De-risking: Overhauling the Regulatory Structure for MSBs
The FATF's announcement that it will be developing guidance to help money remitters identify and manage their risks, and to help banks evaluate and manage the risks of providing financial services to money remitters.
Banks are technically the de facto AML/CFT regulators for MSBs. Heightened AML/CFT regulatory focus and enforcement actions has been cited as one of the key reasons banks and other financial institutions are culling their businesses of high risk clients for AML/CFT purposes. The purging of high risk businesses has largely affected Money Transmitters, charities and other high risk categories. As noted in my previous posts, some banks are also withdrawing from providingcorrespondent banking services. This phenomenon is known as de-risking or de-marketing and it has caught the attention of policymakers including the FATF.
In this post, I would like to focus on Money Services Businesses (MSBs). Let us look at MSBs and why it is so critical for FATF to developing guidance to help money remitters identify and manage their risks, and to help banks evaluate and manage the risks of providing financial services to money remitters.
MSBs provide valuable services to consumers especially in low income countries. In some instances MSBs are the only financial services available to some of the most economically vulnerable people in our community. As I have noted in previous, posts the reckless termination an entire economic regulated industry and may force MSBs customers into the underground financial system itself creates a significant money laundering risk. Read What are the consequences of De-risking?
Who are MSBs?
In Canada, you are an MSB is you offer any of the following services to the public:
Foreign exchange dealing, that is if you conduct transactions where you exchange one type of currency (USD$ for CAD$) for another.
Cashing or selling money orders, traveller's cheques or anything similar
The MSB sector is fragmented and made up of players of different sizes with some players offering multiple products while others focus on specific product, clients and geography. The business is largely one of principal and agents. Where the principal is responsible for oversight of agents' AML/CFT compliance requirements.
What the regulatory requirements for MSBs?
Today, MSBs like the banks and other financial institutions are required to have a comprehensive compliance programme including following:
the appointment of a compliance officer;
the development and application of compliance policies and procedures;
an assessment and documentation of risks related to money laundering and terrorist financing, as well as the documentation and implementation of mitigation measures to deal with those risks;
if you have employees or agents or any other individuals authorized to act on your behalf, an ongoing compliance training program for them. The training program has to be in writing and maintained; and
a review of your compliance policies and procedures to test their effectiveness. The review also has to be done every two years.
MSBs must be registered.
In Canada, MSBs must ID clients when they:
receive $10,000 or more in cash
sell or cash $3,000 or more of traveller's cheques, money orders, or anything similar
exchange currency of $3,000 or more for another
send money transfers of $1,000 or more
suspect that a transaction, or an attempted transaction, of any amount, is related to a money laundering offence or a terrorist financing offence
MSBs must report:
Large cash transactions
Electronic fund transfers
Suspicious transactions and
Terrorist property report
MSBs must maintain records.
Despite the above AML/CFT regulatory requirements for MSBs, they are still classified as high risk regardless of whether any they have been previously cited for any ML/TF infraction. Technically, banks have been forced to be become the de facto regulator for MSBs. The increase costs from regulatory oversight of MSB activity have caused banks to re-assess the risks and benefits of serving MSBs.
What are some of the deficiencies seen in MSB?
In my work with MSBs, some of the most common deficiencies I have seen are:
Absence of, or inadequate AML/CFT policies and procedures
Absence of documented contracts with agents
Absence of oversight of agents' AML/CFT compliance
Lack of AML/CFT compliance training
Absence of a dedicated CCO or CAMLO
Absence of risk assessment
Lack of transaction monitoring and detection systems
Inadequate screening for PEPs
The Way Forward for MSBs
Given the increasing adverse impact of de-risking on MSBs, it is imperative the regulatory regime for MSBs be overhauled. To this end, I am delighted that the FATF has announced that it will be developing guidance to help money remitters identify and manage their risks, and to help banks evaluate and manage the risks of providing financial services to money remitters.
A restructured regulatory framework for MSBs should include the following:
Comprehensive legislative and regulatory requirements including the creation of a regulatory agency for MSBs; and
Rule-based regulation and prudential requirements for MSBs.
The creation of a regulatory agency responsible for MSBs should help to clarify regulatory expectations. The agency would be charge to develop a robust supervisory and enforcement framework, on-going supervisory oversight, licensing and entry requirements and enforcement actions. It could also ensure that MSBs conduct businesses in a prudent and professional manner.
In the interim, MSBs should seek to work with their banks to demonstrate that they are taking AML/CFT compliance seriously. This means an MSB must be able to demonstrate that the firm’s senior management and principals promotes and support a culture of compliance. The upper echelon of leadership structure of an MSB must be able communicate and demonstrate that they understand and oversee the firm’s compliance programme.
It is not just sufficient for an MSB to appoint a Compliance Officer. An MSB must commit sufficient personnel and technological resources to support an effective compliance regime. An MSB must be able to demonstrate to its bankers that it has committed the necessary resources—and is willing and able to invest additional resources necessary to maintain a robust compliance programme. Critically, an MSB must be able to demonstrate that it has an effective transaction monitoring and detection systems in place for an effective AML/CFT compliance regime.
Today, banks are technically the de facto AML/CFT regulators for MSBs. When examined from a risks and benefits perspective, this has turned out to be very costly for banks. Consequently, banks are de-risking MSBs as clients.
One possible solution to de-risking is that banks should not serve as the de facto regulator for MSBs. The regulatory regime for MSBs must be overhauled with comprehensive legislative and regulatory requirements including the creation of a regulatory agency for MSBs. At the same time, MSBs should seek to work with their banks to demonstrate that they are taking AML/CFT compliance seriously.