The money service business industry relies on banking continuity, which is heavily influenced by compliance and regulation. There are currently several shifts occurring in the realm of bank regulation that will likely affect MSB banking relationships. One push is for lightened regulation that will allow banks to pursue law enforcement leads in their fight against financial crime. A second trend is for improved data analytics to help banks and MSBs identify trends and prevent fraud. Both movements center around increasing efficiency, transparent communication, and teamwork to head off financial crime in the United States.
Big U.S. banks are pushing for a change in AML regulation they deem too burdensome and expensive. Many of the regulations in question were formed after 9/11 and then strengthened under the Obama administration. An example of a regulation that banks are protesting is the Suspicious Activity Report (SARs) requirement. This regulation calls on banks to report any suspicious activity through detailed reports sent to FinCEN, a regulatory body of the U.S. Treasury.
According to a Reuters report, bank representatives claim to be over reporting suspicious activity in an attempt to avoid costly fines and judicial action. FinCEN reports that SARs jumped from 669,000 in 2013 to nearly 1,000,000 in 2016. To avoid the cost and effort required by SARs, banks will shift to a law enforcement-driven approach to financial regulation. In essence, the majority of regulations aimed at preventing and prosecuting financial crimes would be scrapped and banks would instead take their cues from law enforcement agencies.
When agencies have a lead or tip relating to financial criminal activity, this will be relayed to the pertinent financial institutions. Banks will then use this intel to shape their efforts to thwart money laundering, fraud, and related financial crime. To help the proposed process run smoothly, the Clearing House is calling for information-sharing for data between banks. This is the first time that the Clearing House, a trade organization formed by big banks before the Federal Reserve was founded, is advocating for regulation reform.
It is unlikely that the SARs system will go down without a fight. After all, the agencies involved have spent years honing the process for productive financial crime investigations. How will this work under the new administration? Financial experts expect that President Trump will be tough on money laundering, despite his overarching push to deregulate. No matter what happens at the federal level, state regulators will still have a say in how the banks in their jurisdiction handle compliance and regulation.
Since the current regulations place responsibility with the financial institutions and businesses involved in the transactions, data analytics is vital. As banks and MSBs work to detect and prevent financial fraud, they collect a myriad of data points in a variety of formats. Through KYC metrics to reports to record keeping, this data is a goldmine for spotting trends and getting ahead of ever-changing risk.
AML regulation has evolved since its origin in the Bank Secrecy Act (BSA) of 1970 to reach this tipping point. The BSA established the first requirements for record keeping for banks and financial institutions. It also sought to identify the sources of currency moving through the system and established reporting metrics for banks. In 1986, the Money Laundering Control Act (MLCA) made money laundering a federal crime, set protections against transactions strategically structured to avoid regulation, and directed banks to create compliance programs.
Additional money laundering regulation in the 1980s and 1990s strengthened the BSA framework, reinforced and increased penalties for non compliance, and further established systems for reporting (as seen in the SARs requirement.). During this time, regulation also set out guidelines for the formal training of compliance officers for financial institutions. The Money Laundering and Financial Crimes Strategy Act of 1998 also created task forces to streamline and concentrate law enforcement efforts across all levels – focusing efforts in areas with pervasive money laundering activity.
In 2001, the USA PATRIOT Act responded to the terrorism on 9/11 with even stronger regulation aimed at stopping international money laundering and financial terrorism. The USA PATRIOT Act built on the BSA framework by reinforcing customer identification procedures. The Act moved further to require due diligence procedures for banks and improve information sharing between financial institutions and agencies. In addition, the Act expanded AML requirements to all financial institutions and increased the civil and criminal penalties for money laundering.
Each of these measures passed in an effort to combat money laundering and reduce financial crime. In doing so, the acts require more from banks in the form of diligence, reporting, and record keeping. The regulation-averse financial services industry is now working to streamline these regulations to improve efficiency and reduce the responsibility and commitment currently required of banks.
What does this mean for the money service business industry and its banking relationships? We won’t know until formal proposals are drafted, but compliance will always remain an important piece of the MSB banking services puzzle. To facilitate swift communication, detailed record keeping, and appropriate reporting, MSBs should implement and maintain strong compliance programs.
One piece of the AML regulation puzzle is POS check cashing technology that aids in the capture and recording of customer metrics. POS technology also allows check cashing employees to run customer information through the relevant databases to catch red flags before they blossom into full blown fraud. POS systems also work to streamline communication and give your banking partner a clear picture of every transaction. Strategic MSB services, including 24/7 customer support and compliance consulting, work to further reinforce the efficiency of money service businesses.
NCC partners with MSB clients across the country to keep them ahead of the regulatory curve. Our team of industry veterans includes former financial regulators and check cashers who know the business inside and out. Our expertise and our strong systems keep your MSB up and running efficiently. The hallmark of our business model is our exclusive network of MSB friendly banks who provide real MSB bank accounts to our clients. The result? Your MBS enjoys reliable banking so that you can focus on your customers and growing your business.