular cash alternatives, such as prepaid debit cards,  which will affect consumers, banks, and retailers.

The Treasury Department has said that in the coming year it will conduct a top-to-bottom review of existing money laundering initiatives. Its Financial Crimes Enforcement Network (FinCEN) is also considering a ...