Providing Services to MSBs

by Mary Beth Guard

Sometimes it seems like the name of our local grocery store should be changed to "Draper's Food and Financial Services," judging from the large number of customers who use the supermarket as an alternative to a bank. The check cashing desk does a booming business and the lines are long to purchase money orders around payday and the first of the month. Our local store is just one of many "Money Services Businesses" ("MSBs"). While federal law and regulations have long required traditional financial institutions to guard against money laundering, until fairly recently other providers of banking-like services largely escaped scrutiny. And once these entities were finally made subject to the full range of Bank Secrecy Act regulatory controls, with limited exceptions, bankers lacked adequate guidance for how they could provide banking services to these entities without running afoul of anti-money laundering requirements.

On April 26, 2005, a significant step was taken to eliminate the uncertainty through the issuance of Interagency Interpretive Guidance on Providing Banking Services to Money Services Businesses Operating in the United States. This Guidance is one of five items posted on the FinCEN site on that date. The other items include an advisory for MSBs, a copy of the statement the director of FinCEN made before a Senate Committee, a copy of the director's oral statement, and a joint news release announcing the guidance and advisory.

The advisory directed at the MSBs themselves emphasizes their Bank Secrecy Act regulatory obligations and explains the type of information they may be expected to provide to a banking organization in the course of opening an account or maintaining an account relationship. Bankers should keep a copy handy in the event they encounter resistance regarding informational or documentation requirements from such customers.

The new guidance to financial institutions consists of five main sections, plus additional resources, and an Appendix which contains Frequently Asked Questions on Providing Banking Services to Money Services Businesses.

The first section explores the background behind the guidance. Anyone not already familiar with what constitutes an MSB and what the AML requirements are for such entities will want to review that section.

The second section outlines the Minimum Bank Secrecy Act Due Diligence Expectations. Among the highlights:

• BSA requirements should be applied to MSBs on a risk-assessed basis, with different MSBs posing different levels of risk. In other words, all MSBs are not alike. Perform a risk assessment to determine l) level of risk; and 2) whether further due diligence is necessary;
  
• The financial institution should require evidence of registration with FinCEN, if the MSB is of a type required to register (see the Background for details) and evidence of a state license, if a state license requirement applies. The institution should confirm the registration and licensing;
  
• All MSBs should be CIPed;
  
• If a customer is an agent of an MSB, confirm its agent status;
  
• In terms of performing the risk assessment, look at l) the types of products and services offered by the MSB; 2) the location(s) and market(s) served by the MSB; 3) the anticipated account activity; and 4) the purpose of the MSB's account.
  
• Examine the "risk indicators" included on page 5 of the guidance. That section provides examples of potentially lower risk indicators, as well as examples of potentially higher risk indicators. [High risk indicators include such things as the MSB offering multiple types of money services products, and being a new business without an established operating history, to name just a couple.]
  
• Once you've performed your risk assessment, if you determine a particular MSB is a "higher risk customer," you will apply a level of due diligence commensurate with the level of risk. In some instances, an institution may want or need to take one or more of the following steps -- although it should be noted that the Guidance states: "[I]t is not the expectation of FinCEN or the Federal Banking Agencies that banking organizations will uniformly require any or all of the actions identified below for all money services business customers"]
  • review the money services business?s anti-money laundering program;
  • review results of the money services business?s independent testing of its anti-money laundering program;
  • conduct on-site visits;
  • review list of agents, including locations, within or outside the United States, that will be receiving services directly or indirectly through the money services business account;
  • review written procedures for the operation of the money services business;
  • review written agent management and termination practices for the money services business; or
  • review written employee screening practices for the money services business.

The next section of the Guidance deals with identification and reporting of suspicious activity. It reminds you to monitor accounts on a risk-based basis in order to spot suspicious activity (just as you should be doing for all customers). You should file a SAR if you know an MSB customer is failing to register with FinCEN (if it is required to register) or has failed to obtain a license under applicable state law. You are not expected, however, to terminate existing accounts for such businesses just because they have failed to register or obtain a license. Five examples are given on page 8 of potential suspicious activity with MSB accounts. These examples generally involve significant unexplained variations in transaction size, nature, or frequency.

The comments in the fourth section should have many bankers breathing a small sigh of relief. That section says banking organizations are not being directed to immediately conduct a review of existing accounts of MSBs for the purpose of determining licensing or registration status. On the other hand, your risk assessment obligation remains, and that is part of the risk assessment...

The final section encourages institutions to register with FinCEN to engage in information sharing about possible money laundering and terrorist financing under the provisions of Section 314(b) of the USA PATRIOT Act.

You will also want to read the Appendix. Among other things, it reviews the registration requirements for MSBs, explains how you can confirm registration or licensing status, helps you understand how to confirm a business is an agent of an MSB, how to document your review of licensing/registration status,, and what the requirements are for due diligence on an MSB perceived to be low risk.

Consider taking a proactive approach with your MSB customers. Send them the Advisory that pertains to them. The time you save by doing so may be your own!

Related Links to all the new MSB-related issuances