US Trade Bodies Release AML Best Practices For Money Transmitters

May 16, 2022
Best practices have been released to guide money service businesses on how to develop a programme for anti-money laundering (AML) and sanctions compliance and addresses the challenge of de-risking.

Best practices have been released to guide money service businesses (MSBs) on how to develop a programme for anti-money laundering (AML) and sanctions compliance and addresses the challenge of de-risking.

The new Best Practices guide for MSBs aims to help firms, such as money transmitters, fintechs and crypto exchanges, on how to set up an effective AML programme, conduct an ongoing, business-specific risk assessment and create a culture of compliance.

It gives a detailed view of regulatory requirements regarding reporting and monitoring potential illicit activity and MSBs' responsibilities regarding sanctions regulations.

The best practices have been jointly developed by the Electronic Transactions Association (ETA), INFiN - Financial Services Alliance, the Money Services Business Association (MSBA) and The Money Services Round Table (TMSRT), and incorporate feedback from regulators, law enforcement agencies, MSBs, banks and banking associations.

The trade bodies stress that there is no “one-size-fits-all” solution. Instead, compliance programmes should be implemented on a risk-based approach, commensurate with the size of the MSB, the services it offers and the geographies in which it operates.

“The Best Practices reflect the MSB industry’s commitment to ensuring a safe and compliant environment for providing non-bank financial services amid rapidly evolving threats to the US financial system,” the document says.

Although the document provides a useful aid for MSBs regarding AML compliance, it is also intended for the use of financial institutions.

“[B]anks and other financial institutions will be encouraged to confidently engage in relationships with MSBs that utilise these standards and best practices,” the payments associations say.

The trade associations hope that MSBs adherence to the best practices can create trust and confidence in their bank partners, which could effectively reduce the challenge of de-risking.

According to the Conference of State Bank Supervisors (CSBS), MSBs conduct more than $1.8trn in transactions annually.

Although they are an essential part of the financial services industry, they are facing challenges accessing banking services. It not only creates increased security risks for them, but effectively hinders their business operations.

Throughout the years, federal banking regulators have taken steps to address de-risking, such as issuing guidance to banks to clarify expectations for providing banking services to money transmitters.

Nonetheless, banks are often reluctant to provide banking services when recipients of funds are in countries at high risk for money laundering.

In a December 2021 report, the Government Accountability Office (GAO) identified various reasons why banks tend to cut ties with money transmitters.

For instance, conducting the necessary due diligence and account monitoring for high-risk money transmitters often comes with higher costs that outweigh the revenue they generate.

Banks may also face heightened regulatory scrutiny when they serve banking customers in higher risk countries. Some banks cited uncertainty regarding regulatory expectations around the complex risk assessments and due diligence as a reason for limiting or closing banking relationships.

Meanwhile, the global correspondent banking network declined by 20 percent between 2011 and 2018, making it even harder for banks that would be willing to provide banking services to money transmitters to do so.

In addition, there are reputational risks involved in these partnerships and negative publicity, regardless of whether true or not, which may cause a decline in the customer base, costly litigation, or revenue reductions.

To address the “forced de-risking” of MSBs, the trade bodies believe “banks will be encouraged to provide services to MSBs that adhere to these Best Practices”.

Banks are not ‘de facto’ regulators

In its statement of purpose, the document reminds financial institutions of certain expectations of federal regulators that could further encourage banks to confidently engage in relationships with MSBs.

Despite the growing regulatory burden and supervisory pressure on banks, the document emphasises that federal banking agencies do not require nor expect banks “to serve as the de facto regulator” of any MSB.

Although banks are expected to manage risk associated with all accounts, including MSB accounts, it stresses that banks will not be held responsible for the AML programme of its MSB partners.

“Not all MSBs pose the same level of risk, and not all MSBs will require the same level of due diligence,” they say, citing the FFIEC AML examination manual for nonbank financial institutions.

Hence, banks are not expected to perform further due diligence on MSBs categorised as lower risk of money laundering beyond the minimum due diligence expectations.

“Unless indicated by the risk assessment of the MSB, banks are not expected to routinely review an MSB's BSA/AML programme.”

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