De-Risking: Fact or Fiction

Bank discontinuance is no longer just a catch phrase. Some consider it to be not an epidemic but a pandemic. Gone are the days where a MSB could readily open a bank account with their ID and a pen stroke. This is not about blame to the financial institution or even necessarily the regulator. It is a mass combination of perception (or lack thereof), regulations, and clarity.

Bank discontinuance is real and compliance professionals who police money services businesses (MSB) on behalf of banks and credit unions have a much higher bar to ensure compliance.

How did it all start and what effect does it have on every financial institution today who banks an MSB? An MSB can wear many hats—from check casher to wire transmitter, money order seller or foreign currency dealer, to name just a few. Prior to the USA PATRIOT Act, there were limited requirements in banking an MSB, and banks readily opened accounts for them. There was no need for due diligence beyond the usual know your customer (KYC), collecting a signature card, setting up the operations account and determining what the analysis fees might be set.

Then it happened: The creation of a whole new set of rules for the MSB. Had you asked your average MSB then what they thought of the USA PATRIOT Act, they would have told you they do not bet on the NFL Patriots team, unless of course they live in New England. Now, the MSB clearly knows their place in the financial ecosystem when it comes to matters of compliance.

Though many MSBs have done a good job in recognizing their requirements under the regulation, the exiting of them from financial institutions goes back to 2005. The April 26, 2005 Interagency Interpretive Guidance on providing banking services, sought to clarify the responsibilities of banks when providing banking services to MSBs. Banking institutions were instructed to provide MSB banking services "on a risk-assessed basis."1 In other words, the compliance department of a financial institution should not put all MSBs in one basket.

If an MSB cashes local payroll checks of a small denomination for local customers, the bank should certainly not risk them the same as if they were conducting massive amounts of foreign currency transactions on the border. Unfortunately, the word "MSB" suddenly had a death sentence associated with it.

The problem became so prevalent that the U.S. mecca of financial services (New York) and other parts of the country from coast to coast took notice. U.S. Representatives Carolyn B. Maloney (NY), chair of the Financial Institutions and Consumer Credit Subcommittee, and Spencer T. Bachus (AL), ranking member of the Financial Service Committee, introduced the Money Services Business Act of 2007, which was legislation that would ease regulatory burdens on financial institutions that service MSBs. This regulation never came to be.

To further complicate matters, in a bulletin issued in 2011, the Federal Deposit Insurance Corporation (FDIC) described potential risks banks could face by facilitating payment transactions with certain merchants, including a list of categories that included payday lenders and others. The list was later used by the Justice Department in subpoenas to banks. Industry critics have accused the FDIC of creating a "hit list."

On that list was money transfer networks, which depending how you look, covers many MSB's from agent relationships on up. After FDIC's announcement, exiting of MSB bank accounts seemed to be an unstoppable avalanche.

Why is this so important? Well, MSBs have been around since the 1930s as an alternative to banking institutions. According to an article in Forbes magazine, nearly one-third of the U.S. population—106 million people—are either underbanked or unbanked.2 This means that they do not have bank accounts or regularly make non-bank financial transactions. One in five households has zero or negative assets. Twenty-five million people have no credit score, which makes them invisible to the mainstream U.S. financial system. According to the Financial Service Centers of America (FISCA), these consumers either do not want or have been denied access to traditional financial institutions. Every year, financial service centers conduct more than 350 million transactions providing an estimated $106 billion in various products and services to 30 million customers.3 So, if MSBs are wiped out, then in essence you have a mass exodus of unbanked and underbanked who will have to find other solutions, or perhaps go underground with their financial needs.

There are many MSBs feeling the heat. For example, Charles, a check casher of over 28 years, was one of many victims. He had been through two banks in the past 15 years. The first one exited him after 14 years and the other just after one. With the 30 days' notice he received prior to his account closure, he was not able to find a new bank and was forced to sell his business at a less than desirable price.

Cathy Scharf who has spent 30 years in banking and 10 years as a Bank Secrecy Act (BSA) compliance officer and who is currently with National Bank Holdings (NBH) bank in Colorado, was asked if she believes MSB bank discontinuance is a myth or reality. Her response was "Bank discontinuance is a reality. Bigger banks are de-risking because they are under scrutiny due to increased regulation and oversight and therefore have to maintain a much higher level of staff and controls, which many institutions find not worth the time, effort, or expense."

She went on to say "that there is also reputational risk to be considered including Unfair, Deceptive or Abusive Acts and Practices (UDAP) and other requirements which are a daily part of the process of MSB banking and boarding." Scharf added, "If the MSB does something wrong, or doesn't have controls, the regulator will look at the bank. If the bank doesn't catch the MSB error, the bank may pay the price. Bottom line, we (banks) are charged with making sure the MSB is compliant if they wish to maintain an account with us."

It is All About the Risk…

Banks can successfully bank an MSB, and MSBs can be a profitable part of the bank's portfolio. Per deposit fees, change order fees, check fees, uncollected funds fees and other fees tend to make up the MSB fee portfolio of a bank. MSBs have been known to pay thousands per month to maintain an account with the bank in order to maintain their account(s).

