Money services businesses (MSBs) run the gamut from storefronts and small businesses exchanging currency, cashing checks, and transmitting money to those that issue or sell traveler’s checks, money orders, or stored value cards.
These businesses provide services that traditional banks had a monopoly on in the past—and, therefore, are considered vital parts of today’s financial ecosystem.
A business must meet specific activity thresholds to be considered an MSB. For instance, according to FinCEN, a currency dealer, check casher, or issuer of traveler’s checks is a money services business if it performs one or more transactions of $1,000 or more per person per day.
MSBs are also defined by what they are not. Banks are not MSBs, nor are people or business operations regulated or examined by the Securities and Exchange Commission or the Commodity Futures Trading Commission.
Are Money Services Businesses Inherently Risky?
Although MSBs are perceived as high-risk, this isn’t necessarily the case. It’s important to remember that the U.S. Postal Service is a money services business and is subject to BSA (Bank Secrecy Act) rules for how MSBs operate. Other large MSBs include Western Union and PayPal, which were estimated to have handled $6 trillion in payments in the U.S. in 2021, a 117% increase over 2020.
So, why is the prospect of banking MSBs often considered so frightening?
Many bankers are scared away by the reputation of MSBs as targets for criminals trying to launder money or engage in nefarious acts underneath the radar.
The key to avoiding problems is having strong compliance practices in place—both as the MSB and as the financial institution acting as a banker.
The American Bankers Association (ABA) has published a downloadable guide of best practices for MSBs working to develop compliance programs.
The Role of Traditional FIs
A great source of deposits for community banks and credit unions, MSBs do mean that heightened BSA compliance efforts should be put in place by financial institutions working with them.
For any institution banking MSBs, it’s important to educate the back office so illicit activities are recognized, reported, and stopped. In fact, in a perfect world, MSBs are covered by two layers of compliance: the compliance activities they initiate and those overseen by the financial institutions where they bank.
Here are a few important points to remember:
All MSBs are required to register with FinCEN. MSBs operating in the United States have 180 days to register with FinCEN. This registration must then be renewed every two years.
Appoint dedicated personnel. MSBs are required to appoint an individual or team to handle AML (anti-money laundering) compliance and the implementation of effective AML policies. Banks working with MSBs will want to feel confident that these steps have been taken. Remember that a successful AML process rests on strong and effective KYC (Know Your Customer) practices. For MSBs, KYC requires collecting a customer’s full name, date of birth, address, and identifying documents, such as a passport or driver’s license.
Mind your CTRs and SARs. To be in compliance with FinCEN, MSBs must file a Currency Transaction Report, or CTR, for transactions performed by a single individual in a given day that amount to over $10,000. If transactions over $2,000 are considered suspicious, then a Suspicious Activity Report, or SAR, must be filed.
Compliance for MSBs cannot be a one-size-fits-all solution. Customize your compliance according to a number of factors, including the size of the MSB, the services offered, and the geographies where it operates.
Consider investing in the latest AML compliance tools. Leading software solutions can remove much of the burden of compliance reporting for MSBs and the financial institutions where they bank. They can also lower the incidence of errors.
Want more information? Tune in to RiskScout’s webinar “The Tricks and Treats of Banking MSBs” for a deeper dive. Register here.