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Banks and MSB Clients: Understanding Risk Ranking and Regulator Expectations

Banks and MSB Clients: Understanding Risk

Ranking and Regulator Expectations

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Banks and MSB Clients: Understanding Risk

Ranking and Regulator Expectations


Moderator:

Anthony Rodriguez, CPA, CAMSChief Global Compliance OfficerRIA Financial Services


Speakers:

Tom HaiderHaider Advisory Service

Alan Abel, CAMS Crowe HorwathExecutive and Global AML Practice LeaderRegional Leader, Regulatory Compliance

Banks & Their MSB Clients: The Risk Ranking

Dilemma

Tom Haider

MSB Representation

Presenting on behalf of the National Money Transmitters Association (NMTA)NMTA is the leading spokesperson for the U.S. money transmitter industry NMTA requires strict AML compliance by its members and provides ongoing AML advice For additional information contact David Landsman; Executive Director at: [email protected] 917-921-9529


Background FFIEC BSA Exam Manual Revision ≈ 2004MSBs included in list of “high risk” clients for banks

Bank examiners begin to question how banks “oversee” their MSB client’s AML compliance, i.e. “what do you know about your client’s clients?”Banks respond by closing MSB accounts and refusing to accept new MSB customersMSBs take concerns to FinCEN, OCC and FDICFFIEC issues Interpretive Guidance in 2005

Guidance is 14 pages long. Effect has been opposite of intent. More banks stopped serving MSBs


Federal DevelopmentsHR 4049 introduced 2007

Provided “self-certification” of AML compliance by MSBsAuthorized bankers & their regulators to rely upon “self-certification”Broad support from bankers, FinCEN and financial regulators Passed House on July 22, 2008

Senate did not take up issue due to financial crisis


Current Situation Smaller/regional MSBs and smaller agents, i.e. “Mom and Pop’s” continue to struggle to find banks willing to serve them Federal banking regulators remain skeptical of MSBs

No federal licensing of MSB industry Cash intensive Often located in higher crime

neighborhoods Limited regulatory oversight of MSB

agents


Current Situation (cont.)Ambiguous information about MSBs & AML

For example, the description of today’s program said: “With recent fines against MSBs for money laundering violations . . .”

2010 and 2011 AML fines/forfeitures*Wachovia (now Wells Fargo) $160 million Zions Bank $8 millionABN AMRO $500 millionPacific National Bank, Miami FL $7 millionPinnacle Capital Markets (broker/dealer) $50,000Pamrapo Savings Bank, Bayonne, NJ $6 millionEight other banks $570,000Victor Kaganov $25,000 (failed to register as an MSB)Sufi Brothers $40,000 (failed to register as an MSB)

* Fine/forfeiture information from bankersonline.com


SAR Issues for MSBsMost MSB agents establish transaction thresholds below $2,000 SAR Aggregation is extremely difficult

MSB customers do not have account numbersHow do you aggregate: Robert White Smith;

Rob Smith; and R.W. Smith? MSBs can not record names of money order purchasers Complexity of SAR form for non-native English speakers

Not user friendly


Why should MSBs matter to Banks? Revenue

Price accordingly if riskyMSBs are strategic outlet for prepaid debit cards

Improve image with underserved segments of community

Gain valuable political goodwill Customer service

Underlying MSB business is already a bank customer


MSBs Widespread Presence


Actions MSBs Should Take

Implement a strong AML program Use sophisticated software for the detection/analysis of

transactions Conduct “know your agent” reviews before taking on

new agents and update for management changesThoroughly train agents

In person or by phone (don’t just send a manual for agent to read at their leisure)Use some form of “test” to confirm comprehension Use multi-lingual training tools Conduct periodic refresher trainingRequire agents to verify training of employees


Implement a strong AML program (cont.)Employ field staff to conduct reviews of higher risk agents Terminate agents who do not embrace effective compliance Educate management and sales on the importance of compliance and the need to invest in itProvide effective compliance tools to agents

Make it easy for agents to comply Teach agents the value of demonstrating compliance professionalism to their bankersProvide regular AML updates to agents

Work with the banking community

Actions MSBs Should Take (cont.)


Risk Assessment PracticesComply with regulatory requirements*

Confirm FinCEN registration, if requiredConfirm state licensing, if requiredConfirm agent status, if applicable Conduct risk assessment to determine if further due diligence is required

* FFIEC BSA/AML Exam Manual, revised 4/29/10, p. 53

“It is essential that banking organizations neither define or treat all MSBs as posing the same level of risk.”

“. . . it is not the case that all MSBs will always require further due diligence.”

Quotes from FFIEC Guidance on Providing Services to MSBs Operating in the U.S. April 26, 2005


Risk Assessment Practices (cont.)Some issues to consider in developing “risk assessment”procedures for reviewing MSBs

If the MSB is licensed that means it is regulated by at least one state banking department and should reduce the need for additional due diligenceIf an agent, what percent of revenue is attributable to MSB business? If an agent, does it represent more than one licensee? What type of MSB services does it provide and how long has it been providing MSB services? Who created the MSB’s compliance program and are they knowledgeable on the topic? How are employees involved in MSB services trained on AML?When was the compliance program last reviewed and who performed the review?


FFIEC Guidance on Serving MSBs“A banking organizations due diligence should be commensurate

with the level of risk of the MSB customer identified through its risk assessment. This is no different from requirements applicable to any other business customer and does not mean that a banking organization cannot maintain the account.”

