Keeping Up with the Compliances: A 2020 AML Guide for Money Service Businesses

Money laundering has become a huge problem worldwide. Money service businesses or MSBs have become the new vehicle for criminal groups to laundry cash and move it across the borders and inside countries. Thus, AML regulations are tightening towards MSBs, making sure that they do everything to prevent criminal activities. In this article, I will take a look at which businesses count as Money Services and how they can stay compliant and lawful.
Which Businesses Count as MSBs?
A money service business (MSB) refers to a company or person that deals in the transmission and conversion of money. Term MBS is used to separate those financial services with banks and other institutions.

Back in 2017 MBSs in the US were operating more than $1 trillion, which is a huge part of every country’s economy.
Every money transmitting company counts as MBS, however, money conversion company can be counted as MBS only if the average check per person exceeds $1000 (the US regulations).
MSB can also include companies in the field of e-commerce, , crowdfunding, travel money, etc. FinCEN has defined the types of businesses that can be counted as MBS.
Those are the companies that:

  • Issue cash checks
  • Issue traveler’s checks
  • Produce money orders
  • Create stored value products
  • Sell or redeem money orders, traveler’s checks, or stored value products
  • Money transmitters
  • Foreign currency exchange services
  • U.S Postal Service
  • Some cryptocurrency businesses and exchanges, including .
  • As it was stated before, banks are not counted as MSB and in most cases comply with slightly different regulatory requirements.
    AML and KYC Requirements for MSBs
    Usually, MBS should follow the legal acts of the country they are registered in.
    For instance, in the USA, MSBs must comply with the Banking Secrecy Act and must register with the Financial Crimes Enforcement Network (FinCEN). The registration does not last forever, MSBs need to renew it every two years.
    In the UK, MSBs must register to become an AML-supervised business with Her Majesty Revenue and Customs department (HMRC). Money transmission types of MSBs need to follow the Payments Regulation 2015 and the Payment Services Regulations 2017. Those legal acts state that information must be reported in regards to fund transfers.

