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Money Services Businesses: Past, Present & Future


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February 6, 2014 presentation to Community Bankers Association of Georgia's BSA Officer's School covering Money Services Businesses (MSBs), Bank Secrecy Act / Anti-Money Laundering (BSA/AML), Office of Foreign Asset Control (OFAC), and operational considerations.

Published in: Law

Money Services Businesses: Past, Present & Future

  1. 1. Money Services Businesses Past, Present, & Future February 6, 2014
  2. 2. Industry Participation
  3. 3. Let’s Start with some basics
  4. 4. WHY would someone use an MSB? Convenience and Control • Hours and locations • Transaction based, immediacy, price transparency, value Funds Availability • Immediate cash for checks; risk transference / no NSFs • Immediate / Guaranteed Prompt payment Language and Culture Accessibility • Simple & easy to understand services; no special skills required Anonymity
  5. 5. “Bank Secrecy Act” MSBs are partners with other FIs and Law Enforcement Protect our nation, communities and families from money laundering, terrorist financing and illicit activities.
  6. 6. 6 The “4 Pillars” I. Development of Internal Policies, Procedures and Controls Risk focused policies Procedures for each area or function Controls to Ensure Compliance Monitoring and Reporting Systems I. Designation of Compliance Officer Sufficient time, resources and authority I. Training Program Content based on current procedures and systems Relevant to specific audience position and responsibilities Documentation I. Independent Testing I. Sufficient scope and testing II. Reporting to the Board of Directors Timely action to address any concerns or weaknesses
  7. 7. 7 Customer Identification Program Required for banks. Not currently required of MSBs by the USA PATRIOT Act...but a good, sensible business practice. This doesn’t mean ID is not required - it often is, e.g. Establish Holder in Due Course Monetary Instrument Log CTR “Travel Rule” Contractual requirement with principal MSB
  8. 8. 8 Customer Due Diligence (CDD) “Know your customer” (KYC) and accurately predict the types of transactions in which the customer is likely to engage. Unusual or unexpected activity without apparent purpose is potentially suspicious. Avoids criminal exposure from persons using or attempting to use the FI for illicit purposes
  9. 9. Agent Due Diligence Principals must maintain a list of authorized agents. Agents present regulatory, credit, operational and reputational risks to the Principal. Processes required: application, acceptance, training, monitoring, discipline, and termination.
  10. 10. Foreign Correspondent Due Diligence Correspondents present regulatory, credit, operating and reputational risk to Principal money transmitters. Required processes include: application/acceptance, due diligence, monitoring, and termination.
  11. 11. Independent Review Required AND Valuable (when done right) Helps Protect MSB, Staff, Management and shareholders Critical to protecting bank relationship Many banks setting requirements to accept reviews ACAMS - CAMS; FIBA-FIU - CP/AML; former regulator Scope and frequency commensurate with risk of the financial services Identify deficiencies, evaluate compliance Detailed, written report - share with bank
  12. 12. Regulatory Review by IRS & State(s) BSA/AML Examination Manual for MSBs released in December 2008. Risk based - Core Review Independent Review Prior regulatory exam findings BSA-Reporting Database Regulators and Independent Reviewers often also look to additional FATF guidance for higher risk entities.
  13. 13. In the beginning… Life of an MSB
  15. 15. A lot was happening • Ba(d Escotnomiy l/ lRec esisiosn …(l)ingering…) • Unemployment (persistent…) • Bank Failures (abating…) • Bank realignment of resources to address increased credit risk (entrenched…) • Bank Discontinuance of MSBs (hard baked) • Political / Regulatory initiatives (onerous) • Reduced transaction revenue and earnings
  16. 16. Bank Discontinuance • Still ao mfaj orM SprBobslem in many areas • Faulty perception that MSBs are too high risk • Banks have other problems to address • Little incentive to serve the industry • Not motivated to bank inSdoumset nroyw chasing same customers
  17. 17. Today...
  18. 18. Challenges faced by MSBs Decreased transaction volumes and revenues minimal commercial checks increased check fraud risks- tax returns, mobile capture Increasing competition for customers High regulatory and banking compliance expectations
  19. 19. Regulation
  20. 20. Common Issues Identified during Reviews License, GA DBF sign and/or pricing not posted. Registrant having “advertising” No GCIC employee background checks FinCEN registration expired, needing late renewal re-registration not filed after change of ownership Risk assessment not present or no evidence of ongoing review/updating amid changes Compliance program inadequate, incomplete, generic, incorrect or no evidence of ongoing review/updating amid changes
  21. 21. Common Issues 2 Training No documentation evidencing any training; inadequate training • Independent Review • Only performed when notified of impending IRS or GA DBF exam • Only performed when specifically requested by bank • Issues previously identified by independent review or regulators not being corrected - repeat findings
