Successfully Banking an MSB: Part II

Based on the characteristics that we laid out in part 1, it would seem that banks would be in a rush to offer banking services to these companies.   However, as we pointed out in the previous blog, Operation Chokepoint and the attitude about MSB’s amongst bank regulators creates a hostile regulatory environment for these entities.  For many institutions, the decision has been made that the regulatory risk associated with Money Service Business is too great to justify offering the product. 

The fact that so many MSB’s lost their banking relationships caused the FDIC (the main “tormentor of financial institutions in this area) to issue FIL 5-2015 which was directed at the mass “de-risking” that that banks were forcing on MSB’s.  In addition, the Treasury Department published a study in April of 2023 that directly addressed the problems associated with de-risking of MSB’s. [1]

One of the important themes that are evident in  both in the FDIC guidance and the Treasury study is that there are ways to successfully and safely offer banking services to MSB’s.  This theme is backed up  by several points in the FFIEC BSA Compliance manual and subsequent guidance that are often overlooked.  For  example,

• The FDIC is aware that some institutions may be hesitant to provide certain types of banking services due to concerns that they will be unable to comply with the associated requirements of the Bank Secrecy Act (BSA).  The FDIC and the other federal banking agencies recognize that, as a practical matter, it is not possible for a financial institution to detect and report all potentially illicit transactions that flow through an institution. 
• Financial institutions have flexibility in the design of their compliance programs and minor deficiencies do not indicate an inadequate program.  
• Isolated or technical violations, which are limited instances of noncompliance with the BSA that occur within an otherwise adequate system of policies, procedures, and processes, generally do not prompt serious regulatory concern or reflect negatively on management’s supervision or commitment to BSA compliance. When an institution follows existing guidance and establishes and maintains an appropriate risk based program, it will be well-positioned to appropriately manage customer accounts, while generally detecting and deterring illicit financial transactions.
• The decision to file a SAR is an inherently subjective judgment. Examiners should focus on whether the bank has an effective SAR decision-making process, not individual SAR decisions. Examiners may review individual SAR decisions as a means to test the effectiveness of the SAR monitoring, reporting, and decision-making process. In those instances where the bank has an established SAR decision-making process, has followed existing policies, procedures, and processes, and has determined not to file a SAR, the bank should not be criticized for the failure to file a SAR unless the failure is significant or accompanied by evidence of bad faith

Despite the guidance and directives above, it has been the experience of many financial institutions that their examination team has concerns about the overall existence of the MSB program.  The BSA examination has become a test of commitment to the overall idea of the program. 

Banking an MSB in the Face of High Regulatory Risk

Put another way, the regulators have noted that despite the appearance otherwise,  the principles for managing the risks of MSB’s are  the same as all basic principle for risk management.  As will all things in banking, the better the monitoring, the lower the risk.  

When considering whether to offer an MSB a bank account, your financial institution should be able to administer the account to keep risks low

Despite the ongoing concerns noted by financial institutions, as we noted in our previous article, there are many reasons that an MSB program can help your institution. 

The steps for developing a successful program include the following :   

1. Develop a risk assessment  – As a first step, your institution should prepare a risk assessment that details:

1. Inherent Risk: The risk associated with offering banking services to MSB’s
   1. Internal controls are the measures that will be taken to address the risks identified in step one.
   1. Residual Risk: The level of risk that remains after internal controls have been employed.  

The risk assessment should be used as the basis for structuring the AML compliance program.  The risk assessment should help recognize the areas that are strong versus areas that need enhancement

2. Develop written program for program. The written compliance program is a requirement of the regulation and should also detail the internal controls at the bank.  
3. Complete training – The staff that will handle the administration of the MSB accounts must fully understand the MSB flow of funds 
4. Develop Software – The regulation to follow is New York’s  504.  The software that you use must have the ability to aggregate transactions and allow you to recognize trends

5. Critically Important: Understand the  Actual Rules for Customers!  There are specific federal rules that are in place for MSBs.  These rules reflect the risk-based approach of the federal government.  These rules reflect the studies that the treasury department has done that detail the practices of money launderers.  
6. Understand the risk appetite of the company. It is important to make sure that there is agreement between the Board and the compliance team about what the appetite is for the company.
7. Be willing to make a forceful defense. Examiners are humans.  They have limited experience with the remittance market.  There are times when questions will be asked that may be well-intentioned but outside the rules.  

For many institutions, the decision has been made that the regulatory risk associated with Money Service Business is too great to justify offering the product.  Of course, most of the reason for this decision harkens back to the structural scrutiny of Operation Chokepoint.   However, with a comprehensive compliance program, your financial institution can provide a huge lift to unbanked and underbanked communities and make a nice profit simultaneously.

[1] THE DEPARTMENT OF THE TREASURY’S DE-RISKING STRATEGY, April 2023