Part One of a Two-Part Series: The Regulators!
In the previous blog, we discussed the reasons to consider banking MSB’s. We noted that there is minimal capital expenditure required and that the fee income is substantial. So why doesn’t every bank offer accounts for money service businesses?
Operation Chokepoint
In 2013, the US Department of Justice initiated Operation Chokepoint. This initiative was described as follows:
Operation Choke Point was a 2013 initiative of the United States Department of Justice, which would investigate banks in the United States and the business they do with firearm dealers, payday lenders, and other companies believed to be at higher risk for fraud and money laundering.[1]
The Justice Department’s decision to focus on the activities of MSB’s directly impacted their treatment by banks. Soon, MSB’s became persona non-grata; the major theme was that these organizations have potential for money laundering and therefore had to be given scrutiny.
However, there was a second theme that was less prominent: the better the monitoring, the lower the risk. Eventually, the regulators were forced to cease the initiative. Unfortunately, a great deal of the stigma associated with MSB’s remains. The forces created by operation chokepoint and growing remittance market are creating great opportunities.
Ongoing Impact
Despite the overall profitability of the remittance business, for many financial institutions, the largest risk remains regulatory risk. In many cases, financial institutions simply crumble under the weight of regulators demands for data and documentation of transactions conducted by MSB’s. Many banking institutions have had the experience of their examination team making it clear that MSB’s are still considered risky to the point of toxicity. As a result, senior management at financial institutions take the stance that the heat from regulators is simply not worth the potential profits.
In 2023, the Department of Treasury released a report on derisking[1]. This report describes the standards for examiners to use to evaluate an MSB program. The main focus of this report was to recognize that the effects of Operation Chokepoint still linger. In the executive summary fo the report, the authors note that:
Treasury focuses on “de-risking” as the practice of financial institutions terminating or restricting business relationships indiscriminately with broad categories of clients rather than analyzing and managing the risk of clients in a targeted manner. Such a practice is not consistent with the risk-based approach that is the cornerstone of the Anti-Money Laundering/Countering the Financing of Terrorism (AML/CFT) regulatory framework for U.S. financial institutions under the Bank Secrecy Act (BSA) and implementing regulations
The report details the harmful impacts that de-risking of MSB’s has had including –
- Loss of access to financial services for the underbanked and unbanked communities
- Increased use of illegal and criminal networks to send funds
- Decreased reporting of financial transactions
- Increased expenses for communities that can least afford it
The report goes on to make several recommendations for the regulatory community. These recommendations are designed to reduce the overall regulatory risks associated with offering banking services to Money services businesses. Among the recommendations that should give hope to all financial institutions are these:
- Promote consistent supervisory expectations, including through training to federal examiners, that consider the effects of de-risking, as mandated by Section 6307 of the AMLA;
- Analyze account termination notices and notice periods that banks give NPO and MSB customers, and identify ways to support longer notice periods where possible;
- Consider proposing regulations pursuant to Section 6101 of the AMLA that require financial institutions to have reasonably designed and risk-based AML/CFT programs supervised on a risk basis, possibly taking into consideration the effects of financial inclusion;
- Consider clarifying and revising or updating AML/CFT BSA regulations and guidance for MSBs.
- Encourage ongoing public and private sector engagement with MSBs, NPOs, banks and regulators (federal and state), including to provide greater clarity on risk-focused BSA/AML supervision and regulatory requirements and to encourage information exchange
The leadership of the banking regulatory agencies have made many public pronouncements about the need to balance regulatory risks with the need for the remittance market to grow and flourish. Unfortunately, the overall goals of reducing regulatory burden and creating consistent expectations for administering an MSB, have not translated into changes in behaviors for many examination teams.
In the next blog, we will discuss ways to work directly with regulators for a successful MSB program
[1] ALMA- The Department of the Treasury’s De-Risking Strategy