Money Services BusinessesPast, Present, & Future

February 6, 2014

Industry ParticipationIndustry Participation

Let’s Start with some basics

Let’s Start with some basics

WHY would someone use an MSB?

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 CultureAccessibility•Simple & easy to understand services; no special skills required

Anonymity

“Bank Secrecy Act”

“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.

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The “4 Pillars”The “4 Pillars”I. Development of Internal Policies,

Procedures and ControlsRisk focused policiesProcedures for each area or functionControls to Ensure ComplianceMonitoring and Reporting Systems

II. Designation of Compliance OfficerSufficient time, resources and authority

III. Training ProgramContent based on current procedures and systemsRelevant to specific audience position and responsibilitiesDocumentation

IV. Independent TestingI. Sufficient scope and testingII. Reporting to the Board of Directors

Timely action to address any concerns or weaknesses

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Customer Identification

Program

Customer Identification

ProgramRequired 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 LogCTR“Travel Rule”Contractual requirement with principal MSB

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Customer Due Diligence (CDD)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

Agent Due DiligenceAgent 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.

Foreign Correspondent Due Diligence

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.

Independent Review

Independent Review

Required AND Valuable (when done right)Helps Protect MSB, Staff, Management and shareholders

Critical to protecting bank relationshipMany banks setting requirements to accept reviews

ACAMS - CAMS; FIBA-FIU - CP/AML; former regulator

Scope and frequency commensurate with risk of the financial servicesIdentify deficiencies, evaluate complianceDetailed, written report - share with bank

Regulatory Review

by IRS & State(s)

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 DatabaseRegulators and Independent Reviewers often also look to additional FATF guidance for higher risk entities.

In the beginning…Life of an MSB

In the beginning…Life of an MSB

FEARUNCERTAINTY

DOUBT

A lot was happening(still is…)

• Bad Economy / Recession (lingering…)

• 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

Bank Discontinuance of MSBs

• Still a major problem 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 industry

Some now chasing same customers

Today...Today...

Challenges faced by MSBs

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

RegulationRegulation

Common IssuesIdentified during

Reviews

Common IssuesIdentified during

ReviewsLicense, GA DBF sign and/or pricing not posted.

Registrant having “advertising”No GCIC employee background checksFinCEN registration

expired, needing late renewalre-registration not filed after change of ownership

Risk assessment not presentor no evidence of ongoing review/updating amid changes

Compliance program inadequate, incomplete, generic, incorrect

or no evidence of ongoing review/updating amid changes

Common Issues2

Common Issues2

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

FinCEN’s BSA eFilingCTRs

submitting CTRs by 25 days rather than by 15 daysdigitally signing but not uploading CTRsnot recognizing and correcting CTR filing errors

SARstransaction monitoring insufficient, not identifying activitypoorly written narratives

Failure to properly establish existence and authority prior to cashing checks for non-natural persons.Daily Record of Checks Cashed

Common Issues3

Common Issues3

Common Issues4

Common Issues4

Check Cashing IssuesCommercial 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 proceduresCustomer Kiting Checks - not recognizing suspicious customer transaction activity

Daily Record of Checks Cashedentities w manual recordkeeping not meeting GA requirements

What’s coming next?What’s coming next?

Increasingly “Unbanked”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

Prepaid AccessPrepaid Access

Massive growth

Increasing Consumer Adoption

Mobile Remote Deposit

Capture

Mobile Remote Deposit

Capture

Mobile WalletMobile Payments

Mobile WalletMobile Payments

Digital Encrypted Currencies

Digital Encrypted Currencies

MSBs must Maintain and Build Bank Relationships

Bankers’ Concerns in Serving MSBs

Bankers’ Concerns in Serving MSBs

• High Degree of Risk and Exposure Associated with MSBs

Risky Business... unsophisticated, inadequate risk management Tons of cash!

Unknown, Vague, Shady source of cash

Criminals can abuse MSBs

Difficult to understand, monitor and manage the MSB relationships

Negative PerceptionsNegative

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 regulatedbeing subject to insufficient examination

• being irresponsible, incompetent, inattentive, reckless...

Challenging / DifficultChallenging / 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

Regulatory Expectations for the

Bank

Regulatory Expectations for the

Bank

Effective supervision/monitoring of MSB relationships

Reasonable understanding of MSB risks

Meaningful additional action on higher potential risks

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

Risk of MSBsRisk 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.

Bank Requirements for Higher Risk MSBs

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

Core needs of the bankCore 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

Bank Pricing of MSB AccountsBank Pricing of MSB Accounts

Analysis

Compliance Surcharge

Set cash limits / require armored courier service

Consider additional collateral

Bank monitoring of MSBs

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

Reasonable Considerations for

MSBs wanting to keep and establish banking

relationships

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

Common Bank Issues re MSBs

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

MSBs need banksMSBs need banks

• Local community banks• How about yours?

• Some big national banks

• National Check & Currency

• Merchants Bank of California

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Jay Postma, CAMSPresidentMSB Compliance Inc.Jay.Postma@MSBComplianceInc.com

(678) 389-9068

www.MSBComplianceInc.com