MSBs: Friend or Foe?
April 7, 2008
The recent high-profile action taken against Sigue Corp., a California-based money services business (MSB), underscores the continued regulatory focus on MSBs. In January, Sigue entered into a deferred prosecution agreement with the Department of Justice on charges of failing to maintain an effective anti-money-laundering (AML) program, undoubtedly spurring the ongoing debate in the industry about banking MSBs, and how to manage the AML risk associated with them--especially since Sigue maintained accounts with several well-known and reputable banks.
MSBs in the U.S. and abroad have been struggling to maintain banking relationships since a June 2004 letter from the Treasury's office of the comptroller of the currency identified MSBs as presenting a high risk for money laundering. After this classification was publicized, several top-tier banks exited their banking relationships with MSBs, sometimes without considering the individual risk levels of MSB customers. Mid-tier banks shortly followed suit, making it almost impossible for MSBs to maintain U.S. banking relationships on an ongoing basis and raising concerns among regulatory agencies that money transmitting businesses will be driven underground.
While this reaction is certainly understandable due to the level of formal and informal enforcement actions against banks, it also poses a significant challenge for the $100 billion MSB industry.
Exiting Relationships
A question that should be on every risk or compliance officer's mind is, "We have made the business decision not to provide banking services for MSBs, how can we be sure that we have exited all MSB relationships?" As with many "hurried" reactions, the actual implementation is often not as easy as initially thought. Sure, most banks should not find it difficult to identify well-known MSBs among their customers, or MSBs that clearly declared themselves as such when entering into the relationship. The challenge largely lies with older banking relationships, established well in the past, for which banks might not have collected or updated an extensive amount of know-your-customer information.
In addition, it is crucial to keep in mind that MSBs, given the obvious challenges in being able to establish banking relationships in the current environment, might not voluntarily disclose that they are an MSB--they might pose as a gas station, travel agency or import-export business, or any other business that would require very frequent transactions to and from multiple parties.
Taking into consideration well-publicized enforcement actions against banks that failed to properly identify and monitor MSB accounts or accounts acting as MSBs, this poses a significant issue for banks that have made the decision to exit all such relationships. In certain cases, the only robust way to ensure that all MSBs have been properly identified is a review of a bank's entire customer base, as well as an in-depth examination and potential enhancement of a bank's transaction monitoring systems and processes to watch for MSB-like activity. As all risk management professionals know, it is much easier to manage a risk that has been identified than an unknown risk.
While that might satisfy banks, it is certainly not an answer for the MSB industry. The fact is that U.S.-based and international MSBs need a reliable banking relationship. Given the size of the MSB industry, it seems highly unlikely to simply disappear.
The obvious answer to the dilemma lies in an increased dialogue between the banking and the MSB industries. In addition, there are several ways in which MSBs can demonstrate to banks that they not only take AML compliance seriously, but have established and implemented strong policies, procedures and processes and have adequate independent testing of their AML program.
