Good day and thank you for reading. In a previous article we discussed the value a smart safe brings to an organization that conducts a measurable amount of business in cash. In this article, we’ll deep dive into one of these businesses, one that falls under the umbrella of a Money Service Business, or MSB. We’ll examine what defines an MSB, their current cash challenges, regulations they face, and how a smart safe can help them make the best use of their cash.
What is a Money Services Business?
According to the Financial Crimes Enforcement Network (FinCen – www.fincen.gov) a money services business includes any person doing business, whether or not on a regular basis or as an organized business concern, 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 transmitter
(6) U.S. Postal Service
Institutions within categories 1-4, above, qualify as money services businesses if they achieve an activity threshold of greater than $1,000 per person per day in one or more transactions.
For money transmitters, no activity threshold applies. Therefore, a person who engages as a business in the transfer of funds is an MSB as a money transmitter, regardless of the amount of money transmission activity.
In this article, we’ll focus our discussion on the “money transmitter” organizations and the effect that regulations, banking, and cash management have on their business.
Before diving into those topics, let’s quickly review the regulatory authorities and legislation that impact these organizations and how they can operate in the U.S.
Established on April 25, 1990, The Financial Crimes Enforcement Network (FinCen) is a bureau of the United States Department of the Treasury that collects and analyzes information about financial transactions in order to combat domestic and international money laundering, terrorist financing, and other financial crimes.
Bank Secrecy Act of 1970
The Bank Secrecy Act of 1970 (or BSA, or otherwise known as the Currency and Foreign Transactions Reporting Act) requires financial institutions in the United States to assist U.S. government agencies to detect and prevent money laundering. Specifically, the act requires financial institutions to keep records of cash purchases of negotiable instruments, and file reports of cash purchases of these negotiable instruments of more than $10,000 (daily aggregate amount), and to report suspicious activity that might signify money laundering, tax evasion, or other criminal activities.
Money Laundering Suppression Act (1994)
- Required banking agencies to review and enhance training, and develop anti-money laundering examination procedures
- Required banking agencies to review and enhance procedures for referring cases to appropriate law enforcement agencies
- Streamlined CTR exemption process
- Required each Money Services Business (MSB) to be registered by an owner or controlling person of the MSB
- Required every MSB to maintain a list of businesses authorized to act as agents in connection with the financial services offered by the MSB
- Made operating an unregistered MSB a federal crime
- Recommended that states adopt uniform laws applicable to MSBs
Other Definitions and Terms
Currency Transaction Report (CTR)
A CTR must report cash transactions in excess of $10,000 during the same business day. The amount over $10,000 can be either in one transaction or a combination of cash transactions. It is filed electronically with the Financial Crimes Enforcement Network (FinCen).
Monetary Instrument Log (MIL)
The MIL must indicate cash purchases of monetary instruments, such as money orders, cashier’s checks and traveler’s checks, in value totaling $3,000 to $10,000, inclusive. This form is required to be kept on record at the financial institution, and produced at the request of examiners or audit to verify compliance. A financial institution must maintain a Monetary Instrument Log for five years.
Suspicious Activity Report (SAR)
The SAR must report any cash transaction where the customer seems to be trying to avoid BSA reporting requirements by not filing CTR or MIL, for example. A SAR must also be filed if the customer’s actions suggest that he is laundering money or otherwise violating federal criminal laws and committing wire transfer fraud, check fraud or mysterious disappearances. The bank should not let the customer know that a SAR is being filed. These reports are filed with the Financial Crimes Enforcement Network (FinCen).
Money laundering is the attempt to conceal or disguise the nature, location, source, ownership or control of illegally obtained money. Money laundering is illegal.
How do the above Regulations and Legislation affect the Money Service Business?
The first thing to understand is that, in many cases, money service businesses (of the brick and mortar nature) are essentially agents of their respective brands, similar to a franchise. Each agent runs his own business – such as a convenience store – and offers money transfer services as part of his overall business offering.
Also, it is not uncommon for a business owner to carry more than one brand of money service businesses in his portfolio. We’ll touch on this briefly a bit later.
