MSB Bank Derisking & Its Nonprofit Impact

March 17, 2017

US nonprofits abroad are facing a financial inclusion dilemma. In the recent wave of derisking, banks are dropping money service businesses from their client lists. These MSBs are the vehicles for transferring funds from the US based nonprofits to their arms working abroad. MSB bank derisking is effectively cutting off funds for nonprofit work abroad. How did we get here?

MSB Bank Derisking

Derisking is a decision by banks to avoid, rather than manage, their risk. Derisking impacts the alternative financial services industry directly because these are the businesses losing their bank accounts. The phenomena of indiscriminate derisking is an unintended result of financial regulation put into action after 9/11. The US government responded to these terrorist attacks, which were illegally financed through a major US bank, with strong regulation.
The USA PATRIOT Act strengthened the BSA of 1970 and widened the scope of Anti-Money Laundering (AML) regulation. This regulation sought to help banks and law enforcement agencies detect, prevent, and prosecute financial crimes. These crimes include money laundering, terrorist financing, tax fraud, and other illicit activities aimed at defrauding the financial system.
Since AML and counter-terrorism regulations place responsibility with banks, many financial institutions are adopting a conservative approach to compliance. This means cutting “risky” money service business clients from their account ledger. Unfortunately, many highly compliant MSBs are receiving abrupt and impersonal letters notifying them of their impending account closure.
When MSBs reach out to their longtime banker, no explanation is given. This unsolicited termination leaves MSBs without banking, a necessity for cashing checks. As a result, check cashers are forced to shut down their businesses while they search for a new financial partner. In the interim, their clients are left without access to alternative financial services.
On the other hand, regulation slows down the transfer of international funds, which have to be thoroughly vetted. Paperwork and documentation bring the money transfer process to a halt, slowing down funds as they make their way to their final destination. An example of this the halt of funds transferred to US nonprofits working abroad.

How Derisking Impacts Nonprofits

Recent reports show that two thirds of US nonprofits working abroad are experiencing significant banking issues due to derisking. In some cases, the NGOs lose access to financial services when their trusted MSB shuts down after their bank account is terminated. In other cases, NGOs are impacted by sluggish regulatory practices including documentation and requests for additional information. Charity and Security Network reports that over one third of nonprofits are impacted by increasing costs associated with access to financial services.
International banks are, in some cases, hesitant to work with US NGOs through international money transfer. They are concerned with protecting their relationship with their US based correspondent banks, which they rely on for these transfers. One red flag could shut down their ability to work the American financial institution.
These factors combine for a drastic drop in access to MSB financial services, which can be directly tied to regulations aimed at preventing money laundering and terrorist financing. The delays in (or absence of) transmitted funds are causing serious delays and project cancellations for these NGOs, which carry serious ramifications. Delays in wire transfer, lasting for months at times, are currently affecting over one third of NGOs. According to Devex, one NGO working in Syria was unable to purchase fuel to power a hospital after lengthy wire transfer delays.
When NGOs can’t rely on money transfer and alternative financial services, they turn to cash. Carrying large amounts of cash puts the NGOs at risk for harm or robbery, while simultaneously reducing transparency. One potential solution to this problem is the adoption of a “safe harbor’ provision protecting banks working with US NGOs abroad. This would alleviate the compliance burden for the financial institution and allow funds to flow freely to the nonprofits counting on them to fund programs.

Reliable MSB Bank Accounts

As a result of derisking, banks that offer MSB accounts are hard to find. The first step to securing a reliable MSB bank account is to implement a robust compliance program. Licensed MSBs cashing over $1,000 per day per customer are required to adhere to a set of federal and state regulations. In addition to securing a license, these MSBs must implement, maintain, and document a compliance program.
For MSB owners, this is the most important part of their business operations. Creating a compliance program that is efficient and consistent requires expertise. Advanced POS technology can aid in the capture and vetting of KYC data. Check cashing technology like this helps the teller collect information from new customers, run this information against national databases, and follow compliance protocol to catch red flags before they become fraud.
A documented check cashing process streamlines operations and aids in the training of new employees. In accordance with the BSA, MSBs must also keep detailed records of specific financial transactions. The BSA also requires MSBs to file Suspicious Activity Reports (SARs) for all questionable financial activity. These measures require quick and transparent communication between money service businesses and their banks.
NCC helps MSBs manage their regulatory burden through compliance expertise and 24/7 customer support. By offering reliable MSB banking, NCC removes the threat of derisking. Money service business owners are able to focus on streamlining processes and reinforcing compliance, rather than chasing their next bank account.
With a dependable money service business bank account on your side, you don’t have to worry about receiving a termination letter from your trusted bank. Instead, you can focus on expanding your business, increasing foot traffic, and improving your customer loyalty program. What could you do with all of the time you spend worrying about banking?
In addition to a network of MSB banking partners, NCC provides supportive services to help your check cashing operations. These services include deposit turnaround, ACH services, money transfer capability, remote deposit capture, and more. All of these elements work together to support your check cashing business and avoid delays in transfer times. With NCC, you can avoid the negative fallout of derisking.

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