2024 has been no exception. Money Services Businesses (MSBs) play a crucial role in the financial ecosystem and continue to face challenges in tracking AML threats. While MSBs offer a wide range of financial services, including money transfers, currency exchange, and check cashing. However, these businesses face a unique set of regulatory challenges due to their nature and the services they provide. In this article, we will discuss the trending regulatory challenges that MSBs encounter in today’s financial landscape.
1. Anti-Money Laundering (AML) and Know Your Customer (KYC) Compliance
The Bank Secrecy Act (BSA) is an essential Anti-Money Laundering (AML) regulation in the United States. The regulations require financial institutions to use record-keeping and reporting practices such as Know Your Customer (KYC). These help to fight against money laundering.
The BSA classifies MSBs as financial institutions. So, MSBs must use the KYC process to verify their customer’s identities and determine the risk of terrorist financing and money laundering.
Older methods of customer identification, such as in-person office interactions and physical documentation are impractical in a digital era, especially for cross-border operations. They rely on digital submissions, which are sometimes deepfakes. Fraudsters use deepfake technology to open accounts with fake and stolen identities.
2. Evolving AML Laws and Regulations
Regulators and authorities are stern about AML non-compliance. MSBs violating these regulations may suffer reputation damage, hefty fines, criminal charges, civil charges, or imprisonment. Unfortunately, MSBs pay the price for a fluid AML regulatory landscape. Keeping up with the changes may prove overwhelming, leading to unintentional non-compliance.
The AML landscape has been constantly changing due to public scandals that reveal loopholes, and the ever-changing financial technology. For instance, the BSA was first established in 1970, when e-wallets such as PayPal, and cryptocurrency, were inexistent. Fund transfers are now faster, with greater global connectivity. Consequently, threats have increased, and tracing money is now harder.
Keeping up is costly. MSBs must now invest in state-of-the-art technology to weed out money laundering schemes, hire top personnel, and invest in compliance consultants. They should also often train their employees on threats and regulatory changes.
3.Transaction Monitoring and Reporting
Transaction monitoring and reporting help MSBs identify money laundering and other financial crime cases. MSBs use data and set rules to flag any suspicious activities, manually reviewing each case. Typically, MSBs monitor deposits, transfers, and withdrawals.
Transaction monitoring systems sometimes generate a high number of false positives, requiring an extensive workforce to weed out actual financial crime incidents. MSBs, therefore, waste a lot of time, money, and human resources, becoming inefficient.
Additionally, a one-size-fits-all approach hurts the business. Money laundering is increasingly sophisticated. Businesses need better solutions than tracking ‘unusual account activities’ such as unusually large deposits or withdrawals. In some cases, there are several small missed red flags that a broad blanket misses.
The opposite is also true. Some MSBs may consider too many scenarios, that effective monitoring and reporting is cumbersome and overwhelming.
A customer-specific risk-based approach is best. But this requires ample investment in policies and human resources.
4.Licensing and Registration
MSBs require federal, state, and local government approvals to operate. MSBs must register with the federal government within 180 days of establishment, via the Financial Crimes Enforcement Network (FinCEN) BSA e-Filing System. FinCEN is a bureau in the U.S. Department of Treasury. There’s been a big rise of outsourced compliance services by Silicon Valley style startups like Captain Compliance who are giving companies breathing rooms from spending six-figures for an in house compliance personnel.
Certain changes trigger re-registration with the federal government. Failure to re-register is considered non-compliance, attracting criminal and civil consequences. For example, a more than 50% increase in an MSB’s agents requires re-registration.
MSBs must also register with the state governments they operate with. Unfortunately, the requirements and regulations aren’t uniform, including definitions of MSB activities such as money transmission. MSBs operating in multiple states have a more difficult time understanding the complexities involved.
Local governments such as cities also impose their own laws. Taxes and rate of license renewal are some of the issues that differ, further increasing MSB compliance difficulties.
5. Cross-Border Transactions
Cross-border transactions are arguably the biggest challenge MSBs face when expanding. High operational costs, cut-throat competition, cultural differences, transaction speed, security issues, and transparency challenges are a few of them.
The legal and regulatory scene is a challenge, too. In addition to the USA’s three government-level legal requirements, MSBs must comply with stringent and irregular regulations in the regions they operate in.
MSBs expanding into Europe must comply with the European Union’s General Data Protection Regulation (EU GDPR) and HM Revenue & Customs (HMRC), for example. MSBs operating in Europe must register with the HMRC, and comply with the Financial Conduct Authority’s (FCA) directives on money laundering and terrorism financing. MSBs should also protect their customers’ data per the GDPR.
Avoid unintentional non-compliance
MSBs’ ability to facilitate quick and convenient international money transfers and foreign exchange services benefits the global economy. However, it’s also a quick way for terrorists, scammers, and money launderers to commit financial crimes. Subsequently, MSBs must adhere to the ever-changing strict regulations in all jurisdictions they operate in.
Challenges such as keeping up with fluid regulations, advanced money laundering tricks, cross-border transactions, and changing financial technology lead to involuntary non-compliance. Consider investing in advanced AML technology and getting a second opinion from other experienced compliance consultants to avoid penalties and litigation.