Secondly, and unfortunately, money service businesses have been used in some cases as a vehicle for money laundering and terrorist funding. Due to this, many well-known brands in the Money Service Business employ Anti-Money Laundering (AML) practices to which they require their independent agents to comply. In addition, banks who receive deposits from money service businesses take extra precautions, and employ additional oversight, to ensure compliance with appropriate FinCen regulations and guidelines. Even with these measures in place, banks often risk-adjust their offerings and charge higher fees to these companies to cover their risks.
For banks, such measures often aren’t enough to mitigate the risks. As a result, many banks are simply ending their relationships with money service businesses, as the risks and costs are simply too high for them to absorb. Without a bank to receive their deposits, money service agents, and their customers, find themselves in a difficult predicament.
The relationship between MSB companies, their agents, and banks – Bob’s Convenience Store
As mentioned above, money service businesses, in many cases, are independent agents of their respective brands. These agents often bank with a bank branch near to their location, since they are responsible for making the deposit. The MSB company and the bank in question need to have a relationship in order to process ACH transactions and appropriately account for deposited funds. Let’s take a look at this process in further detail.
For this example, let’s assume the MSB agent is “Bob’s Convenience Store,” owned and operated by Bob Smith. Bob’s Convenience Store is located in Houston, TX, and Bob processes around 50 money transfers per day on average, with most transfers going to Mexico. Bob has a relationship with a local bank branch, which is located less than a mile from his store. Bob makes the deposits himself, and uses a simple drop safe in his office to store his cash between deposits. Bob is an independent agent of two popular US-based MSB brands.
Since Bob does a fair amount of transactions, each of his MSB brands has opened a fixed line of credit for him, so that he can process transactions (and collect fees) between deposits. Here’s an example of how one wire transfer follows the process:
1. On Monday, customer Dave walks into Bob’s Convenience Store so he can wire $1,000 to his father in Mexico.
2. Bob processes the wire transaction, and charges Dave a $15 transaction fee. Dave hands Bob $1,015 in cash to process the transaction.
3. Shortly thereafter, Dave’s father receives the $1,000 wire in Mexico.
4. Bob places the $1,015 cash into the drop safe in his office in the back of the store, since he doesn’t want to store this money in his till and expose it to potential robbery.
5. At the end of the day, Bob’s MSB partner runs a point of sale report for that day and sees the $1,015 transaction that took place.
6. In accordance with his agreement with his MSB brand, Bob is debited $7.50 from the $1,015 transaction in order to account for the commission he owes his MSB for the transaction. Bob keeps the other $7.50 for his fee.
7. The very next day, Tuesday, Bob takes the $1,007.50 deposit to the bank. This 24-hour window is required of his MSB in order to avoid suspension of his account.
8. The next day, Wednesday, an employee at the corporate office of the MSB initiates an automated clearing house (ACH) transaction with the bank to account for the deposit.
9. The next day, Thursday, the ACH and the bank tie out on the deposit, and the funds are then moved to a concentration bank account for the MSB.
Issues, Risks, and Gaps with the Process
While the above process may seem straightforward, there are certainly risks, issues and costs with this process worth noting. Let’s go through some of them.
1. As described earlier, the money service business is highly regulated by US appointed agencies to prevent money laundering and terrorist funding activities. For banks that handle deposits from money service organizations such as Bob’s Convenience Store, they take on additional risk in order to comply with these regulatory requirements. To many banks, this risk is too costly to bear. Today, more and more banks are ending their relationships with the likes of Bob’s Convenience Store, forcing Bob (and proprietors just like him) to scramble for a bank that will accept his deposits. When agents like Bob are in disarray, the MSB brand faces a revenue loss risk for that particular market these agents serve.
2. Bob has been in business for several years, and has enjoyed strong working relationships with each of his MSB brands. He can always be trusted to make his deposits on time.