  22. 22. Common Issues 3 FinCEN’s BSA eFiling CTRs submitting CTRs by 25 days rather than by 15 days digitally signing but not uploading CTRs not recognizing and correcting CTR filing errors SARs transaction monitoring insufficient, not identifying activity poorly written narratives Failure to properly establish existence and authority prior to cashing checks for non-natural persons. Daily Record of Checks Cashed
  23. 23. Common Issues 4 Check Cashing Issues Commercial checks - Failure to properly establish existence and authority prior to cashing checks for non-natural persons. Tax Refund Checks - no recognition of increased risk from a new customer or deviation from standard ID/decision procedures Customer Kiting Checks - not recognizing suspicious customer transaction activity Daily Record of Checks Cashed entities w manual recordkeeping not meeting GA requirements
  24. 24. What’s coming next?
  25. 25. Increasingly “Unbanked” Increasing numbers of Unbanked / Underbanked No longer qualifying… Disaffected / Dissatisfied - many no longer wanting bank… Increasingly open to transactional financial services But… increasing retail, mobile and banking competition for customers
  26. 26. Prepaid Access Massive growth Increasing Consumer Adoption
  27. 27. Mobile Remote Deposit Capture
  28. 28. Mobile Wallet Mobile Payments
  29. 29. Digital Encrypted Currencies
  30. 30. MSBs must Maintain and Build Bank Relationships
  31. 31. Bankers’ Concerns in Serving MSBs • High Degree of Risk and Exposure Associated with MSBs Risky Business... unsophisticated, in management adequate risk Tons of cash! Unknown, Vague, Shady source of cash Criminals can abuse MSBs Difficult to understand, monitor and manage the MSB relationships
  32. 32. Negative Perceptions • Law Enforcement and Banking Regulators often perceive MSBs as … being used by either criminals, shady/bad people, or by uneducated, uninformed or foolish consumers who would be better served by a bank “The Un-banked” - “The Under-Banked” - “The Self- Banked” being insufficiently regulated being subject to insufficient examination • being irresponsible, incompetent, inattentive, reckless...
  33. 33. Challenging / Difficult Regulatory rules and issues can be complex Bank may not sufficiently understand customer business or risks May result in gaps with bank compliance and risk management May result in bank compliance issues, regulatory risks
  34. 34. Regulatory Expectations for the Bank Effective supervision/monitoring of MSB relationships Reasonable understanding of MSB risks Meaningful additional action on higher potential risks
  35. 35. Interagency guidance since 2005, FFIEC BSA/AML Exam manual, and best practices... Low Risk? - registration and licensing High Risk? - expanded due diligence Price appropriately Recourse and collateral considerations Security considerations Ongoing monitoring
  36. 36. Risk of MSBs • Principal Money Transmitter (high risk areas) • Principal Money Transmitter (lower risk areas) • Full Service MSB / Principal Check Casher, multi-store, high dollar, non-natural persons • Full Service MSB / Principal Check Casher, multi-store, high dollar • MSB Agent, money transfer services limited to high risk areas • Full Service MSB/ Principal Check Casher, multi-store, low dollar • Full Service MSB/ Principal Check Casher, one store • Offers MSB services including check cashing, low dollar, limited scope (e.g. payroll) • Offers MSB services - agent only, not dedicated to serving high risk areas Note that higher potential risk MSBs can be lower risk due to mitigation efforts.
  37. 37. Bank Requirements for Higher Risk MSBs Initial & ongoing site visit, inspection, staff interviews Negative news monitoring Independent Review Scope. Reviewer. Reporting. Management responses. 3rd Party review on behalf of bank Assessment of foreign government oversight
  38. 38. Core needs of the bank Meaningful, complete background - CIP & CDD Confirm FinCEN registration Confirm State licensing Confirm Agent status Ability to assess risks Ability to monitor Address Credit Risk / Exposure
  39. 39. Bank Pricing of MSB Accounts Analysis Compliance Surcharge Set cash limits / require armored courier service Consider additional collateral
  40. 40. Bank monitoring of MSBs • Verify FinCEN registration, state licensing • Ongoing Extended Due Diligence on higher risk MSBs • Independent Reviews • 3rd party review on behalf of bank • Large fluctuations / change in volume - reasonable? • Check cashing concentration, non-natural persons • Out of market deposits
  41. 41. Reasonable Considerations for MSBs wanting to keep and establish banking relationships • Communication, transparency, responsiveness • Don’t assume your bank understands what you do and want makes sense • Help the bank accurately understand risks • Provide documented evidence of compliance • Be sure your relationship is beneficial to the bank
  42. 42. Common Bank Issues re MSBs • Not understanding MSB customers and that each have different risks • Failure to reasonably risk rate MSBs and distinguish between higher and lower risk MSB customers • Poorly defined policies and procedures regarding MSB relationships • Incorrectly identifying all MSBs as high risk then not following FinCEN guidance or Board approved policies regarding monitoring • Not setting and maintaining reasonable standards for performance • Not charging MSBs for services rendered • Missing security implications of large cash deposits or withdrawals • Not considering credit risks of MSB relationships
  43. 43. MSBs need banks • Local community banks • How about yours? • Some big national banks • National Check & Currency • Merchants Bank of California
  44. 44. 45 Jay Postma, CAMS President MSB Compliance Inc. m (678) 389-9068