Banking Florida’s Money Service Businesses – Part 1

By John Vardaman

Overview

The practice of de-risking has become an all-too-familiar storyline: In the face of a challenging regulatory environment, banks are terminating whole categories of customers considered too risky to justify commensurate compliance costs. Few industries have suffered more from de-risking than money services businesses (MSBs), which have effectively become pariahs in certain banking circles.

Nowhere have the challenges of banking MSBs been felt more acutely than in Florida. Home to nearly 2,000 MSB principals alone, Florida’s economy depends on a variety of MSBs, such as check cashers, money transmitters, and foreign exchanges. But Florida’s robust MSB market has also attracted federal scrutiny in recent years, including enforcement actions against financial institutions for insufficient oversight of their MSB customers, and geographic targeting orders against south Florida check cashers. The perceived risks of servicing MSBs eventually prompted many Florida banks to terminate their MSB accounts.

There can be no faulting a bank for making the rational business decision to exit a market whose risks outweigh its rewards. But lost amid the attention as to the causes of de-risking is a recognition of the tremendous opportunity created by the wholesale termination of MSB accounts. De-risking is literally creating a new market of customers for financial institutions willing and able to service MSBs. Through a combination of improving regulatory conditions and new technologies, we believe it is time for a reassessment of banking MSBs – as opportunities to be seized, not problems to be avoided.

Regulatory Environment

There are indications that the regulatory pressure on banks serving MSBs may be easing. After all, MSBs are legal businesses that provide a range of essential services to segments of society lacking access to the formal financial system. In 2014, FinCEN issued a statement acknowledging the vital role MSBs play in our financial system and criticizing the practice of de-risking against these entities. Specifically, the statement noted that “FinCEN does not support the wholesale termination of MSB accounts without regard to the risks presented or the banks’ ability to manage the risk.”  These sentiments have been echoed by the head of the OCC.

MSBs also stand to benefit from the Trump Administration’s pledge to significantly curtail existing business regulations. A critical indicator will be how President Trump handles the Consumer Financial Protection Bureau, which has been a leading critic of MSBs and the financial services industry. If, as many expect, President Trump replaces the current head of the CFPB, that would send a powerful message that the regulatory environment for MSBs will be more hospitable for the foreseeable future.

Regulators’ Expectations

There is a significant amount of guidance regarding the banking of MSBs. FinCEN, FDIC, FFIEC, and state DFI’s, including Florida’s OFR, all provide information regarding regulation and best practices. Sample examination work program documents are available from FinCEN that are an extraction of the Bank Secrecy Act/Anti-Money Laundering Examination Manual for Money Service Businesses.

It is important to note that while banks are expected to manage risks associated with all accounts, they will not be held responsible for their customers’ compliance with the BSA and other applicable federal and state laws and regulations. According to FinCEN, “the Bank Secrecy Act does not require, and neither does FinCEN expect, banking institutions to serve as the de facto regulator of the money services business industry any more than of any other industry.”

The question then becomes: How do banks manage associated risks even though they are not responsible for the BSA obligations of their MSB customers? This is accomplished through appropriate risk analysis, initial due diligence, and on-going risk assessment. Each of the various types of MSBs have their own attributes and their risks may vary accordingly. In addition, each MSB will be different in their experience, dollar volumes, and available resources.

In order to properly perform risk analysis, a bank must monitor the performance of their MSB clients both in initial due diligence and through on-going monitoring. To successfully perform these functions, regulators are increasingly expecting banks to forgo manual processes in favor technological solutions.

As I will discuss in my next post, new technologies are enabling banks to service MSBs with unprecedented levels of transparency and compliance. 

John Vardaman is executive vice president and general counsel for Hypur. Email him at jvardaman@hypur.com.