Unfortunately, not every proprietor is as trustworthy as Bob. Since there is a 4 day lag time between the time the money is wired and the deposit is settled at the bank, this exposes an opportunity for fraud. If a rogue agent decided to concoct a scheme so that the deposit was never made, and the recipient of the wire was also involved in the scheme, the agent (and his co-conspirator) can literally walk away with twice the amount of cash. As long as the MSB leverages an agent model, it will face this inevitable risk.
3. For Bob to conduct multiple wire transactions each day, his MSB partner must avail a line of credit to him. Even though Bob has an excellent track record of conducting his business and making his deposits on time, he still has a credit limit and may run into it, especially during peak times (holidays, pay days, etc.) of wire transfer activity.
To address this, Bob utilizes the services of two MSB brands in his store. When he reaches his credit limit with one brand, he’ll simply conduct any additional wire transactions that day with his other brand. To the first MSB brand, this represents lost revenue.
4. Bob makes his deposits on time, but not all agents do. Many agents that are habitually late with their deposits can have their account with their MSB brand suspended. To get re-instated, the agent must go through a new credit evaluation and underwriting by the MSB. For the MSB, this is non-trivial cost of doing business in an agent-based model. Also, if an agent is suspended, this represents lost revenue for the MSB for that particular market.
5. Deposit discrepancies. There may be a discrepancy between what was counted at the bank, vs. what was recorded by the agent. This discrepancy may result in an investigation, putting Bob’s account status at risk and causing additional costs to the MSB corporate office to handle.
Pain Point Recap
Before addressing a potential solution to the aforementioned gaps and issues, let’s summarize the pain points for each party involved.
Being the MSB agent, Bob has the following challenges and risks for his business:
1. Ensuring he always has a bank to accept his deposits
2. Staying under his credit limits
3. Depositing his wire transfer funds to the bank within 24 hours of the transaction
4. Transporting the deposits to the bank each day
1. A predictable pattern such as this exposes Bob to robbery
2. Takes Bob away from his store
5. Keeping cash in a safe and out of his till
6. Being keenly aware of money laundering activity and reporting any suspicious behavior
7. Minimizing deposit discrepancies, so he can avoid his account being suspended
The MSB faces the following risks in an agent-base model:
1. Risk of an established banking relationship ending abruptly, as the bank deems the regulatory requirements, costs and risks of the money transfer business to much to bear
2. Risk of theft by a rogue agent
3. Loss of revenue when agents are suspended
4. Loss of revenue when an agent reaches his credit limit
5. Increased investigation overhead when deposit discrepancies need to be investigated
6. Increase underwriting overhead when a suspended agent’s credit needs to be reinstated
Banks that accept deposits from MSB agents face the following risks and issues:
1. Ongoing compliance with anti-money laundering (AML), CTR, SAR and related FinCen requirements
2. Risks of severe fines and penalties if found non-compliant
3. Receiving large cash deposits at their branch from an MSB agent. This is costly for a bank branch, and the fees they levy on MSB agents often do not offset the costs. In addition, the business models of many bank branches have evolved in such a way that accepting large cash deposits no longer fits their model. This is one critical reason why several banks have ended their business relationships with the MSB operators.
What’s the Solution?
The solution to address the above pain points is multi-faceted, yet one that can be implemented by aligning the necessary components. The solution brings two new variables to the equation – a Cash in Transit (CIT) provider, and a smart safe.
Deployment of a smart safe into an operation such as Bob’s Convenience Store, supported by a CIT, provides a level of visibility, transparency, security, and accountability from which all parties – Bob, the MSB, and the bank – will greatly benefit. Let’s take a closer look:
Smart Safe Offering
For Bob, a smart safe offers the following benefits:
1. A place to securely store his cash
2. Can be set up in such a way that neither he, nor his employees, can access the cash in the safe
3. Bill validators to detect counterfeit notes
4. Expansive, and near-time, reporting capability – so that authorized entities, such as Bob, his CIT partner, or his MSB partner, can access, locally or remotely, all transactions that have occurred at the safe level – including current content, end of day reports, etc.
