Money makes the world go around but what makes the money go around? In today’s digital world, it isn’t just banks, mints or treasuries. Money services businesses (MSBs) – a catch-all term used by financial regulators to describe the wide spectrum of businesses involved in converting or transmitting money – represent a big chunk of the economy. In 2017, MSBs in the U.S. alone handled nearly $1 trillion in transactions.
The term covers such a wide range of business services because the options are so much more diverse than they’ve been in the past. No longer limited to a trip to the local bank, people now have numerous options when it comes to sending, receiving or converting funds.
What is an MSB?
MSBs come in many forms, ranging from payment companies to investment services, from individuals and startups to major global enterprises. They can include currency dealers or payday lenders, a payment app on your phone or the post office down the road – essentially, the term can apply across bricks, mortar and pixels.
But MSBs are not banks. While they provide many of the services of a bank, their offerings and customers differ. First off, many serve individuals who do not have access to traditional banking services – the unbanked – or wish to use an alternative. MSBs provide them with a variety of financial services such short-term loans, payment processing and transferring or exchanging of foreign currencies.
The MSB umbrella can also cover a number of unique or emerging financial services such as crowdfunding, online marketplaces, cryptocurrencies or other electronic money and alternative financial services.
Regardless of their specific service or how they differ from traditional banking, MSBs must comply with many of the same rules and regulations that banks and financial institutions contend with. Whether transmitting funds, converting cash or engaging in any other type of activity that involves the exchange of a dollar, yen, pound or bitcoin from one pocketbook to another, those regulations dictate the way MSBs do business.
MSBs in the USA
In the United States, the Financial Crimes Enforcement Network (FinCEN) has specific definitions and requirements of what constitutes an MSB and any business that meets any one of those criteria is subject to regulations under the Bank Secrecy Act (BSA). A few of those include money transfers, currency exchanges, prepaid access and check cashing. All MSBs must be registered with FinCEN, are subject to review by the Internal Revenue Service (IRS) and must be compliant with the appropriate and myriad state and federal regulations. Across the U.S., there are a lot of regulations and failure to comply will result in very serious penalties.
One of the biggest concerns for MSBs in the U.S. involves the funding of illegal or illicit activities – intentional or not. MSBs have a duty to ensure that they are not involved in or permitting money laundering from illicit activities such as drug trafficking, that they’re not helping with funding terrorist activities, and that they’re not violating economic or trade sanctions against a specific list of countries or organizations.
To stay in compliance, MSBs must have a written set of policies and procedures for filtering transactions, an individual (or team) within the organization responsible for overseeing compliance, and processes in place to keeping up to date on regulations and barred transactions (such as watch lists and sanctioned entities). FinCEN’s website offers a wealth of information and resources for registration, compliance and more.
Go north of the border and some things change for MSBs, but most are basically the same. In Canada, preventing financial crimes is the domain of the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC). Their definition of MSBs includes foreign exchanges, money transfers or the selling or cashing of financial products (like money orders) within Canada.
All MSBs must be registered with FINTRAC, regardless of their location in Canada. Similar to the U.S., Canadian MSBs must appoint a compliance officer, they must have documented procedures and policies, and must have mechanisms in place to stay up to date on regulations with regular training programs in place for staff members and representatives.
Know Your Customer
The common thread across borders and throughout the money services business market is the duty to know who you’re doing business with. Know Your Customer (KYC) regulations are at the center of the compliance landscape. To prevent the proceeds of crime from trickling out and doing more harm, MSBs must verify the identity of customers and follow sound practices for ensuring that due diligence is complete.
The MSB Challenge
The field is so heavily regulated because there are serious risks for fraud and criminal activity in the space.
Some legitimate uses of MSBs include:
- A remittance by a foreign or migrant worker to family members in another part of the world
- Someone purchasing goods or services across great distances or international boundaries
- A business or individual in one jurisdiction conducting business with someone in another
The nefarious uses could include:
- A money launderer trying to “clean up” funds from illegal activities
- A terrorist group attempting to transfer funds to support the activities of cell in a target area
- A fraudster attempting to scam an eager investor on a “get rich quick” scheme
No one wants to deny a family of food and shelter but they certainly don’t want to permit a deadly terrorist attack or allow criminals to get away scot-free.
What to Watch
When it comes to combating money laundering and terrorism funding, the international Financial Action Task Force (FATF) takes a risk-based approach. That means companies are expected to identify, evaluate and know the potential risks and implement measures to mitigate them.
Regardless of the activity or the jurisdiction, the goals are the same – fighting criminal activity and protecting the public interest while providing a much-needed service. That means that MSBs need to be compliant with Know Your Customer (KYC) and Anti-Money Laundering (AML) regulations. Verifying the customer’s identity is crucial to that process. For MSBs, the task at hand is to make sure that the people and entities involved in the transferring and receiving of those funds are legitimate, verified and non-fraudulent.