Money Service Business: A Spring Cleaning Checklist

A cease and desist order was recently issued against a major money service business (MSB). That signals heightened regulatory scrutiny across the industry. It would be prudent to prepare. MSBs face strict state and federal requirements. A thorough "spring cleaning" helps. Audit and monitor your systems and procedures. Make sure every part of the business meets industry best practices. This approach guards against legal and financial pitfalls. It also positions the business to capture growth and improve performance in a competitive market.

From AML to Regulation E to licensing, here is a checklist of key areas for MSBs to review.

AML Best Practices

MSBs face strict Anti-Money Laundering (AML) compliance demands because they are vulnerable to financial crime. This guide outlines the AML measures MSBs need. That starts with an AML program, as required by the Bank Secrecy Act (BSA). The program is a set of internal policies, procedures, and controls. Tailor it to the MSB's size, complexity, and risks. The goal is to prevent, detect, and report illicit activity.

AML Checklist

Designate a BSA/AML Officer

The first step toward AML compliance is appointing a dedicated BSA/AML officer. This person develops, implements, and oversees the AML program. The officer should know BSA/AML regulations well, have the authority to enforce compliance, and have direct access to the board of directors.

Develop Internal Controls

Internal controls form the framework of your AML program. They include policies and procedures tailored to your business's risk profile, transaction monitoring systems, and controls for timely, accurate regulatory reporting. A strong system of internal controls helps you identify and reduce risks and stay compliant with AML requirements.

Provide Ongoing Training

Training is a core part of any AML program. All relevant employees should get regular training on BSA/AML regulations, internal policies, and procedures, and on how to recognize and handle suspicious activity. Tailor the training to each employee's role. Update it to reflect changes in regulations or operations.

Conduct Independent Testing

Independent testing or auditing of your AML program is essential to confirm it works. This can be done by an internal audit department or an external third party. The testing should assess your AML policies, procedures, and controls, and your compliance with BSA/AML requirements.

Perform Risk Assessment

An AML risk assessment identifies and evaluates the AML risks in your operations. This includes risks tied to your customer base, products and services, geographic locations, and transaction methods. The findings should shape the design of your AML program.

Implement Customer Identification Program (CIP)

A major part of AML compliance is knowing who you do business with. Implement a CIP with procedures to verify each customer's identity, keep customer records, and check whether the customer appears on any government list of known or suspected terrorists or terrorist organizations.

Report Suspicious Activities

Set up ways to detect and report suspicious activity. Monitor transactions for anything inconsistent with the customer's known legitimate business, personal activities, or risk profile. Report any suspicious activity to FinCEN using a Suspicious Activity Report (SAR).

Comply with Recordkeeping Requirements

Keep a record of all relevant compliance documentation. That includes risk assessments, training materials, internal control manuals, customer identification data, and suspicious activity reports. Retain these records for at least five years.

Implement a Strong Sanctions Screening Program

Comply with OFAC sanctions by running a strong sanctions screening program. Screen all customers, transactions, and third parties against OFAC's Specially Designated Nationals (SDN) list and other sanctions lists.

Monitor and Manage Agents

If your MSB operates through agents, set up procedures to monitor and manage them so they comply with your AML program.

Implement Information Sharing Procedures

Establish procedures for sharing information with other financial institutions and law enforcement, in line with Sections 314(a) and 314(b) of the USA PATRIOT Act.

Stay Updated on Regulatory Changes

Finally, keep up with any changes in BSA/AML regulations and update your AML program to match.

For more information on AML best practices, check out MSB AML Best Practices by MSBA.

Regulation E Procedures

The Electronic Fund Transfer Act (EFTA), implemented through Regulation E, sets the rights, liabilities, and responsibilities of participants in electronic fund and remittance transfer systems. For MSBs, complying with Regulation E is essential to keep operations running smoothly and protect consumers.

Understand the Scope

Start by learning the scope of Regulation E. It applies to electronic fund transfers (EFTs), prepaid accounts, gift cards, and gift certificates.

Review Disclosure Requirements

Regulation E requires MSBs to give consumers clear, concise disclosures. Review your disclosure practices for compliance. Disclosures should cover fees, error resolution, and unauthorized EFTs.

Assess Error Resolution Procedures

MSBs must have effective error resolution procedures. Review yours against the requirements of Regulation E. Investigate and resolve consumer complaints about EFTs promptly.

Stay Updated on Fee Limitations

Regulation E limits fees for certain services, such as gift cards and prepaid accounts. Learn these limits and make sure your fee structure complies.

Implement Safeguards Against Unauthorized EFTs

MSBs must have strong security to protect consumers against unauthorized EFTs. Review your security protocols and add safeguards such as encryption and strong authentication.

Evaluate your Remittance Transfer Practices

If your MSB offers remittance transfers, review your practices for compliance with the Remittance Rule under Regulation E. Pay attention to disclosure requirements, error resolution, and cancellation rights.

Train Employees

Educate your employees about Regulation E. Train them on disclosure practices, error resolution procedures, and security protocols so compliance stays consistent across your organization.