5. Daily deposit credit – more on this below
A smart safe also offers Bob another critical benefit. By making the appropriate arrangement with Bob’s bank, the cash-in-transit provider can deploy the smart safe and guarantee the funds in the safe. This is known as provisional credit, whereby the funds in the safe act as if they were in Bob’s bank account.
For Bob, he no longer needs worry about making his deposits within 24-hours to keep him from bumping up against his credit limit. Bob also feels safer, since he no longer transports the money to his bank each day. In fact, he never transports the money as his cash-in-transit provider is doing this on his behalf, as part of its bundled offering.
So now that we’ve established two new variables in the equation – a smart safe and a CIT – let’s review how the inclusion of these two variables addresses the pain points of the three original members – Bob, the MSB, and Bob’s bank.
- Due to the transparency and accountability that a smart safe provides, banks become more confident in the MSB business model. In turn, Bob should have more flexibility to select a bank of his choosing – he no longer has to scramble to find a bank that will accept his deposits.
- Bob feels safer, as he’s no longer transporting money to the bank, himself. That’s now handled by his CIT provider.
- Bob is more productive, because the time he previously allocated to transporting his deposits to the bank can now be re-allocated to his business.
- Bob can run his wire transfer business more confidently, as he no longer fears bumping into his credit limit. Provisional credit enables Bob to have his deposits recognized, even though the funds may still be in his safe.
- Bob now has a proven system to automatically detect counterfeit notes. This is significant, as Bob is inevitably responsible for any returned notes from his bank.
- Bob can build a more trustworthy relationship with his MSB, as the smart safe provides a level of cash transparency he’s never been able to offer before.
- Due to the transparency and accountability that a smart safe provides, the MSB has increased flexibility in the banking relationships it desires to establish, as banks are more confident in the MSB model.
- The MSB is pleased to have significantly more transparency to Bob’s money transfer business. With assistance from the CIT, the MSB can view a myriad of reports, on a real-time basis, that the smart safe generates. Reports also allow the MSB to adjust Bob’s credit limit, based on real-time data.
- The MSB is more confident knowing that Bob won’t run into his credit limits as he did in the past, since the CIT is guaranteeing his deposits via provisional credit. Because Bob won’t bump into his credit limits, the MSB can now be more confident knowing they won’t face a loss of revenue, which would occur if Bob’s account is temporarily suspended.
- The MSB is more confident it won’t have to undergo credit underwriting, as Bob’s account should remain in good standing as account suspensions should be drastically reduced.
- Since the smart safe accurately records all deposits, the MSB is more confident it won’t run into deposit discrepancies with Bob’s bank.
- The CIT who deploys the smart safe will ask the agent (in this case, Bob) to assume ownership of, and liability for, the safe. This removes the MSB from owning, and being responsible for, the asset.
With the smart safe/CIT model, banks are taking on significantly less risk than they did with the prior model. Let’s review:
- The combination of smart safes and cash-in-transit providers enable a more efficient means to handle bank deposits. In fact, many CIT’s offer the usage of their own vaults to store the deposited cash, relieving the bank of this burden.
- Given its increased confidence in the MSB model, the bank is more willing to work with a corporate MSB entity to ensure regulatory compliance. It no longer has to assume the risk of working with hundreds of small entities.
- Reduces CTR, BSA and SAR inquiries, since the CIT/smart safe model enables such inquiries to fall to the MSB corporate office to follow through with their requirements, and the bank can now monitor one client and not hundreds.
- In this model, Bob’s bank no longer has a relationship with Bob (or any other agent). Therefore it does not need to underwrite each agent.
- Banks can now view the MSB agent business as something worth supporting, versus a clientele wrought with risks and potential liability.
Technological advancements in smart safes, coupled with innovative offerings such as provisional credit, have enabled businesses that have adopted these solutions to realize immediate gains in transparency, accountability, and visibility to their cash business.
For the money service business, these attributes are significantly more critical, as government regulations, illicit activity, and heightened bank concerns have put this industry in a difficult spotlight.
However, with the right deployment model, leveraging proven solutions, the MSB industry and its key players can approach the money service business with a higher degree of confidence, as their risks and liabilities can now be better managed and contained.