“FinCEN and the federal banking agencies do not expect banking organizations to act as the de facto regulators of the MSB industry.”

Banks and MSBs working together can be a win-win situation.

Quotes from FFIEC Guidance on Providing Services to MSBs Operating in the U.S. April 26, 2005


Thank you!

For further information contact Tom Haider

[email protected]


Banks and MSB Clients: Understanding Risk Ranking and Regulator Expectations – An Auditor’s Perspective

Alan Abel



Original Regulatory Mandate

1996-97 BSA regulations governing certain categories of “Non-Bank Financial Institutions” (NBFIs) were on Treasury’s agenda.FinCEN conducted a study of NBFI “Five Sectors”:

Money transmissionTravelers checksMoney ordersRetail foreign currency exchangeCheck cashing.

During the project, FinCEN came up with the term: “Money Service Business” -- MSB.

Original Regulatory Mandate . . .Study resulted in identifying these businesses, their population and nature of their activitiesWho were the major players Principals versus agents, the nature of agency relationships Niche players Primary and ancillary activities, products, and services, and how they were bundled together (or not) Domestic versus international activity The nature of supervision, primarily the U.S. states and territories (i.e. not the Federal bank regulators, not the SEC) Coincidence (or not) of products and services The marketplace and certain characteristics of consumer behavior

Original Regulatory Mandate . . .It was important to “get arms around”So that was that the prelude toMSB BSA rules. . .Characteristic business processes and controlsGeneral banking needs and practices.

Ten + Years Later . . .Major growth in the MSB sectors

The “20th century business”Development and proliferation of 21st century business:

Products and services and their utilizationTechnologyDistribution.

Overall greater regulation of MSBs by states and other jurisdictionsImpact of Ten+ years of BSA rules and heightened regulatory expectations for control environments:

SAR requirements: http://www.fincen.gov/financial_institutions/msb/msbsar.htmlIndependent reviews: http://www.fincen.gov/financial_institutions/msb/pdf/Guidance_MSB_Independent_Audits9-21.pdf


Ten + Years Later . . .Advancement of COSO framework of control principles by accounting profession -focus on risk assessment , and more recently, risk response in newer enterprise framework.Impact on banks

Concepts of risk appetite at the Board level and risk tolerance for managementEnhanced AML risk assessment processes for banks, identification of risk factorsDevelopment and refinement of risk scoring modelsNew COSO-based risk and control measurement and alignment process and technology.

Heightened regulatory expectationsEnhanced Due Diligence (EDD) on MSBs to get there (better risk assessment) Interaction of functional regulatory guidance, FFIEC BSA/AML Examination Manual revisions, greater guidanceGreater focus by functional bank regulators on stronger compliance function and compliance monitoring

Examinations emphasizing need to strengthen processes and controls


Ten + Years Later . . .Proliferation of third party players who might not be directly or clearly subject but who must adopt equivalent compliance standards through service agreements.– Evolution of “soft law” – other U.S. and foreign guidance (e.g.

FATF) on typologies, EDD, risk assessment, monitoring and other controls.

– Law enforcement activity (e.g. see unlicensed money transmitters)

The Gist: These are all factors that point to improvement in the MSB control environment and how MSBs are banked – how banks can better assess and measure their risk and weigh that against their appetites and tolerances.COSO definition of controls: “policies, procedures, and systems”


Ten + Years Later -- Lessons Learned

The importance of national coordination – harmonizing definitions of money services and activities between federal and state levels. “Brick and mortar” versus internet transactions. Does it matter anymore? What will be the impact of technological change within the next five years?How can risk models be improved to consider entity types, activity and transactions, business models, size, volume, other characteristics?


Salient AML/BSA Auditing Considerations for Banking MSBs

(A) Risk appetite – Board approved policy framework(B) Risk tolerances – implementing and operating policies and proceduresDoes B align with A?Risk assessment process in line with regulatory guidance and expectations? Does the risk scoring model make sense? Are the parameters and weights reasonable? If we test it, does it work?EDD: Is it complete? Are the procedures followed? Reviews and approvals? Records and data quality? Consistent? Reasonable basis for KYC? Current? (or stale?) Does management reasonably explain and document comfort level – i.e. “here’s why I am comfortable banking this entity” . . .

Acid test – “Here’s why I am comfortable in my belief that my MSB client has the ability and does KYC well and capably monitors its own customers and has the ability to identify, escalate, investigate and report suspicious activity.”And do they? Do they have a track record?Have I verified their representations and explanations – licenses, audit reports, examinations, registrations, beneficial owner, litigation, enforcement actions, reportable eventsWhat is their “unusual and suspicious” track record? Do we have the ability to comfortably monitor our MSB accounts activities? Do we have controls in place that enable us to ferret out money services activities from all of our customer relationships? (e.g. is Tillie’s Bar & Grill really a check cashing operation that calls itself an haute cuisine restaurant?)

Keeping Perspective . . .

More funds gets electronically transferred around the world by the global banking system in a few minutes than by the non-banking system in a year.


Questions? Alan Abel

Executive and Global AML Practice LeaderRegional Leader, Regulatory Compliance

[email protected]

If you have additional questions for today’s experts, please send them to:

[email protected]

Thank you for joining us today!


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