Money Services Businesses—Victims of the Risk-Based Approach?

Fueled by recent high profile cases such as HSBC’s $1.9 billion money laundering fine, banks have been taking a good look at their risk profile. This has resulted in many banks terminating banking services for money services businesses (MSBs). Barclays, for example, took the decision in 2013 to close around 250 MSB accounts,1 which has had a huge impact on local expatriate communities and the economy of developing countries such as Somalia.2

It should not be forgotten that the combating of money laundering and terrorist financing is an important and daunting task. In 2011, the United Nations Office on Drugs and Crime (UNODC) estimated that $1.6 trillion, or 2.7 percent of global GDP was laundered by criminals.3 Banks and MSBs alike have an important role to play in this fight against crime—but is closing down MSB accounts really the solution or is it just throwing fuel on the fire?

The Importance of MSBs

Major international banks do not have the desire to provide remittance services to a large number of small-value customers. Therefore, MSBs play a vital role in providing remittance services to the “unbanked” and expatriate community. By cutting off this funding channel, these “unbanked” and expatriates will be forced to use more expensive, unreliable and informal channels. Money will end up being stuffed in suitcases, smuggled across borders and is more likely to end up in the hands of criminals and extremists.

According to the World Bank, it was estimated that worldwide, remittance flows reached $550 billion in 2013 and may reach over $700 billion by 2016.4 Remittances are now nearly three times the size of official development assistance and larger than private debt and portfolio equity flows to developing countries. They exceed the foreign exchange reserves in at least 14 developing countries, and are equivalent to at least half of the level of reserves in more than over 26 developing countries. As emerging markets are facing a weakening balance of payments, the importance of remittances as a source of foreign currency earnings is increasing.

Risk-Based Approach vs. Rule Based

The revised FATF 40 Recommendations issued in 2012 focused more on taking a risk-based approach. Banks took this opportunity to review their client risk assessments.5 With regulatory fines fresh in their minds, banks had less appetite to serve high-risk customers. As a result, many legitimate, well-run MSBs became victims of the risk-based approach.

Instead of managing the risks, banks started exiting from the MSB market completely. This sent a signal to other banks that there was something wrong with all MSBs and as a result a ripple effect of account closures is happening across the board.

So, are the regulatory fines and the application of the risk-based approach having the desired effect? Are more money launderers being caught or has it just resulted in many innocent customers being victimized?

Perhaps the market is not mature enough for a risk-based approach without supporting rules. There are guidelines issued by the Financial Action Task Force (FATF) and regulators, but perhaps they do not go far enough for banks to feel confident that they are managing their risks sufficiently to avoid regulatory fines.

Take the HSBC case, for example, the fine was not for money laundering or for holding accounts for MSBs, but because they had weak internal controls. With the absence of clear rules, the reaction of many of the international banks has been to close MSB accounts implying that they are too high-risk to deal with.

What can international bodies do?

  • An internationally recognized certification, similar to an “ISO standard” from an established international body could help MSBs develop a strong compliance program and be able to demonstrate as such. This “seal of approval” would give banks more comfort to hold accounts for MSBs with certified compliance programs.
  • Invite MSB representatives to speak at conferences and demonstrate how their compliance programs work. This helps raise the profile of MSBs and educates the compliance officers of banks, so they feel more comfortable managing these accounts.

What can regulators do?

Correspondent banks are less likely to hold accounts for MSBs in poorly regulated jurisdictions.
Regulators must enforce the regulations consistently across all MSBs under their control. Many countries now have MSB regulations that meet the FATF Recommendations; however, in reality, they are not being followed uniformly by all MSBs.

Customers will always go to the cheapest, most convenient MSB. Convenience means not being asked questions or having to fill out forms and provide supporting documents for transactions. MSBs that are trying to follow the anti-money regulations strictly will often be penalized by losing business to the more relaxed MSBs.

Regulators need to be more proactive in supporting the banking of MSBs. Establish clear guidelines on the due diligence requirements of MSBs, so that banks feel more confident that they are managing their accounts correctly and are not at risk of regulatory fines for banking MSBs.

