Regulators Warn MSB Banks Against Indiscriminate Derisking

October 06, 2016

Three years have passed since the Financial Crimes Enforcement Network (FinCEN) introduced their list of “risky businesses,” referred to as Operation Choke Point. Since its publication, the list has inadvertently encouraged banks to indiscriminately derisk. Indiscriminate derisking occurs when big banks shut down MBS bank accounts without reason, clarification, or warning to shed perceived risk.  
Even though FinCEN revoked the list and urged banks to adopt compliance programs, the effects of Operation Choke Point are still felt by MSB owners today. Of course, banks face risk from a wide variety of sources beyond money service businesses. In general, confusion over compliance leads banks to shut out entire industries or locations in order to manage their risk and keep their compliance operations within budget.
Recent fraud committed by big banks is leading some to wonder how regulators can miss wide scale fraud committed by huge corporations, yet crush smaller, compliant entities with regulation.

Comptroller of the Currency Announces New Compliance Guide

To address one facet of compliance confusion, U.S. regulators recently announced that they will help banks assess foreign risk.  Comptroller of the Currency, Thomas Curry, spoke to members of the Association of Certified Anti-Money Laundering Specialists in Las Vegas. Curry noted that the OCC will publish a “best practices” guide to reduce confusion over AML expectations for banks.
The Office of the Comptroller of the Currency (OCC) was established by the National Currency Act of 1863 and currently operates as an independent bureau within the United States Department of the Treasury. According to their website, the OCC “charters, regulates, and supervises all national banks and federal savings associations as well as federal branches and agencies of foreign banks.”
The OCC is currently under fire for not catching the recently discovered fake account fraud committed by Wells Fargo. As a result of this and other pressures, Curry is working to optimize the OCC’s supervision of financial institutions, assess high-pressure working environments that can lead to illegal behavior, and perform a comprehensive analysis of financial risk in the US.

“The global financial system cannot be paralyzed by risk.”
– Thomas Curry (Source: Reuters)

The announcement comes at a time when banks are continuing to indiscriminately derisk in the name of MSB compliance regulation. Curry urges banks to consider the ramifications of their derisking decisions. Even though this announcement is addressing concerns over location-based risk, the OCC’s efforts will hopefully extend to the indiscriminate derisking of money service businesses.

Derisking & Correspondent Banking

The pending guidance is aimed at helping banks address risk in their foreign correspondent banking portfolios. Correspondent banks are financial institutions that provide services on behalf of another financial institution. In this function, correspondent banks facilitate wire transfers, business transactions, and deposits on behalf of another financial institution. More often than not, US banks use correspondent banks to service transactions originating or completed in a foreign country.
Correspondent banks in the Caribbean are currently dealing with derisking and face losing their connections to the global economy. Jamaica is currently fighting to keep their correspondent banking relationships with larger banks abroad. The country is strengthening their own regulatory insight and making efforts to address the issue on the international stage.
Minister of Foreign Trade and Foreign Affairs Senator Johnson-Smith recently said, “We are also exploring the feasibility of strengthening our anti-money laundering counter-terrorist finances (AML/CTF), due diligence and monitoring infrastructure.”
According to a recent G20 survey conducted by the World Bank, both banks and MTOs recognize that correspondent bank derisking are closing down bank accounts. Banks note the following reasons for their decision to terminate relationships with international MTOs:

  1. Profit
  2. Pressure from other banks and regulators
  3. Lack of confidence in MTO’s compliance procedures
  4. Perceived risk

In light of the banking crisis in the Caribbean, the World Bank is urging members to balance their risk with financial inclusion in mind.

OCC Regulatory Impact for MSB Banking

Even though the new guidelines set out by OCC and reinforced by the World Bank are aimed to help big banks work with correspondent banks abroad, the message reaches beyond this specific niche.
The implications of this development for MSB banking include three positive MSB financial regulation trends:

  1. Clarification of compliance expectations
  2. A U.S. regulatory authority is saying “do not engage in indiscriminate derisking.”
  3. Financial regulators are addressing their own oversights in regards to banking regulation

By encouraging banks to rethink their risk management and giving them clarification, the OCC is taking a step in the right direction to solve the pervasive issue of indiscriminate derisking.  When banks do not have clarity around compliance, they are much more likely to shut down bank accounts instead of finding solutions.

MSB Banking & US Financial Regulation

US financial regulation is handed down from government bodies, including FinCEN and the OCC. The OCC regulates large banks in the US and enforces Anti-Money Laundering (AML) and Bank Secrecy Act (BSA) regulation. Like the OCC, FinCEN operates as a bureau within the United States Department of the Treasury.
FinCEN’s mission is “to safeguard the financial system from illicit use and combat money laundering and promote national security through the collection, analysis, and dissemination of financial intelligence and strategic use of financial authorities.” To fulfill this mission, FinCEN enforces the Bank Secrecy Act, provides resources, and analyzes financial data.
Money service businesses are a compliance concern for FinCEN because they have historically been used by individuals or groups to launder money, finance terrorism, and commit tax fraud. These illegal activities can be shut down through strong compliance programs.
As a result of this pressure to stay compliant, money service businesses have to quickly adopt new regulations as they are handed down from the OCC and FinCEN. When banks receive new compliance expectations, MSBs scramble to meet the new requirements before their accounts are terminated.

MSBs Face Derisking by Big Banks

National Check and Currency client, Mo Motameti has experienced indiscriminate derisking firsthand. After being with Wells Fargo for 9 years, the bank cut Mo’s business account loose with little warning or explanation and left him scrambling to find a bank.
Mo explains, “TTS Financial was able to stay in business because NCC worked so hard to get us banked. I was actually on vacation when we found NCC and I remember Steve touching base with me as he needed information. I was able to relax while he found us a banking solution. I chose NCC because it was very clear from the get go that Andy and Steve would work as hard as it took to get the job done”
With NCC’s POS technology, Mo is able to instantly see what is happening at either of his two check cashing locations. This visibility is also granted to his bank, ensuring that all interested parties have a direct line to transaction details.
This transparency and compliance infrastructure gives both Mo and his bank peace of mind.
National Check and Currency is committed to staying ahead of financial regulation and MSB compliance, so that you don’t have to keep track of it. NCC helps their clients adopt and implement new regulations ahead of schedule, often before the OCC or FinCEN hand down formal notices. NCC’s network of MSB friendly banks provides you with reliable MSB banking and supported MSB services.

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