According to Scharf, "MSBs are often high risk and therefore require enhanced due diligence (EDD). In addition, if banks wish to board an MSB or MSBs, they may need to be reviewed quarterly, which includes a sampling of transactions, trend analysis, negative news searches, review of licenses and flow of funds between accounts. It's a massive undertaking from the pre-USA PATRIOT Act to now."

Furthermore, according to Scharf, "the costs for a financial institution to bank MSBs can be as much as four times higher than let's say a dry cleaner account." Banks should not, however, be deterred. By creating an appropriate risk matrix, especially designed for MSBs and conducting the proper due diligence, compliance departments can begin to turn the tide of bank discontinuance.

So, what should the compliance department consider when deciding whether to bank an MSB?

  • Does the MSB have a solid compliance program in place?
  • Does the MSB conduct internal monitoring and independent reviews based on its risk?
  • Are the MSB licenses and registrations current?
  • How many types of services does the MSB provide?
  • Does the MSB conduct cross-border transactions?
  • Are the primary services provided conducted in an agent relationship with a large MSB (i.e., Western Union, Money Gram, etc.)?
  • Does the MSB have limits in place when conducting its services?
  • Does the MSB cash commercial checks?
  • What is the age and experience of the MSB?
  • Is the MSB in a High Intensity Financial Crime Area (HIFCA) or High Intensity Drug Trafficking Area (HIDTA)?
  • Does the MSB have agents of its own?

These are but a few of the considerations a compliance professional must look at in order to determine whether a bank should or should not bank an MSB. Other items to consider include whether the bank should allow the MSB to make use of remote deposit capture (RDC), which may require enhanced monitoring on the bank's part. In addition, compliance professionals need to consider when the bank last paid a visit to the MSB to conduct an onsite visit.

Scharf was clear: "We know our customers and we expect our MSBs to know their customers in addition to having a solid anti-money laundering (AML) program, including the four pillars in place, and to make sure that their monitoring is consistent. We always take a risk-based approach when deciding whether or not to open the MSB account."

In Bulletin 2014-58, issued by the Office of the Comptroller of the Currency (OCC) on November 19, 2014, the OCC in part stated that:

"MSBs present varying degrees of risk to an institution. Not all MSBs should be considered high risk. In keeping with the OCC's mission and commitment to ensuring all customers have fair access to financial services, the agency expects OCC-regulated banks to assess the risks posed by each MSB customer on a case-by-case basis and to implement appropriate controls to manage the relationship commensurate with the risks associated with each customer." Furthermore in the bulletin, the OCC stated that:

  • "The OCC does not direct banks to open, close, or maintain individual accounts, nor does the agency encourage banks to engage in the termination of entire categories of customers without regard to the risks presented by an individual customer or the bank's ability to manage the risk.
  • MSBs present varying degrees of risk.
  • Banks are expected to assess the risks posed by an individual MSB customer on a case-by-case basis and to implement controls to manage the relationship commensurate with the risks associated with each customer."4

On November 10, 2014, the Financial Crimes Enforcement Network (FinCEN) issued a statement.

"Money services businesses (MSBs), including money transmitters important to the global flow of remittances, are losing access to banking services, which may in part be a result of concerns about regulatory scrutiny, the perceived risks presented by money services business accounts, and the costs and burdens associated with maintaining such accounts.

MSBs play an important role in a transparent financial system, particularly because they often provide financial services to people less likely to use traditional banking services and because of their prominent role in providing remittance services. FinCEN believes it is important to reiterate the fact that banking organizations can serve the MSB industry while meeting their Bank Secrecy Act obligations.

Currently, there is concern that banks are indiscriminately terminating the accounts of all MSBs, or refusing to open accounts for any MSBs, thereby eliminating them as a category of customers. Such a wholesale approach runs counter to the expectation that financial institutions can and should assess the risks of customers on a case-by-case basis. Similarly, a blanket direction by U.S. banks to their foreign correspondents not to process fund transfers of any foreign MSBs, simply because they are MSBs, also runs counter to the risk-based approach. Refusing financial services to an entire segment of the industry can lead to an overall reduction in financial sector transparency that is critical to making the sector resistant to the efforts of illicit actors. This is particularly important with MSB remittance operations."

In summary, can or should all MSBs be banked? No, but a vast majority should and can be with cooperation from the MSB and strong processes in place by the bank and its compliance department. Banking an MSB can be both a positive and profitable experience for the bank and the MSB. If, however, bank discontinuance continues to be allowed to erode our financial fabric, there is no telling what those unbanked and underbanked (ranging in the millions upon millions) will have to do without those services they so heavily depend upon on a daily basis.

Bob Frimet, CAMS, president, RMF Consulting Group, Las Vegas, NV, USA,

  1. "Interagency Interpretive Guidance on Providing Banking Services to Money Services Businesses Operating in the United States," FinCEN, April 26, 2005,
  2. Ashoka, "Banking the Unbanked: A How-To," Forbes, June 14, 2013,
  3. "FISCA History," FISCA,
  4. "Statement on Risk Management," Office of the Comptroller of the Currency, November 19, 2014,

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