AML compliance and money service businesses

Money service businesses are a growing part of the financial services industry but compliance with anti-money regulations is critical.

In this slow economy, few financial institutions are willing to take risks. Consequently, the primary moneymaker

for banks -- lending -- has slowed. Institutions have two choices to boost their bottom line: cut costs or increase fee income. Many are eliminating free or discounted services and charging higher fees for other services. This pricing strategy will force more customers away from financial institutions and towards the unbanked sector serviced by money services businesses.

A money service business (MSB), using the simple definition, can provide basic bank-like services to individuals that do not have a banking relationship, and offer them at a lower cost. These services can include: purchasing money orders, cashing payroll or personal checks, sending payments electronically, selling stored value or gift cards, and even bill-pay services. However, the MSB world is a regulated world that can include a criminal element because of the potential for money laundering. If you already are an MSB or are considering adding an MSB product line, you need to be aware of anti-money laundering regulations and plan for compliance.

In this tip, we'll describe the steps MSBs should take to ensure AML compliance.

AML compliance planning is key

Expanding your retail store to include MSB products is not hard. There are plenty of vendors who are willing to assist you with expanding into payment services, but there are things you need to know. Learning about AML compliance and planning in advance is the key to a successful product launch. If you know what to expect, you can include these requirements in the vendor selection process and simplify your world instead of having to re-do everything afterwards.

First and foremost, you will need to understand anti-money laundering and the Bank Secrecy Act.The IRS, which provides an overview of money laundering, defines the term as activities and financial transactions that are undertaken specifically to hide the true source of the money. Understanding money laundering from the perspective of the IRS is integral to understanding what to look for and how to develop effective compliance procedures and a risk management program. The Financial Crimes Enforcement Network (FinCEN) has also published an examinations manual that is used specifically for MSBs.

Here's an AML compliance checklist for MSBs:

  1. Register as an MSB on the FinCEN website.
  2. Develop the appropriate policies and procedures (particularly for each product you offer). An effective policy identifies the products and services you will offer and the context of the offering. For example, a policy statement might be that your check cashing services for payroll checks are only available to customers after the individual and the company are verified and can't exceed $2,500.00
  3. Create an activity monitoring program for all transactions. Monitoring involves keeping a record of specific or similar customer activity: how many times they come into your store, what type of checks they cashed, or are they converting cash into money orders. The objective of monitoring activity is to determine if a customer or related customers are trying to structure a transaction in such a way that it avoids monitoring threshold triggers that would normally generate a Currency Transaction Report (CTR) or a Suspicious Activity Report.
  4. Learn about currency CTRs and SARs via the FFIEC's BSA/AML Infobase. The BSA/AML infobase is designed to provide financial institutions guidance; however, this can also be a very useful tool for the MSB with respect to understanding expectations of your organization by your bank.
  5. Develop a record retention system. A good record retention system can keep track of all of your MSB activity, particularly if you have multiple stores. The system will have customer-specific records and tracking that would include images of the checks the customer has cashed along with identity documents they used during the transaction (such as a drivers license or passport).
  6. Create a customer identification program also known as a CIP. This includes a list of acceptable identity documents.
  7. Develop a risk assessment program that helps you control losses. A good risk assessment and loss control program includes a system that would verify businesses prior to the cashing of payroll checks, identify valid identity documents, verify bank routing and transit numbers, and have access to negative databases in the event a customer has a history of passing bad checks or that the check is counterfeit or has been reported stolen. All of these steps should be taken at the start of a transaction and not after the money has left your store.

There are organizations that offer automated reporting, monitoring and risk management services. For example, EmagineNET Technologies Inc. of Sugarland, Texas, has developed an end-to-end solution.

AML compliance is ongoing

If you already are an MSB, you need to visit the FinCEN website and make sure your AML compliance program is updated. Compliance is not a fire and forget event. Just recently the FDIC and FinCEN increased the Section 314(a) monitoring requirements for financial institutions. The new rules require that financial institutions regularly check a secure website to see if they've been asked to provide information regarding a particular investigation. While MSBs don't have to follow these new monitoring requirements, they may be subject to them if a financial institution is required to provide information for an investigation that includes a transaction processed by their MSB.

The marketplace is changing and now would be a good time to approach your vendor to update your product line in addition to acquiring an automated AML compliance solution that will reduce your per transaction compliance cost.

Details versus complexity

Regardless of your MSB status, whether you are an existing business or one that is considering adding MSB-related products, the MSB business itself is not complicated. The real challenge is in the details. Doing your homework, making sure you understand the AML compliance requirements in advance, and finding the right vendor fit will mean your MSB program is built on a solid foundation.

Ultimately, the money service business is a rapidly growing and can be a profitable component of your product inventory, providing that your compliance plan is well thought-out and up to date.

About the author:

Dan Fisher is president and CEO of The Copper River Group, a consulting firm headquartered in Fargo, N.D. that focuses on technology and payment systems research and consulting for community financial institutions. For nearly 30 years, Dan Fisher has worked in the financial industry using technology to improve the bottom line. He has served as a director of the Federal Reserve Board of Minneapolis, chairman of the American Bankers Association Payment Systems Committee, and as a member of the Independent Community Bankers of America Payments Committee. Dan has written numerous articles on banking technology and the payments system. He has authored or co-authored six books and recently published Capturing Your Customer! The New Technology of Remote Deposit. You can contact Dan via email at dan@copperwombat.com


This was first published in December 2010

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