Money Service Business: A Spring Cleaning Checklist

April 10, 2024
By Cornerstone Staff

With a cease and desist order recently issued on a major money service business (MSB), it would be prudent to prepare for heightened regulatory scrutiny in the industry. Facing strict state and federal requirements, MSBs are recommended to conduct a thorough “spring cleaning” by auditing and monitoring systems and procedures, ensuring all facets of the business align with the highest standards of industry best practices. This strategic approach not only safeguards against potential legal and financial pitfalls but also positions businesses to seize growth opportunities and enhance their business performance in the competitive financial market.

From AML to Regulation E to licensing, we have compiled the following checklist for MSBs to outline key areas for review.

AML Best Practices

MSBs face stringent Anti-Money Laundering (AML) compliance demands due to their vulnerability to financial crime. This guide outlines the necessary AML measures for MSBs, including the development of an AML program as mandated by the Bank Secrecy Act (BSA). This program consists of internal policies, procedures, and controls that should be tailored to the MSB’s size, complexity, and inherent risks, aimed at preventing, detecting, and reporting illicit activities.

AML Checklist

Designate a BSA/AML Officer

The first step towards AML compliance is appointing a dedicated BSA/AML officer. This individual shoulders the responsibility of developing, implementing, and overseeing the AML program. The officer should be sufficiently knowledgeable about BSA/AML regulations, have the necessary 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. These include policies and procedures tailored to your business’ risk profile, transaction monitoring systems, and controls for timely and accurate regulatory reporting. A robust system of internal controls helps in identifying and mitigating potential risks, ensuring adherence to AML requirements.

Provide Ongoing Training

Training is an integral part of any AML program. All relevant employees should receive regular training on BSA/AML regulations, internal policies, and procedures, as well as the recognition and handling of suspicious activities. The training should be tailored to the employee’s specific role and responsibilities and updated to reflect changes in regulations or business operations.

Conduct Independent Testing

Independent testing or auditing of your AML program is crucial to ascertain its effectiveness. This can be done through an internal audit department or an external third party. The testing should evaluate the adequacy of your AML policies, procedures, and controls, as well as your compliance with BSA/AML requirements.

Perform Risk Assessment

Performing an AML risk assessment involves identifying and evaluating the potential AML risks inherent to your business operations. This includes assessing the risks associated with your customer base, products and services, geographic locations, and transaction methods. The findings of this assessment should inform the design and implementation of your AML program.

Implement Customer Identification Program (CIP)

A major piece of AML compliance is knowing who you are doing business with. Implement a CIP that includes procedures to verify the identity of each customer, maintain customer records, and determine whether the customer appears on any governmental lists of known or suspected terrorists or terrorist organizations.

Report Suspicious Activities

Set up mechanisms for detecting and reporting suspicious activities. This involves monitoring transactions for any activity that is inconsistent with the customer’s known legitimate business, personal activities, or risk profile. Any suspicious activity should be reported to FinCEN using a Suspicious Activity Report (SAR).

Comply with Recordkeeping Requirements

Maintain a record of all relevant compliance documentation, including risk assessments, training materials, internal control manuals, customer identification data, and suspicious activity reports. These records should be kept for a minimum of five years.

Implement a Robust Sanctions Screening Program

Ensure you comply with OFAC sanctions by implementing a robust sanctions screening program. This involves screening 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, establish procedures for monitoring and managing these agents to ensure they comply with your AML program

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Implement Information Sharing Procedures

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

Stay Updated on Regulatory Changes

Finally, keep abreast of any changes in BSA/AML regulations and update your AML program accordingly.

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, establishes the rights, liabilities, and responsibilities of participants in electronic fund and remittance transfer systems. For MSBs, ensuring compliance with Regulation E is crucial to maintain a smooth operation and protect consumers.

Understand the Scope

Begin by familiarizing yourself with the scope of Regulation E. It applies to electronic fund transfers (EFTs), prepaid accounts, gift cards, and gift certificates.

Review Disclosure Requirements

Regulation E mandates that MSBs provide clear and concise disclosures to consumers. Review your disclosure practices to ensure compliance with the regulation’s requirements. Disclosures should include information on fees, error resolution, and unauthorized EFTs.

Assess Error Resolution Procedures

MSBs must have effective error resolution procedures in place. Review your procedures to ensure they meet the requirements of Regulation E. Promptly investigate and resolve consumer complaints related to EFTs.

Stay Updated on Fee Limitations

Regulation E imposes limitations on fees for certain services, such as gift cards and prepaid accounts. Familiarize yourself with these limitations and ensure that your fee structure complies with the regulation.

Implement Safeguards Against Unauthorized EFTs

MSBs must have robust security measures in place to protect consumers against unauthorized EFTs. Review your security protocols and implement necessary safeguards, such as encryption and strong authentication mechanisms.

Evaluate your Remittance Transfer Practices

If your MSB provides remittance transfer services, review your practices to ensure compliance with the Remittance Rule under Regulation E. Pay attention to disclosure requirements, error resolution, and cancellation rights.

