February 6, 2014 presentation to Community Bankers Association of Georgia's BSA Officer's School covering Money Services Businesses (MSBs), Bank Secrecy Act / Anti-Money Laundering (BSA/AML), Office of Foreign Asset Control (OFAC), and operational considerations.

1. Money Services Businesses
Past, Present, & Future
February 6, 2014

2. Industry Participation

3. Let’s Start with
some basics

4. WHY would someone
use an MSB?
Convenience and Control
• Hours and locations
• Transaction based, immediacy, price transparency, value
Funds Availability
• Immediate cash for checks; risk transference / no NSFs
• Immediate / Guaranteed Prompt payment
Language and Culture
Accessibility
• Simple & easy to understand services; no special skills required
Anonymity

5. “Bank Secrecy Act”
MSBs are partners with other FIs and Law
Enforcement
Protect our nation, communities and families from money
laundering, terrorist financing and illicit activities.

6. 6
The “4 Pillars”
I. Development of Internal Policies,
Procedures and Controls
Risk focused policies
Procedures for each area or function
Controls to Ensure Compliance
Monitoring and Reporting Systems
I. Designation of Compliance Officer
Sufficient time, resources and authority
I. Training Program
Content based on current procedures and systems
Relevant to specific audience position and
responsibilities
Documentation
I. Independent Testing I. Sufficient scope and testing II. Reporting to the Board of Directors
Timely action to address any concerns or
weaknesses

7. 7
Customer
Identification
Program
Required for banks.
Not currently required of MSBs by the
USA PATRIOT Act...but a good, sensible
business practice.
This doesn’t mean ID is not required - it
often is, e.g.
Establish Holder in Due Course
Monetary Instrument Log
CTR
“Travel Rule”
Contractual requirement with
principal MSB

8. 8
Customer Due
Diligence (CDD)
“Know your customer” (KYC) and
accurately predict the types of
transactions in which the
customer is likely to engage.
Unusual or unexpected activity
without apparent purpose is
potentially suspicious.
Avoids criminal exposure from
persons using or attempting to
use the FI for illicit purposes

9. Agent Due Diligence
Principals must maintain a list of authorized agents.
Agents present regulatory, credit, operational and
reputational risks to the Principal.
Processes required: application, acceptance, training,
monitoring, discipline, and termination.

10. Foreign Correspondent
Due Diligence
Correspondents present regulatory, credit, operating and
reputational risk to Principal money transmitters.
Required processes include: application/acceptance, due
diligence, monitoring, and termination.

11. Independent
Review
Required AND Valuable (when done right)
Helps Protect MSB, Staff, Management and
shareholders
Critical to protecting bank relationship
Many banks setting requirements to accept
reviews
ACAMS - CAMS; FIBA-FIU - CP/AML; former
regulator
Scope and frequency commensurate with risk of
the financial services
Identify deficiencies, evaluate compliance
Detailed, written report - share with bank

12. Regulatory Review
by IRS & State(s)
BSA/AML Examination Manual for MSBs
released in December 2008.
Risk based - Core Review
Independent Review
Prior regulatory exam findings
BSA-Reporting Database
Regulators and Independent Reviewers often also look to
additional FATF guidance for higher risk entities.

13. In the beginning…
Life of an MSB

15. FEAR
UNCERTAINTY
DOUBT

16. A lot was
happening
• Ba(d Escotnomiy l/ lRec esisiosn …(l)ingering…)
• Unemployment (persistent…)
• Bank Failures (abating…)
• Bank realignment of resources to
address increased credit risk
(entrenched…)
• Bank Discontinuance of MSBs (hard
baked)
• Political / Regulatory initiatives
(onerous)
• Reduced transaction revenue and
earnings

17. Bank Discontinuance
• Still ao mfaj orM SprBobslem in many
areas
• Faulty perception that MSBs
are too high risk
• Banks have other problems to
address
• Little incentive to serve the
industry
• Not motivated to bank
inSdoumset nroyw chasing same customers

18. Today...

19. Challenges faced by
MSBs
Decreased transaction volumes and revenues
minimal commercial checks
increased check fraud risks- tax returns, mobile capture
Increasing competition for customers
High regulatory and banking compliance expectations

20. Regulation

21. Common Issues
Identified during Reviews
License, GA DBF sign and/or pricing not posted.
Registrant having “advertising”
No GCIC employee background checks
FinCEN registration
expired, needing late renewal
re-registration not filed after change of ownership
Risk assessment not present
or no evidence of ongoing review/updating amid changes
Compliance program inadequate, incomplete, generic,
incorrect
or no evidence of ongoing review/updating amid changes

22. Common Issues
2
Training
No documentation evidencing any training; inadequate training
• Independent Review
• Only performed when notified of impending IRS or GA DBF
exam
• Only performed when specifically requested by bank
• Issues previously identified by independent review or regulators
not being corrected - repeat findings

23. Common Issues
3
FinCEN’s BSA eFiling
CTRs
submitting CTRs by 25 days rather than by 15 days
digitally signing but not uploading CTRs
not recognizing and correcting CTR filing errors
SARs
transaction monitoring insufficient, not identifying activity
poorly written narratives
Failure to properly establish existence and authority prior to
cashing checks for non-natural persons.
Daily Record of Checks Cashed