Maintain Accurate Records

Regulation E requires MSBs to keep accurate records of EFTs and remittance transfers. Review your recordkeeping and retain all needed documentation for the required timeframes.

Monitor Changes and Updates

Stay informed about changes to Regulation E. Monitor announcements and updates from the Consumer Financial Protection Bureau (CFPB) to keep up compliance.

Conduct Periodic Internal Audits

Run regular internal audits to assess your compliance with Regulation E. Identify any gaps and take corrective action.

Establish a Complaint Resolution Process

Build a strong complaint resolution process for consumer grievances about EFTs and remittance transfers. Investigate and resolve complaints promptly to keep consumer trust.
For more information on Regulation E and other regulatory guidelines, visit the CFPB website.

Consumer Fairness

MSBs provide financial services, often to people who lack access to conventional banking. With that comes a duty to follow regulatory norms focused on consumer fairness.
Key regulations to consider

For MSBs, several regulations come into play, including but not limited to:

• Unfair, Deceptive, or Abusive Acts or Practices (UDAAP)
• Privacy (Regulation P)
• Truth in Lending (Regulation Z)
• Fair Credit Reporting Act (FCRA)
• Servicemembers Civil Relief Act (SCRA)
• Americans with Disabilities Act (ADA)
• Fair Debt Collection Practices Act (FDCPA)

These regulations aim to protect consumers and ensure fairness. That makes them critical for any MSB.

Risk Identification and Prioritization

Conduct risk assessments across public-facing operations and third-party vendors. These assessments help you identify and prioritize risks that could affect your reputation.

Consumer Journey Assessment

Assess the consumer journey, including marketing, product and service design, and delivery. Build consumer protection and fairness into each step.

Consumer Complaint Data Analysis

Analyze consumer complaint data to group concerns, find root causes, and deploy focused responses. This improves control operations and the complaint resolution process.

Simplification of Public Communications

Simplify public communications and your policies and procedures. Consumers should clearly understand your terms and conditions, and employees should be able to explain your standards clearly.

Review of Marketing Materials

In the spirit of a thorough spring cleaning, review your marketing materials. Make sure they reflect the regulatory standards and best practices above.

Audit your website, marketing collateral, and social media profiles. Keep branding consistent. Update content regularly with relevant information. Make sure every claim is accurate, not misleading, and compliant with advertising laws. Verify that all terms and conditions for your services are clearly stated. Finally, check for required legal disclaimers and risk warnings.

Customer Receipts Examination

Confirm that receipts include all necessary transaction details, such as amount, date, fees, and customer rights. Make sure they comply with local and federal laws on transaction records. Finally, review them for clarity so customers understand them.

Licensing

Proper licensing is essential for your MSB to stay compliant. You need to understand both federal and state requirements.

Almost all MSBs must register with the U.S. Department of the Treasury by filing through the BSA e-Filing System. The term "money service business" covers several roles, such as currency dealers or exchangers, check cashers, issuers of traveler's checks, and, importantly, money transmitters.

If your company is in the business of transferring funds, regardless of the amount, you generally must obtain a money transmitter license and renew it. Nearly every state has some version of a money transmitter license that you must obtain.

There is no minimum or maximum threshold. Any fund transfer activity falls under this requirement. You may need to re-register after changes in ownership or control, or an increase in the number of agents.

Operating without proper licensure and registration can bring civil and criminal penalties.

Multi-State Licensing

If your money transmitter business operates across multiple states, you will need to meet the licensing requirements in each state where you do business.

Local Licensing Requirements

Beyond state rules, consider any local or municipal licensing requirements that may apply to your location.

Money Transmitter Laws and Virtual Currency

The landscape for money transmitters is changing, especially with the rise of virtual currencies (cryptocurrencies). Make sure you comply with the laws and regulations for virtual currency transactions.

Application and Renewal Process

Compile all necessary documentation, including business incorporation details, AML policies, and proof of compliance with local regulations. Follow renewal schedules strictly to avoid lapses in licensure, which could bring penalties or disrupt operations.

Cornerstone Can Help

Licensing can be complex and feel overwhelming. Requirements keep changing, and each jurisdiction has its own applications, fees, and timing. Cornerstone Licensing Services can help with all your licensing needs. With 25 years and over 500k filings behind us, Cornerstone has grown into one of the largest, highest-rated, and most experienced licensing companies in the industry. Our success is built on our commitment to service and the expertise of our team, who have deep knowledge and trusted relationships with each state and jurisdiction. We know you have a lot on your plate. We give you a solution that frees you from the burden of licensing, done right and on time, every single time. That is why we are the best in the industry at helping you obtain and renew your licensing. Connect with us today to build a solution specific to your business.

Conclusion

Amid rapid regulatory expansion, MSBs need to stay vigilant and proactive about compliance. The recent crackdown signals that MSBs should prepare for closer scrutiny. That reinforces the need for a culture of compliance and due diligence.
By adopting thorough review processes and staying informed about regulatory developments, MSBs can protect their operations against pitfalls. They can align with the best practices and expectations of the regulators. That supports not only their survival but their growth and lasting success in a competitive market.