Compliance Blog

Written by Eliott C. Ponte, Regulatory Compliance Counsel

Last month, the NCUA issued a supervisory letter regarding money services businesses (MSBs).  The supervisory letter does three things:  First, the supervisory letter gives background information on MSBs, explains how MSBs pose risk on credit unions, and lists expectations for credit unions.  Second, the supervisory letter details exam procedures.  Credit unions working with MSBs will want to review this section of the supervisory letter before an examination.  Last, the NCUA lists additional guidance documents relevant to MSBs, including supervisory guidance issued by the Federal Financial Institutions Examination Council.  While I believe this supervisory letter is extremely important and insightful to credit unions, I will not be analyzing the entire letter in this blog post.  I can’t, there is too much information. Instead, I will only cover the first part of the supervisory letter as it relates to its guidance on determining the risk associated with MSBs. 

Before talking about risk, it is helpful to discuss the definition of a MSB.  MSBs are transactional businesses that include check cashers, prepaid card providers, foreign currency dealers, money transmitters, and money orders and travelers checks issuers.  See 31 CFR 1010.100(ff).  While the NCUA acknowledges that MSBs provide valuable services to consumers, the cash-intensive nature of MSBs pose elevated risk for potential money laundering activities.  Thus, where elevated risk activity is present, credit unions must “exercise heightened due diligence by establishing monitoring and controls to properly assess, minimize, and manage the risk of money laundering.”

All types of financial institutions have struggled with determining the type of risk associated with MSBs.  In recent months, some financial regulators have pressured financial institutions to cut ties with these legally-run business to reduce risk and operational costs (see operation choke point and this blog post).  One major issue with MSBs is that not all MSBs pose the same level of risk.  For instance, the amount risk associated with each MSB will depend on its size, the primary nature of the business (i.e., a grocery store that offers check cashing will have less risk when compared to a standalone check cashing business), its recordkeeping practices, the frequency of cash transactions, identification requirements, customer base, and other factors.  Thus, each MSB will require a different level of due diligence based on the credit union’s review and assessment.

What makes the NCUA’s supervisory letter so important is that it lists several types of factors that credit unions should consider when working with MSBs.   Below are some examples of factors the NCUA believes credit unions should consider when assessing risk in MSBs:

Examples of potentially higher risk indicators:

• The MSB allows customers to conduct higher-amount transactions with moderate to high frequency;
• The MSB offers multiple types of money services products;
• The MSB is a check casher that cashes any third-party check or cashes checks for commercial businesses;
• The MSB is a money transmitter that offers only, or specializes in, cross-border transactions, particularly to jurisdictions posing heightened risk for money laundering or the financing of terrorism or to countries identified as having weak anti-money laundering controls;
• The MSB is a currency dealer or exchanger for currencies of jurisdictions posing heightened risk for money laundering or the financing of terrorism or countries identified as having weak anti-money laundering controls;
• The MSB is a new business without an established operating history; or
• The MSB is located in an area designated as a High Intensity Financial Crime Area  or a High-Intensity Drug Trafficking Area.

Examples of potentially lower risk indicators:

• The MSB primarily conducts routine transactions with moderate frequency in low amounts;
• The MSB offers only a single line of money services business product (for example, only check cashing);
• The MSB is a check casher that does not accept out-of-state checks;
• The MSB is a check casher that does not accept third-party checks or only cashes payroll or government checks;
• The MSB is an established business with an operating history;
• The MSB only provides services such as check cashing to local residents;
• The MSB is a money transmitter that only remits funds to domestic entities; or
• The MSB only facilitates domestic bill payments.

The supervisory letter also lists risk mitigation factors:

• Proper identification of MSB relationships
• Adequate assessment of potential risks
• Adequate understanding of the business model and activity of the MSB
• Adequate and ongoing due diligence relative to the risk assessed
• Adequate and ongoing suspicious activity monitoring
• Adequate staffing, expertise, and resources

Credit unions working with MSBs, or considering working with MSBs, should review the supervisory letter in its entirety.  While the supervisory letter stresses the importance of due diligence, credit unions should also remember that the NCUA has repeatedly stated that “the BSA does not require credit unions to serve as a regulatorof any type of MSB account.”