Regulatory Expectations Regarding Banking Money Service Businesses

Regulatory expectations surrounding banking money service businesses (MSBs) are a frequent source of confusion for financial institutions.

Many financial institutions are surprised to receive deficiencies and matters requiring attention in examinations, even though they believe they followed the regulatory guidance.

Because of this confusion, the National Credit Union Administration (NCUA) has announced that it intends to make providing services to MSBs or other types of high-risk businesses a supervisory priority this year, with field staff tasked with targeting this area.

This article discusses potential problem areas for financial institutions banking MSBs.

MSBs Defined

FinCen defines (summary and detailed) a money service business as any person doing business in one or more of the following capacities:

  1. Currency dealer or exchanger
  2. Check casher
  3. Issuer of traveler’s checks, money orders or stored value
  4. Seller or redeemer of traveler’s checks, money orders or stored value
  5. Money transmitters
  6. U.S. Postal Service

Oftentimes performing money service business activities is not a business’ primary activity. For example, a market or convenience store may also offer check cashing or money transmitting. These businesses can be troublesome as financial institutions need to assess the risk of each business activity separately.

Regulation of MSBs

MSBs are regulated by the Internal Revenue Service, and with just a few exceptions, all MSBs must register with the Department of the Treasury. In addition to the IRS, most states have money transmitter requirements regulated by their DFIs (department of financial institutions or equivalent) that certain types of MSBs must follow.

Regulatory Guidance

The FFIEC guidance regarding MSBs clearly states that the Bank Secrecy Act (BSA) does not require, and neither FinCEN nor the federal banking agencies expect, financial institutions to serve as the de facto regulator of their MSB customers.

Specifically, the guidance states:

“While banks are expected to manage risk associated with all accounts, including MSB accounts, banks will not be held responsible for the MSB’s BSA/AML program.”

The expectation is that the risk assessment of a particular MSB will determine the level of due diligence required.

In a low risk environment, “a bank is not routinely expected to perform further due diligence beyond the minimum due diligence expectations.” Additionally, “unless indicated by the risk assessment of the MSB, banks are not expected to routinely review an MSB’s BSA/AML program.” 

The initial due diligence expectations are clearly stated by the FFIEC, with the NCUA providing additional guidance in documents such as 14-CU-10 referencing SL No. 14-05.

Understandably, many institutions take the written guidance at face value. They perform a risk assessment, obtain and review the due diligence information commensurate with the risk of the MSB, board the merchant, believing that they are not responsible for the MSB’s BSA/AML program.

Unfortunately this belief does not hold up well in reality.

Regulatory Expectations

When it comes to banking MRBs, real-world regulatory expectations differ from written guidance.

Financial institutions are often cited for problems in their MSB programs and regulators expect heightened due diligence and monitoring.

Significant civil money penalties have been levied in more extreme circumstances involving multiple violations of consent orders. In February 2017, the U.S. Treasury penalized a California financial institution $7 million for failure to adequately monitor the activity of their MSB customers.

So the question becomes: how do financial institutions reconcile written regulatory guidance with real world expectations of banking MSBs?

The key to this answer rests in the fact that financial institutions are responsible for managing the risks associated with all accounts.

Continual Risk Assessment

In order to accurately determine the risks of a particular account, financial institutions must perform continual risk assessments. This risk assessment includes having sufficient insight into the activities of your MSB customers to determine if their risk profile has changed after boarding.

Warning signs the risk profile of an MSB has changed include changes in:

  • Transaction volumes, products offered, locations or markets
  • Management or beneficial ownership
  • BSA/AML policies and procedures
  • The types or volume of CTRs and SARs being filed
  • Transactional risk indicators

Only by continuously monitoring these activities can a financial institution ensure they have the appropriate procedures in place to properly assess for the risk profile of their MSB customers.

Common Problem Areas

Discussions with third-party bank auditors and financial institutions servicing MSB clients reveals the problem areas are across the board and include:

  • Poor and/or missing documentation
  • Insufficient baseline and transactional analysis
  • Inability to monitor reputational risk
  • Deficiencies in determining unusual activity and AML
  • Inconsistency in obtaining information necessary to perform proper risk analysis

A common theme among virtually all institutions with these deficiency characteristics is that they rely on manual processes to monitor their MSB customers.

The Challenge

MSB transactional activity comes in many forms with examples including:

  • wire files
  • ACH files
  • ATM records
  • cardholder and merchant transactional files
  • image cash letters

Further complicating matters is that many MSB’s have a high volume of transactions and the files are in differing formats.

Traditional banking systems aren’t designed for the needs of money service businesses and expecting financial institution staff to manually review this data and detect changing trends or suspicious items without errors is unreasonable.

How Technology Fits In

Examiners today increasingly expect automation in order to bank MSBs in a responsible, sustainable, and profitable manner. Fortunately, there is technology designed specifically to help financial institutions bank MSBs.

MSB banking software enables financial institutions to parse and analyze volumes of data, from multiple sources, that otherwise go either unnoticed or spot checked at best. Software can also assist with documentation and the other common areas of deficiency.

Technology is the great equalizer that enables institutions of all sizes to service highly-regulated and cash-intensive industries that were previously limited to only the largest banks.

Ask us how you can leverage technology to help your institution successfully bank MSBs.

Versions of this article originally appeared on and and in the Florida Bankers Association Newsletter.