Money Service Business Banks & Regulators Enter Multi-State Contract

February 14, 2018

Money service business banks and state regulators are forging ahead with a multi-state licensing process for MSBs. The new agreement will standardize core parts of the money service business licensing process. This is just one of the changes affecting MSB-friendly banks and their clients in the coming year. Keep reading to learn more about this agreement and other trends affecting the MSB industry.

Multi-State MSB Licensing Agreement

According to a new multi-state licensing agreements, one state will accept another state’s findings during the money transmitter license application process. When a business applies for their money transmitter license, the state works to ensure that they have a business plan, clean background check, and that they are in compliance with the Bank Secrecy Act (BSA) and anti-money laundering (AML) requirements.
Additional states are expected to join Georgia, Illinois, Kansas, Massachusetts, Tennessee, Texas and Washington as the compact gains steam. This compact is the first step towards a streamlined MSB licensing process. Experts are hopeful that this is the start of a 50-state licensing program. Money service businesses, money transmitters, payment service providers, currency exchangers, and fintech companies will benefit greatly from this integrated approach.
Tennessee Department of Financial Institutions Commissioner, Greg Gonzales, notes “With this initiative, state governments will be able to be responsive to business innovation while ensuring regulatory compliance. This Department has advocated for a more coordinated approach for the licensing and regulation of MSBs for nearly thirty (30) years and it is satisfying to be among the first states to take this step toward an integrated nationwide system.  This is a global industry and its supervision must be addressed in a way that allows consumers to take advantage of a broad array of products while ensuring appropriate regulation.”  

OCC Semiannual Risk Report

A few times a year, the Office of the Comptroller of the Currency (OCC) releases a risk report highlighting the strategic, credit, operational, and compliance risks facing the United States’ banking system. The OCC’s National Risk Committee (NRC) is a group of officials who issue guidance for financial institutions that help them comply with current AML and BSA requirements while promoting financial security. The group includes senior level officials from the supervisory, legal, policy, and economics departments.
Their fall 2017 report centered around cybersecurity and financial crime. Cybersecurity was the main focus of the report, specifically as it pertains to AML and the federal banking system. As the speed and scope of cybersecurity threats increases, banks are continually facing threats to their personnel, processes, and technology.
Some of these threats aim to exploit personal information and intellectual property for fraud. “Phishing” schemes and other criminal data breaching techniques point to a need for robust software and extensive employee training. Long story short, banks are being urged to invest more time, money, and manpower into their fraud-prevention and compliance programs.
While the current fintech explosion is bringing new advancements that financial institutions can use to strengthen processes, these same advancements are opening the door to new risks. The risk environment itself is growing increasingly complicated alongside this technological boom.
As the financial sector embraces technology for compliance, they are also using it to boost customer service, increase convenience, and expand access to their financial services. These new applications create a need for new and updated regulations. As new regulations are handed down by FinCEN, money service business banks must review and refine their compliance programs in order to keep up with the latest requirements.

New FinCEN Requirements for MSBs & Banks

The United States Treasury’s Financial Crime Enforcement Network (FinCEN) announced the creation of the FinCEN Exchange at the end of 2017. The Exchange is designed as a voluntary platform for information sharing on financial crimes issues and AML efforts. The Exchange also formalizes roughly 40 special briefings that FinCEN has conducted for financial institutions and law enforcement agencies since 2015.
The new platform is accompanied by FinCEN’s plan to facilitate periodic briefings between itself, law enforcement agencies, and industry players. These briefings will center around the identification and exchange of information relating to specific threats, like the development of new money laundering methods.
In May 2018, FinCEN’s new customer due diligence requirements will go into effect. The Final CDD Rule, as it is known, requires financial institutions to collect, maintain, and report beneficial ownership information. The Federal Register clarifies this further, saying that all banks and broker/dealers “must identify and verify the identity of the beneficial owners of all legal entity customers (other than those that are excluded) at the time a new account is opened (other than accounts that are exempted).”
When it comes to customer due diligence, FinCEN focuses on these four elements:

  1. Customer identification and verification
  2. Beneficial ownership identification and verification
  3. Understanding the nature and purpose of customer relationships to develop a customer risk profile
  4. Ongoing monitoring for reporting suspicious transactions and, on a risk-basis, maintaining and updating customer information

The Final Rule seeks to prevent money laundering and terrorist financing by closing any and all existing loopholes. FinCEN has the power to require financial institutions to record and file reports as a part of the U.S. Treasury under the BSA, which was amended by the Patriots Act.
The Final Rule focuses on beneficial ownership, which FinCEN defines as:

  1. Each individual, if any, who, directly or indirectly, through any contract, arrangement, understanding, relationship or otherwise, owns 25 percent or more of the equity interests of a legal entity customer
  2. A single individual with significant responsibility to control, manage, or direct a legal entity customer, including:
    1. An executive officer or senior manager (e.g., a Chief Executive Officer, Chief Financial Officer, Chief Operating Officer, Managing Member, General Partner, President, Vice President, or Treasurer)
    2. Any other individual who regularly performs similar functions
  3. If a trust owns directly or indirectly, through any contract, arrangement, understanding, relationship or otherwise, 25 percent or more of the equity interests of a legal entity customer, the beneficial owner shall mean the trustee

MSB-friendly banks and MSB owners will need to keep an eye on FinCEN and changing requirements in the year ahead.

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