24. Common Issues
4
Check Cashing Issues
Commercial checks - Failure to properly establish existence
and authority prior to cashing checks for non-natural persons.
Tax Refund Checks - no recognition of increased risk from a
new customer or deviation from standard ID/decision
procedures
Customer Kiting Checks - not recognizing suspicious customer
transaction activity
Daily Record of Checks Cashed
entities w manual recordkeeping not meeting GA requirements

25. What’s coming next?

26. Increasingly “Unbanked”
Increasing numbers of Unbanked / Underbanked
No longer qualifying…
Disaffected / Dissatisfied - many no longer wanting
bank…
Increasingly open to transactional financial services
But… increasing retail, mobile and banking competition for
customers

27. Prepaid Access
Massive
growth
Increasing
Consumer
Adoption

28. Mobile
Remote Deposit Capture

29. Mobile Wallet
Mobile Payments

30. Digital Encrypted
Currencies

31. MSBs must
Maintain and Build
Bank Relationships

32. Bankers’ Concerns in
Serving MSBs
• High Degree of Risk and Exposure Associated with MSBs
Risky Business... unsophisticated, in management adequate risk
Tons of cash!
Unknown, Vague, Shady source of cash
Criminals can abuse MSBs
Difficult to understand, monitor and manage the MSB
relationships

33. Negative Perceptions
• Law Enforcement and Banking Regulators often perceive
MSBs as …
being used by either criminals, shady/bad people, or by
uneducated, uninformed or foolish consumers who would be
better served by a bank
“The Un-banked” - “The Under-Banked” - “The Self-
Banked”
being insufficiently regulated
being subject to insufficient examination
• being irresponsible, incompetent, inattentive, reckless...

34. Challenging / Difficult
Regulatory rules and issues can be complex
Bank may not sufficiently understand customer business or
risks
May result in gaps with bank compliance and risk management
May result in bank compliance issues, regulatory risks

35. Regulatory Expectations
for the Bank
Effective supervision/monitoring of MSB relationships
Reasonable understanding of MSB risks
Meaningful additional action on higher potential risks

36. Interagency guidance since 2005, FFIEC BSA/AML Exam
manual, and best practices...
Low Risk? - registration and licensing
High Risk? - expanded due diligence
Price appropriately
Recourse and collateral considerations
Security considerations
Ongoing monitoring

37. Risk of MSBs
• Principal Money Transmitter (high risk areas)
• Principal Money Transmitter (lower risk areas)
• Full Service MSB / Principal Check Casher, multi-store, high dollar, non-natural
persons
• Full Service MSB / Principal Check Casher, multi-store, high dollar
• MSB Agent, money transfer services limited to high risk areas
• Full Service MSB/ Principal Check Casher, multi-store, low dollar
• Full Service MSB/ Principal Check Casher, one store
• Offers MSB services including check cashing, low dollar, limited scope (e.g.
payroll)
• Offers MSB services - agent only, not dedicated to serving high risk areas
Note that higher potential risk MSBs can be lower risk due to mitigation efforts.

38. Bank Requirements for
Higher Risk MSBs
Initial & ongoing site visit, inspection, staff interviews
Negative news monitoring
Independent Review
Scope. Reviewer. Reporting. Management responses.
3rd Party review on behalf of bank
Assessment of foreign government oversight

39. Core needs of the bank
Meaningful, complete background - CIP & CDD
Confirm FinCEN registration
Confirm State licensing
Confirm Agent status
Ability to assess risks
Ability to monitor
Address Credit Risk / Exposure

40. Bank Pricing of MSB Accounts
Analysis
Compliance Surcharge
Set cash limits / require
armored courier service
Consider additional collateral

41. Bank monitoring
of MSBs
• Verify FinCEN registration, state licensing
• Ongoing Extended Due Diligence on higher risk MSBs
• Independent Reviews
• 3rd party review on behalf of bank
• Large fluctuations / change in volume - reasonable?
• Check cashing concentration, non-natural persons
• Out of market deposits

42. Reasonable Considerations for
MSBs wanting to keep and
establish banking relationships
• Communication, transparency, responsiveness
• Don’t assume your bank understands what you
do and want makes sense
• Help the bank accurately understand risks
• Provide documented evidence of compliance
• Be sure your relationship is beneficial to the
bank

43. Common Bank Issues re MSBs
• Not understanding MSB customers and that each have different risks
• Failure to reasonably risk rate MSBs and distinguish between higher and
lower risk MSB customers
• Poorly defined policies and procedures regarding MSB relationships
• Incorrectly identifying all MSBs as high risk then not following FinCEN
guidance or Board approved policies regarding monitoring
• Not setting and maintaining reasonable standards for performance
• Not charging MSBs for services rendered
• Missing security implications of large cash deposits or withdrawals
• Not considering credit risks of MSB relationships

44. MSBs need banks
• Local community banks
• How about yours?
• Some big national banks
• National Check & Currency
• Merchants Bank of California

45. 45
Jay Postma, CAMS
President
MSB Compliance Inc.
Jay.Postma@MSBComplianceInc.co
m
(678) 389-9068
www.MSBComplianceInc.com