Train Employees

Educate your employees about the requirements of Regulation E. Provide training on disclosure practices, error resolution procedures, and security protocols to ensure consistent compliance across your organization.

Maintain Accurate Records

Regulation E requires MSBs to maintain accurate records of EFTs and remittance transfers. Review your record-keeping practices and ensure that you retain all necessary documentation for the required timeframes.

Monitor Changes and Updates

Stay informed about any changes or updates to Regulation E. Regularly monitor regulatory announcements and updates from the Consumer Financial Protection Bureau (CFPB) to ensure ongoing compliance.

Conduct Periodic Internal Audits

Perform regular internal audits to assess your compliance with Regulation E. Identify any areas of non-compliance and take appropriate corrective actions.

Establish a Complaint Resolution Process

Develop a robust complaint resolution process to address consumer grievances related to EFTs and remittance transfers. Promptly investigate and resolve complaints to maintain consumer trust and satisfaction.
For more information on Regulation E and other regulatory guidelines, visit the CFPB website.

Consumer Fairness

MSBs provide financial services, particularly to those who lack access to conventional banking systems. However, with this responsibility comes the necessity to adhere to 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 ensure consumer protection and fairness, making them critical considerations for any MSB.

Risk Identification and Prioritization

Risk assessments should be conducted across public-facing operational areas and third-party vendors. These assessments can help identify and prioritize risks that could impact the organization’s reputational risk profile.

Consumer Journey Assessment

The consumer journey, including marketing, product/service design, and delivery, should be assessed to embed consumer protection and fairness principles into each step of these processes.

Consumer Complaint Data Analysis

Analyzing consumer complaint data can help aggregate concerns, identify root causes, and deploy streamlined response efforts to enhance control operations and the complaint resolution process.

Simplification of Public Communications

Public communications and policies/procedures should be simplified to ensure consumers have a clear understanding of Terms and Conditions, and employees can clearly articulate organizational standards.

Review of Marketing Materials

In the spirit of thorough spring cleaning, it is now time to review marketing materials to ensure they underscore all of the regulatory standards and best practices discussed above.

Conduct an audit of your website, marketing collateral and social media profiles, ensuring consistency in branding, and update content regularly with relevant information, ensuring all claims are accurate, not misleading, and comply with statutory advertising standards. Verify that all terms and conditions related to services are clearly stated, and finally check for the presence of 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. Ensure compliance with local and federal laws regarding transaction records. Finally, review for clarity and understandability to ensure customer awareness and satisfaction.

Licensing

It’s essential to have the proper licensing for your MSB to comply with regulations, and it’s important to understand both federal and state requirements.

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

If your company engages in the business of transferring funds—regardless of the amount—you must obtain a money transmitter license and renew it. Nearly every state has some version of a money transmitter business license which must be obtained.

There is no minimum or maximum threshold; any fund transfer activity falls under this requirement. Re-registration may be necessary due to changes in ownership, control, or an increase in the number of agents.

Civil and criminal penalties can be imposed for operations without proper licensure and registration.

Multi-State Licensing

If your money transmitter business operates across multiple states, you’ll need to navigate the licensing requirements for each state where you conduct business.

Local Licensing Requirements

In addition to state regulations, consider any local or municipal licensing requirements that may apply to your specific location.

Money Transmitter Laws and Virtual Currency

Keep in mind that the landscape for money transmitters is evolving, especially with the rise of virtual currencies (cryptocurrencies). Ensure compliance with relevant laws and regulations related to virtual currency transactions.

Application and Renewal Process

Compile all necessary documentation, including business incorporation details, AML policies, and proof of compliance with local regulations. Adhere to renewal schedules strictly to avoid lapses in licensure, which could result in penalties or operational disruptions.

Cornerstone Can Help

Licensing can be complex and feel overwhelming with requirements constantly changing and each jurisdiction having their own set of applications, fees and timing. Cornerstone Licensing Services can help with all your licensing needs. With 25 years and over 500k filings under our belt, Cornerstone has grown to become 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 understand that you have a lot on your plate. We give you a solution that frees you from the burden of licensing – one that’s done right, on time, every single time. That’s why we’re the best in the industry at helping you obtain and renew your licensing. Connect with us today to customize a solution specific to the needs of your business.

Conclusion

Amid the landscape of rigorous regulatory expansion, it’s imperative for MSBs to remain vigilant and proactive in their compliance efforts. The recent regulatory crackdown signals that MSBs should be prepared for enhanced scrutiny, reinforcing the need for a culture of compliance and due diligence.
By embracing such comprehensive review processes and staying informed about regulatory developments, MSBs can safeguard their operations against potential pitfalls and align themselves with the best practices and expectations of the regulatory agencies, thereby ensuring not only their survival but also their growth and sustained success in the competitive marketplace.

Author

Cornerstone Staff

Staff
| Cornerstone
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