The Unintended Consequences of AML Regulations

August 19, 2016

The Honorable Intentions of AML Regulation for MSBs

No one argues over whether or not we should protect against money laundering and potential terrorist funding. So why do Anti-Money Laundering regulations receive such mixed reviews? The unintended consequences of AML are far-reaching– and piling on top of the de-banking drama already plaguing money service businesses today.
Anti-Money Laundering efforts fall under the rule of the Financial Industry Regulatory Authority. In Finra’s own words, “Firms must comply with the Bank Secrecy Act and its implementing regulations (“AML rules”). The purpose of the AML rules is to help detect and report suspicious activity including the predicate offenses to money laundering and terrorist financing, such as securities fraud and market manipulation.”

In between a rock and a hard place

For firms, this means added compliance costs and an ongoing effort to keep up with changes in regulations. Banks are walking the tightrope between complying with tightening regulations and avoiding indiscriminate de-risking. “We are kind of in a Ping-Pong match between financial inclusion and avoiding regulatory scrutiny and we are the ball,” said Pamela Dearden, managing director for financial crimes enforcement at JP Morgan Chase (from this American Banker article). When banks do choose to work with high risk accounts, they absorb the higher costs that come with compliance. In the mean time, New York is looking to start holding banking executives personally liable for regulation issues (from this American Banker article).
On the heels of widespread criticism, the FDIC is making changes to the rhetoric associated with Operation Choke Point to encourage financial institutions to target individuals rather than entire groups of “risky” clients. Banks have been quick to explain their de-risking efforts as part of standard compliance issues. In addition, the Patriot Act has extended the Bank Secrecy Act to require at-risk businesses (the money service industry) to use CIPs (Customer Identification Programs). This shows a shift from an identify and report approach to a detect and prevent mindset. While this encourages a more thorough approach to risk management and attempts to minimize large-scale de-risking, the problems persist.

“Risky” MSBs and Impoverished Companies Hurt by AML Regulation

Banks are now dropping remittance providers who don’t implement CIPs up to their standards. Since remittances now outweigh aid entering poor nations around the world, countries like Somalia are the ones left absorbing the fall out.
Entrepreneur, tech strategist, and Somali Liban Egal is hoping to solve this very problem with his new tool to bring high-tech customer identification to the hawalas of Somalia. As we mentioned in our last article, “Is Global Financial Inclusion at Risk?,” Egal has announced a plan to help money transfer services and banks track where transferred money ends up. His pitch includes the use of biometric identification. A fingerprint scanner bought from a firm in India coupled with the CamelCash smartphone app, currently owned and developed by FSB, will hopefully make this vision a reality.
These endeavors seem too little too late as funds to desperate communities are strangled. MSBs are not alone. Other industries perceived as “risky,” such as pawn shops, payment solutions, and private security companies, who comply to a laundry list of regulations, are crying “Uncle” as they get de-banked by the dozen. Experts are quick to point out that a bank will never decrease its risk to zero, so the effort should be on quality compliance control and a determined commitment to avoid indiscriminate de-risking. Will the shift to individual identification relieve these industries? Only time will tell.
At National Check and Currency, we are committed to maintaining compliance without compromising profit. We use redundant MSB banking solutions to mitigate risk and keep you banked.

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