    Dmitri Laush, CEO of GetID,
    Both of the above countries have quite common regulations for MSBs. First of all, AML regulations require MSBs to take AML compliance measures. Part of those measures refers to the identity and verification of the customers and their personal data (known as ‘Know Your Customer’ or KYC).
    These AML policies also need to find and highlight potentially suspicious behavior, along with processes for this activity to the relevant bodies. MSBs must also report transactions that exceed $10,000 (in the US) or 10,000 EUR (in Europe).
    To comply with the Banking Secrecy Act in the USA, MSBs should have a person or even the team to deal with AML regulation compliance inside the company. The MSB must provide up-to-date AML training to all MSB’s compliance staff.
    Money services need to make independent audits once in while to demonstrate AML compliance. MSBs also need to keep records in case of a third-party audit. Some types of records need to be held on file for up to five years.
    The Role of KYC in MSB AML Compliance
    Know Your Customer (KYC) is an important part of AML policy for any company dealing with money. What does it include? The identification and authentication of customers during the user onboarding process. Customers must prove that they are not criminals or fraudsters, that they don’t use a fake ID.
    KYC processes can help to identify risky customers in the onboarding process as well as suspicious transactions. Personal Identifiable Information (PII) is gathered from a customer, including full name, date of birth, and an address. MSBs also need to collect official documents, such as a passport or driver’s license.
    After the verification process, customer’s information is compared to official databases that highlight Politically Exposed Persons (PEPs) and anyone on the Sanctions List. This will highlight the potential clients who might use the money for laundering, terror funding, or other criminal activity.
    Traditionally, the verification process is done manually by third-party verifiers. This means it is slow, expensive, and peppered with errors. As technology moves forward, there started to appear automated identity verification solutions.
    As it was stated above, MSBs are not the banks, KYC procedure can differ for them when it comes to customer due diligence (CDD). The main difference is that banks are more likely to complete enhanced due diligence (EDD) because of the higher value of transactions that occur.
    EDD is very strict in comparison to KYC or CDD. However, if MBS is dealing with the big sums of money, it might be needed to complete EDD procedures too.
    Why is AML Compliance So Important for MSBs?
    Even though it is necessary, proper AML compliance is very costly for any business. So why is it so important to stay compliant with regulations?
    MSB AML Compliance is a Barrier to Financial Crime
    Only AML compliance can keep any MSB users away from fraudsters. Also not following the regulations can lead to serious penalties from the authorities.
    A good example is Western Union, one of the most famous MSBs in the world, which was fined $600 million for poor AML compliance. Why can the fines be that big? Because Western Union became a prime target for criminal money transactions and staff members helped the process. Western Union office in China, not on purpose of course, had helped illegal immigrants and human traffickers structure payments in a way to not trigger Bank Secrecy Act reporting requirements.
    British police fear that MSBs are preferred by criminals because of their propensity to deal in cash. The Metropolitan Police found that MSBs are linked to drug trafficking rings, as opposed to banks that have more stringent regulations. The network of 35,000 MSBs in the UK helps criminals easily launder small amounts of money and go largely unnoticed.
    MSB AML Non-Compliance Can Result in Company-Crumbling Fines
    As I have mentioned before, poor AML compliance can lead to serious penalties.
    Another example is Touma Foreign Exchange Ltd which was accused of the 10.1 million pound fine from the HMRC in the UK. HMRC identified shortcomings in ‘fundamental’ customer due diligence controls, staff training, and financial risk assessments. The company went bankrupt because the fine was indeed huge.
    Ignoring AML regulations is no longer an option. With such significant clampdowns on money services firms, non-compliance is likely to result in fines that will put MSBs out of business.
    MSB AML Compliance Protects Company Reputation
    When firms are identified as falling short on AML, it scares customers into believing that these companies aren’t safeguarding their clients. As a result, customers might avoid the company which might lead to reduced profits. Recently, for example, Danske Bank has lost and an annual profit drop of around $12 billion.
    The prospect of criminal activity and fraud in an MSB not only worries customers but also shakes investor confidence. This was seen when PayPal’s AML policy information was subpoenaed due to suspicion that the company’s procedures were not up to scratch. Almost immediately, share prices fell by 1.5%.
    Protection against financial criminality is not only important to authorities but also to the clients within MSBs. When it comes to money services, customers need to know that they trust their money to secure service, otherwise, they would choose another one.
    The AML Compliance Pain Points for MSBs
    To stay compliant is not a piece of cake for any financial service provider. And here is why.
    Strict KYC/AML Become A Hard Part For The New Customers
    KYC procedures are an important part of AML compliance, but the proper process can take a lot of time which in most cases is annoying for the new users.
    Customers expect MBS to be easier to deal with than banks, and they might be really disappointed if they will need to provide the same amounts of documents and the process will be the same length. Statistics show that 48% of MSBs felt that KYC and AML compliance is a barrier to innovation.
    Studies show that 52% of customers leave the MBS they initially applied to. This figure has increased by 35% in the last two years. This is a big loss and it is partly caused by a slower onboarding process due to detailed KYC.
    However, there is still a lack of standardization for KYC and AML procedures. External third-party verification mechanisms aren’t transferable between companies, and this, in turn, creates friction.
    The Cost of MSB AML Compliance is Rising
    In response to heightened regulations, MSBs need to put more rigorous AML processes in place. The problem is, these compliance programs cost a lot.
    There is a need to hire staff dealing with compliance, and it is additional expenses for the company. In addition, more rigorous KYC procedures mean amplified spending on external verification and remedying errors caused by manual processing.
    For instance, Revolut recently has increased its compliance team by a third and it sure caused a lot of expenses. Global compliance spending sits close to $270 billion, with about 10 to 15 percent of the MSB workforce dedicated to ensuring regulatory compliance.
    The cost of compliance shows no signs of slowing down. For smaller companies and startups, these costs will continue to impact profit margins and the ability to scale.
    Manual Processing is Highly Error-Prone
    Manual processes involve third-party verifiers checking applicants against databases and official documents by hand. Human mistakes are very common, but in this case, they might be crucial for the whole company.
    While the banking industry has started to implement more standardized procedures, the vulnerability of the KYC process is heightened with MSBs and their unique needs.
    Future KYC solutions need to tackle the shortcomings of manual systems. The solution to the problem might be the use of the digital, automated KYC tool. It might be less expensive too.
    In Conclusion
    Compliance is essential for all money services. Because of this, it is very important for any MSB to have a compliance team and implement KYC procedures for customers’ identification. MSBs are feeling the full force of costly verification procedures and staffing, slow onboarding, and poor KYC accuracy. But since AML compliance is a must, it might be the right time for MSBs to implement a modern and automated solution. That will enable MSBs to streamline the customer onboarding process and stay regulatory compliant.
    Dmitri Laush, CEO of , an omnichannel identity verification solution

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