Navigating the landscape of money services business regulations

Money services businesses (MSBs) – a catch-all term used by financial regulators to describe the broad spectrum of businesses involved in converting or transmitting money – represent a significant part of the economy. The term covers a wide range of business services because the options are much more diverse than they’ve been in the past. No longer limited to a trip to the local bank, people now have numerous options for sending, receiving or converting funds.

What is a money services business?

MSBs come in many forms, including payment companies, investment services, individuals, startups and major global enterprises. They can include currency dealers or payday lenders, a payment app on your phone or the post office down the road. Essentially, the term can apply across bricks, mortar and pixels.

But MSBs are not banks. While they provide many services of a bank, their offerings and customers differ. Many serve people who do not have access to traditional banking services – the unbanked – or wish to use an alternative. MSBs provide various financial services, such as short-term loans, payment processing and transferring, or foreign currency exchange.

The MSB umbrella can also cover several unique or emerging financial services, such as crowdfunding, online marketplaces, cryptocurrencies, or other electronic money and alternative financial services.

Regardless of their specific service or how they differ from traditional banking, MSBs must comply with many of the same rules and regulations as banks and financial institutions. Whether transmitting funds, converting cash or engaging in any other activity involving the exchange of a dollar, yen, pound or bitcoin from one pocketbook to another, those regulations dictate how MSBs do business.

Performing Know Your Customer and Anti-Money Laundering

One common thread across borders and throughout the money services business market is understanding and complying with Anti-Money Laundering (AML) regulations. MSBs need effective AML policies and procedures to ensure they don’t enable money laundering or other financial crimes, including:

• Written AML policies
• A designated AML officer
• Training programs
• Ongoing review processes

Those requirements include knowing people are who they say they are. Know Your Customer (KYC) regulations are at the center of the compliance landscape. To prevent the proceeds of crime from trickling out and doing more harm, MSBs must verify the identity of customers and follow sound practices to ensure due diligence is complete.

Another requirement is for reporting transactions, either if the activity exceeds a threshold or if the activity is suspicious.

Money services businesses in the U.S.

In the United States, the Financial Crimes Enforcement Network (FinCEN) has specific definitions and requirements for MSBs. Any business meeting those criteria – such as money transfers, currency exchanges, prepaid access and check cashing – is subject to the Bank Secrecy Act (BSA). All MSBs must be registered with FinCEN, are subject to review by the Internal Revenue Service (IRS) and must be compliant with the appropriate and myriad state and federal regulations. Across the U.S., there are many regulations, and failure to comply can result in serious penalties.

One of the biggest concerns for MSBs in the U.S. involves funding illegal or illicit activities – intentional or not. MSBs must ensure they are not engaged in or permitting:

• Money laundering from illicit activities such as drug trafficking
• Funding of terrorist activities
• Violations of economic or trade sanctions against a specific list of countries or organizations

In the U.S., MSBs need to report transactions that total more than $10,000 during one business day for any one person.

To stay in compliance, MSBs must have written policies and procedures for filtering transactions, an individual (or team) within the organization responsible for overseeing compliance, and processes in place to keep up to date on regulations and barred transactions (such as watchlists and sanctioned entities). FinCEN’s website offers a wealth of information and resources for registration, compliance and more.

Canadian money services businesses

Go north of the border and some things change for MSBs, but the fundamentals are similar. In Canada, preventing financial crimes is the domain of the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC). Its definition of MSBs includes foreign exchanges, money transfers, or the selling or cashing of financial products, such as money orders, within Canada.

All MSBs must be registered with FINTRAC, regardless of their location in Canada. Similar to those in the U.S., Canadian MSBs must appoint a compliance officer and have documented procedures and policies. They must have mechanisms to stay up to date on regulations with regular training programs for staff members and representatives.

In Canada, one or two transactions that total $10,000 in 24 hours must be reported to FINTRAC.

The MSB challenge

The field is heavily regulated because of severe risks for fraud and criminal activity in the space.

Some legitimate uses of MSBs include:

• A remittance by a foreign or migrant worker to family members in another part of the world
• Someone purchasing goods or services across great distances or international boundaries
• A business or individual in one jurisdiction conducting business with someone in another

Nefarious uses could include:

• A money launderer trying to “clean up” funds from illegal activities
• A terrorist group attempting to transfer funds to support the actions of a cell in a target area
• A fraudster trying to scam an eager investor on a “get rich quick” scheme

No one wants to deny a family food and shelter, but neither does anyone want to permit a deadly terrorist attack or allow criminals to escape.

Many fintech companies are using an MSB license to offer innovative services, expanding the definition of what it means to be a money service business. For example, in Canada, crypto dealers are regulated as MSBs. But without specific regulatory guidance or laws, the appropriateness of MSB requirements to cover new financial service activities might be questionable. Working with regulators early and often to ensure proper compliance is well-advised to confirm appropriate licensing before offering the service.

Creating an effective MSB compliance program

When combating money laundering and terrorism funding, the international Financial Action Task Force (FATF) takes a risk-based approach for MSBs. That means companies identify and evaluate the potential risks and implement measures to mitigate them.

The risk-based approach is about understanding your MSB’s AML risk and having effective controls to counter those risks. Each MSB operates differently, so there’s no single approach ideally suited for all scenarios. But there are MSB best practices that can help create robust, adaptable and secure compliance programs.

Regardless of the activity or jurisdiction, the goals are the same: fighting criminal activity and protecting the public interest while providing a much-needed service. That means MSBs need to be compliant with KYC and AML regulations. Verifying the customer’s identity is crucial to that process. For MSBs, the task is to ensure people and entities involved in transferring and receiving funds are legitimate, verified and nonfraudulent.

This post was originally published on March 14, 2018. It has been updated to reflect the latest industry developments and best practices.