Regulatory Compliance Challenges MSBs Face in 2024/2025

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MSB Compliance Advice

Money Services Businesses (MSBs) play a crucial role in our financial ecosystem domestically and globally. They offer a wide range of financial services, including money transfers, currency exchange, and check cashing. Using an outsourced compliance officer is one way to help handle the ever expanding bandwidth of increasing regulations.

You may know the common banks and transfer companies where remittances are sent back each month.

What you don’t think about however, is that these businesses face a gigantic set of regulatory challenges due to their nature and the services they provide transferring not data but money around the world. Here are 5 trending regulatory challenges that MSBs encounter in today’s financial landscape.

1. Technological advancements

Technological advancement seems to be a double-edged sword for MSBs. It has increased service efficiency and delivery, transaction speed, currency support, regions served, customer service, and issue resolution, among others.

Regrettably, money laundering and other financial crimes have equally grown in efficiency and sophistication. Fraudsters are quick to respond to and exploit MSB countermeasures, creating new vulnerabilities. For example, technological advancement has made identity theft easier for fraudsters. MSBs have a hard time detecting fakes with manual checks.

Launderers use technology to set up complicated transactions by layering and integrating, returning the money to themselves in indirect ways. As a result, MSBs struggle to detect and report fraudulent activities, as required by law, finding themselves vulnerable to noncompliance.

Some have invested in top-notch AML technology. Regrettably, it faces glitches. 95% of system-generated alerts are false positives, wasting a lot of time and money on unnecessary investigations.

2. Cryptocurrency and Digital Assets

Technology has introduced a new concept in the financial market- cryptocurrency and digital assets.Lack of regulation has made cryptocurrency a launderers’ paradise, and an MSB’s compliance nightmare. In 2019, $2.8 billion was laundered via cryptocurrency. MSBs get caught up when launderers use fake or stolen identities to clean up illegitimate crypto money.

Digital assets account holders are not always appropriately screened and vetted during the onboarding process. The regulatory landscape for digital assets gets foggy in different jurisdictions. Subsequently, MSBs handling digital assets may not appropriately follow the KYC requirements.

The Digital Asset Anti-Money Laundering Act of 2022 recognizes the need to establish rules regarding digital assets, making them BSA-compliant. It directs the Department of the Treasury to outlaw anonymity-enhancing technologies and anonymized digital assets. Although the bill was rejected, it set the pace on the need to regulate the digital assets and cryptocurrency markets. Issues such as anonymity, use of multiple accounts, illegal payments to blocked platforms, and sanctions violations should be tackled.

3. Risk-Based Approach

A risk-based approach to regulatory compliance allows the regulator to assess an MSB’s risk of non-compliance, and devise ways of appropriately dealing with the problem. MSBs also use the approach to identify and assess their risk of exposure to money laundering and terrorist financing.

While the intention is commendable, a risk-based approach has historically been hurtful to MSBs. Banks see MSBs as high-risk profiles, refusing to lend to them. In extreme cases, banks terminate banking services for MSBs.

Banks perceive MSBs as costly and burdensome to maintain. MSBs also increase banks’ exposure to regulatory scrutiny, when operating in poorly regulated regions. So, banks serving MSBs must make sure that their MSB clients strictly adhere to the requirements of the BSA. Most importantly, MSBs must strictly enforce KYC and Customer Due Diligence (CDD) processes to reduce their level of exposure. Lastly, MSBs should voluntarily require cryptocurrency and digital asset providers to be BSA-complaint, to do business together.

4. Regulatory Enforcement and Penalties

Compliance is expensive, especially for smaller MSBs and those operating in developing regions. The upfront technology, personnel, and training costs are expensive.

Conversely, non-compliance is costly! It can lead to hefty penalties, license revocation, criminal prosecution, civil prosecution, and reputational damage. Operating an unregistered MSB is a federal crime, attracting a fine of $5,000 per violation. An MSB was charged a $110,003,314 civil money penalty, while the alleged operator of an MSB was charged $12 million for willfully violating the BSA.

Regulatory readiness is also an ongoing problem. MSBs must get federal, state, and local government regulations, including registering with the Financial Crimes Enforcement Network (FinCEN). They should also be reviewed by the Internal Revenue Service (IRS).

MSBs must also understand secondary regulations and approvals, such as money transmitter licensing (MTL) application fees, continued regulation renewal, and reporting fees. The overall cost of these fees is expensive.

5. Customer Education and Awareness

MSBs risk reputation damage when caught up in financial crime cases, losing customers. However, in some circumstances, these financial crime cases are caused by the same customers who unwittingly enable the said financial crime. So, customers should identify and understand ways fraudsters could exploit them to launder money.

Several federal departments in the United States, such as the IRS, Association of Certified Fraud Examiners (ACFE), Federal Bureau of Investigation (FBI), and the U.S. Department of Justice (DOJ) constantly educate consumers on a range of fraud and scams. Consumers learn how to protect themselves and report these attempts.

MSBs should also develop customer education and awareness programs. While government agencies offer plenty of information, MSBs should assess their systems for specific vulnerabilities. Then, update their customers on ways they’re targeted, and how to avoid, and report these issues.

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