That is not to say that efforts are not already being made by regulators. For example:

  • In April 2014, the Financial Conduct Authority (FCA) warned firms again that it does not expect them to drop clients unnecessarily simply to avoid money laundering risk. Tracey McDermott, FCA director of enforcement and financial crime, said that the regulator “would rarely expect firms to exit business relationships to avoid risks.” She said “this was unlikely to be the only solution to the problem. We don’t want to end up in a world where the fear of the consequences…will deny people access to legitimate services.”6
  • In early 2014, the Joint Money Laundering Steering Group (JMLSG) published for comment proposed Guidance on MSBs (as customers of banks).7
  • In 2005, FinCEN issued guidelines for banking MSBs.8 This document states:

“As with any category of accountholder, there will be money services businesses that pose little risk of money laundering and those that pose a significant risk. It is essential that banking organizations neither define nor treat all money services businesses as posing the same level of risk… If a banking organization’s risk assessment indicates potential for a heightened risk of money laundering or terrorist financing, it will be expected to conduct further due diligence in a manner commensurate with the heightened risk. This is no different from requirements applicable to any other business customer and does not mean that a banking organization cannot maintain the account.”

Regulators could also:

  • Publicize enforcement actions taken against MSBs for non-compliance of anti-money laundering (AML) regulations. If it is not made public, MSBs will become complacent and will not take the regulations seriously thinking there are no consequences.
  • Insist on minimum training standards for those responsible for compliance of an MSB. A recognized qualification such as Certified Anti-Money Laundering Specialist (CAMS) or completion of other courses recognized by the regulator should be mandatory before a regulator will approve the appointment of a compliance position.
  • Establish agreed-upon procedures for auditors to audit the compliance of MSBs. The quality of AML compliance audits varies widely across different countries. A correspondent bank will have a lot more comfort receiving a detailed transparent audit that demonstrates it has covered all areas of the MSBs compliance rather than a few lines stating that the MSB is compliant with all regulatory requirements.
  • Implement central monitoring of MSB transactions. Transactions above a certain value could be uploaded to the regulators central database on a daily or monthly basis and scrutinized with automated monitoring systems. If MSBs know they are being monitored they are much more likely to comply with the regulations and carry out proper due diligence on their customers.

What can banks do?

Banking MSBs has its advantages. MSB accounts have a high volume of transactions and therefore are good fee income producers. In the current environment, MSB customers are very loyal to their existing bank relationships. Well-run MSBs also make good credit customers. Banks that can become familiar with the risks surrounding these accounts and learn to manage them properly often find that they have solid and profitable bank relationships.9

FinCEN gives clear guidelines on how to conduct enhanced due diligence (EDD) on MSBs:

  • Review the MSB’s AML program
  • Review results of the MSB’s independent testing of its AML program
  • Conduct on-site visits
  • Review list of agents, including locations, within or outside the U.S., that will be receiving services directly or indirectly through the MSB account
  • Review written procedures for the operation of the MSB
  • Review written agent management and termination practices for the MSB
  • Review written employee screening practices for the MSB.

EDD incurs extra costs for the banks; however, it is not unprecedented to take this cost into consideration when formulating the pricing for MSB accounts. Banks could charge a flat fee for all MSB customers with additional fees depending on the account activity.

Banking MSBs and working with them to improve their compliance program should be considered good corporate social responsibility. Not only is it helping society as a whole, but it is also helping the local community by allowing them to send money home to their loved ones.

What can MSBs do?

It only takes one MSB with weak internal controls to damage the reputation of all others. MSBs should work together to improve the strength of their compliance programs across the industry. Set up local MSB associations to share challenges and ideas. Invite the regulators and financial intelligence units to attend meetings and give guidance on areas of compliance they should improve on and updates on money laundering trends and typologies.

Senior management of MSBs need to demonstrate they are serious about compliance and respect their regulatory obligations. They can do this by recruiting properly trained compliance professionals to run their compliance program. It is still common to see a junior member of staff given the responsibility of compliance and then given no support to develop their knowledge or implement the required controls.


With the closure of bank accounts, MSBs are being forced to up their game. MSBs with a strong compliance program will welcome the opportunity to do this, but they need support from the banks, regulators, governments and international bodies.

We need to make MSBs a reputable, highly regulated industry in order to support financial stability and ensure cash flow across borders is not driven into the hands of criminals and extremists.

Rosanna Deamer, MSc, CAMS, MICA, CFE, head of compliance, Bahrain Financing Company, Manama, Bahrain,

The views expressed in this article are those of its author and do not necessarily represent the views of Bahrain Financing Company.

  3. Illicit money: how much is out there? 25 October 2011
  4. Migration and Remittance Flows: Recent Trends and Outlook, 2013-2016, 2 October 2013, The World Bank
  6. FCA warns firms again about AML 'de-risking,' Compliance Complete, Martin Coyle, April 30, 2014
  8. Interagency Interpretive Guidance on Providing Banking Services to Money Services Businesses operating in the United States
  9. 6 Steps for Community Banks to Succeed with Money Services Businesses, ABA Bank Compliance, January | February 2006, Kathlyn L. Farrell

Leave a Reply