Explore the world of Money Service Businesses (MSBs), also known as Money or Value Transfer Services (MVTS), and how these companies can mitigate the risks of money laundering, fraud, and substantial penalties from regulatory agencies.
Money Service Businesses (MSBs) offer a speedy and anonymous way to transfer and exchange small amounts of cash. Despite their convenience, MSBs are also susceptible to money laundering (ML) and heightened scrutiny from regulatory bodies. A notable example of this vulnerability occurred when Western Union, the largest MSB globally, was fined $586 million and confessed to neglecting to detect criminal use of its services for ML and fraud.
This article provides valuable insights into how MSBs can protect themselves from fraud and costly penalties across various countries.
What is a money service business?
A money service business (MSB) is a non-bank financial institution that transfers, converts, or exchanges currency. Depending on the jurisdiction, such businesses may also be known as money transfer businesses, money transfer dealers, or remittance service providers.
MSBs typically facilitate funds transfer between individuals and/or businesses and are subject to various regulatory requirements, including compliance with anti-money laundering (AML) regulations.
Money Service Businesses (MSBs) can be either companies or individuals offering a range of financial services, including but not limited to money transfers, currency exchange, remittance services, cashing of cheques, money orders, or stored value cards, and payment services like tax or utility payments.
MSBs may also provide Alternate Financial Services (AFS), such as payday lending and overdrafts, or more sophisticated financing options like microloans, crowdfunding, car loans, or online marketplaces.
Additionally, New Payment Method (NPM) or peer-to-peer (P2P) lending platforms may also fall under the MSB category. MSBs are subject to various regulatory requirements, depending on the jurisdiction, and must adhere to anti-money laundering (AML) regulations to combat the risk of financial crimes.
MSBs and anti-money laundering (AML)
Money Service Businesses (MSBs) are considered particularly vulnerable to the risks of money laundering due to various factors.
- Firstly, they often deal in cash and various types of money transfers, which can be challenging to trace and regulate.
- Secondly, they may involve third parties and intermediaries, increasing the potential for illicit activities.
- Thirdly, the increasing use of digital platforms has opened up new avenues for money laundering.
- Additionally, customer anonymity and using undisclosed sources of funds further exacerbate the risks associated with MSBs.
To combat these risks, MSBs must comply with various regulatory frameworks and adhere to anti-money laundering (AML) regulations to ensure they are not exploited for criminal purposes.
Money Service Businesses (MSBs) can be exploited by criminals seeking to move illicit cash into the financial system. These individuals may attempt to achieve this by transferring funds to overseas locations, or by converting illegal cash into high denomination notes, such as the €200 or €500 note. Alternatively, they may convert cheques derived from illicit activity into cash or business and salary cheques into cash for tax evasion purposes. MSBs are therefore at risk of being used as a conduit for illicit financial activities, which could have serious consequences for the financial system and the broader economy.
As such, MSBs must comply with relevant regulations and implement robust anti-money laundering (AML) measures to prevent criminals from abusing their services.
Money Service Businesses (MSBs) are subject to close regulatory scrutiny due to the potential for their services to be used for illicit purposes. In 2016, the Financial Action Task Force (FATF) drew global attention to the risks associated with MSBs, prompting most jurisdictions to require these firms to adopt a risk-based approach to Know Your Customer (KYC) and transaction monitoring procedures. Implementing these measures is essential to ensure that MSBs are not exploited by criminals to move illicit funds across borders, which could have far-reaching consequences for the financial system’s stability. As such, MSBs must remain vigilant and committed to complying with regulatory requirements to mitigate the risks associated with their operations.
How to regulate MSBs based on various countries’ regulations
In the United States, Money Service Businesses (MSBs) are subject to the regulatory oversight of the Financial Crimes Enforcement Network (FinCEN) under the Bank Secrecy Act (BSA). As such, MSBs must register with FinCEN and comply with a range of regulatory requirements, including developing and implementing an Anti-Money Laundering (AML) program and reporting currency transactions over a certain threshold, and filing Suspicious Activity Reports (SARs) where necessary.
Specifically, the MSBs’ owner or controlling person must complete and sign FinCEN Form 107, “Registration of Money Services Businesses,” within 180 days of establishment and renew their registration every two years. Failure to comply with MSB registration requirements may result in significant civil penalties of up to $5,000 for each violation and for each day a registration violation continues, according to 31 U.S.C. 5330 and 31 C.F.R. § 103.41(e).
In the United Kingdom, MSBs are subject to the Money Laundering Regulations and must register with the country’s tax authority, Her Majesty’s Revenue and Customs (HMRC). MSBs must conduct risk assessments, establish an effective anti-money laundering program, and appoint a designated officer to oversee compliance with regulations.
The HMRC also requires MSBs to perform due diligence on their customers and monitor their transactions for suspicious activities.
Non-compliance with these regulations may result in substantial financial penalties. For instance, in 2021, the HMRC imposed a fine of $32.4 million on MT Global, a UK-based MSB, for failing to comply with anti-money laundering regulations.
MSBs in Canada are subject to the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA), which requires a compliance program to detect and prevent money laundering and terrorist financing activities. MSBs must register with the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) and report certain transactions, suspicious activities, and terrorist property. Companies can check if they must register with FINTRAC on its website.
Non-compliance with the PCMLTFA may result in significant penalties, including fines of up to 2 million CAD ($1.5 million) and/or up to five years imprisonment.
In Hong Kong, individuals or businesses intending to operate money services must apply for a license from the Customs and Excise Department under the Anti-Money Laundering and Counter-Terrorist Financing Ordinance (Cap. 615) (AMLO). The licensing process involves a fit-and-proper test, and the applicant must demonstrate that they have appropriate systems and controls in place to manage ML/TF risks. Failure to obtain a license may result in fines of up to HKD 100,000 ($12,820) and imprisonment for up to six months. Additionally, operators who do not comply with the AMLO may face fines of up to HKD 5 million ($641,000) and imprisonment for up to seven years.
MSBs in Singapore are subject to the oversight of the Monetary Authority of Singapore (MAS). This regulatory authority covers a wide range of payment services, including account issuance services, domestic and cross-border money transfer services, merchant acquisition services, e-money issuance services, digital payment token services, and money-changing services. To operate a payment service in Singapore, businesses must apply for one of three licenses from the MAS: a money-changing license, a standard payment institution license, or a major payment institution license under Section 6 of the Singapore Payment Services Act 2019.
Each license carries specific requirements and obligations, and businesses must comply with strict anti-money laundering and countering the financing of terrorism regulations.
In Australia, businesses that accept instructions from clients to transfer money or property to a recipient are considered Remittance Service Providers (RSPs), or MSBs, and must register with the Australian Transaction Reports and Analysis Centre (AUSTRAC) in accordance with local AML regulations. Failure to comply may result in significant fines.
To comply with AML regulations, MSBs must establish and maintain a robust AML compliance program that includes risk assessment, employee training, and more. In addition, MSBs are required to conduct the KYC process as part of Customer Due Diligence, implement transaction monitoring, and adopt a risk-based approach.
For more guidance and advice, you may reach our team at сoredo.eu.