Identify and Monitor High- Risk and Money Service Businesses Accounts. Presented by Lynn English Lafayette Federal Credit Union

Transcription

1 Identify and Monitor High- Risk and Money Service Businesses Accounts Presented by Lynn English Lafayette Federal Credit Union

2 Key Takeaways After this webinar, participants should have an understanding of Money Service Businesses and the requirements for banking such high risk entities. Guidance on identifying high risk accounts at your institution and how to monitor them. Understand Examiner Expectations for providing banking services to Money Services Businesses and other high risk accounts.

3 Agenda What is an MSB (Money Service Business)? FinCEN MSB Requirements To Bank or Not to Bank aka De-Risking How to determine if a business may be an MSB. Is my institution equipped to handle the risk? What other accounts are considered High Risk? How to identify High Risk accounts. How to monitor high risk accounts. Programming your Monitoring System to help you identify undisclosed MSB s Examiner Expectations

4 What is a Money Service Business and What s the Big Deal? Money Service Business (MSB) as defined by FinCEN [Title 31, Subtitle B, Chapter X Part, Subpart A, (ff)] : A person doing business as an organized or licensed business concern, wholly or in substantial part within the US, in one or more of the following capacities: Dealer in Foreign Exchange Check Casher (amounts greater than $1000 for any person on any day) Issuer or Seller of Traveler s checks or Money Orders Provider of Prepaid Access Money Transmitter U.S Postal Service Seller of Prepaid Access

5 FinCEN Requirements for MSB s The Financial Crime Enforcement Network, also known as FinCEN has a section of the Code of Federal Regulations dedicated to Money Service Businesses and their responsibilities under the Bank Secrecy Act. Those requirements are codified here: Title 31, Subtitle B, Chapter X, Part 1022-Rules for Money Service Businesses Surprisingly, the responsibilities of a MSB are very similar to a bank or credit union. Identification Program Written Compliance Policies Compliance Officer Reporting Independent Reviews Record Keeping Registration with FinCEN, okay this one is different

6 What is a Money Service Business and What s the Big Deal? You may say, there s nothing wrong with providing those services and there isn t. There are plenty of people who can t use the standard banking system for one reason or another and MSB s provide necessary services and are very beneficial to them There are also plenty of people who try to avoid the legitimate banking system by using MSBs and therein lies the problem. So, what do we do?

7 To Bank or Not to Bank? AKA De- Risking If a MSB has obligations under BSA just like a bank or credit union, what s the risk in offering accounts to them? Well The movement of funds through an MSB are not the same as funds that move directly through your institution. You can only see part of the picture. Depending on the MSB, they may have Agents at other locations. Is there a way for you to know your customer s (the MSB) customer for the purposes of CIP? You have no real control over the MSB s compliance with the BSA rules. Requires Monitoring Inspections?? Cash needs?? Location, location, location

8 Poll Question?? Does your credit union provide accounts to Money Service Businesses (MSB s)? YES NO

9 How do you know if a business is a MSB? If a business owner doesn t walk into your institution and declare that they are a Money Service Business, how would you know? Site Visits Transactions (after account opening) Cash Requests Deposit Activity Internet Searches You can also ask at account opening (recommended) Use a survey or risk matrix when a business account is opened to determine what kind of services the business offers. Check Cashing-(Average daily, weekly volumes) Funds Transfers (Wire Services, Western Union, MoneyGram)- Anticipated Volumes Gambling Services (Reg. GG)- Licensed? Internet Based? Lottery? Phone, Gift, Prepaid reloadable cards

10 What if they are a Money Service Business? If your new member is a MSB or you discover subsequent to account opening that your member is a MSB, there are steps you must take: You must verify that the business has registered with FinCEN under the MSB Registry found here: You need to obtain a copy of the MSB s Compliance Policy Obtain the name of the Compliance Officer or Responsible Person Perform a site visit to verify all services offered Perform a risk assessment for the MSB (not a specific requirement, but highly recommended): Services offered Volumes Number of offices Number of Agents Geographic locations Client Base Designate the account as High Risk Monitor Monthly or more frequently based on risk assessment

11 What if they are a Money Service Business? Does your credit union offer services to Money Service Businesses?? If not, what will you do at account opening if it is disclosed? What happens if you discover it after the account has been opened and the member did not disclose to you their true business? What happens if a sudden change in activity leads you to believe your existing member is now operating as an MSB? Are these questions addressed in your policy? If not, they should be

12 Is My Institution Equipped to Handle the Risk? Did your Board of Directors approve banking services for MSB s? Did you perform a risk assessment? Do you have a MSB Policy? Do you have the means to identify a MSB (especially if it hasn t been disclosed at account opening)? Do you have the resources to visit your identified MSB members on a regular basis? Does your staff have the expertise or experience to successfully monitor the activity of your MSB members? Do you have enough staff members to do so?

13 What about the other types of high risk accounts? Motor Vehicle Sales(Car, Plane, Motor Homes Lawyers Real Estate Brokers Precious Metals & Gems Dealer Insurance Broker Accountant Gaming Auctioneer Medical Providers Liquor Store Convenience Store Grocery Store Investment Broker Pawn Shop Charter Services (Bus, Plane, Boat) Account subject to previous BSA reporting SAR, CTR Any account identified by your transaction monitoring system as high risk Any account identified by your credit union as high risk

14 How do you identify a high risk account? At Account Opening By industry (NAICS Codes) By declaration (remember that survey we mentioned?) Internal/External Notification Internal communication of unusual or suspicious activity Back Office CIP Review Subpoena Negative News Account Activity Manual Report Reviews Transaction Monitoring System Reports

15 How do you identify high risk accounts? If you are using a transaction monitoring system, identification of high risk accounts can be achieved at a more granular level. A good system will allow you to look at multiple aspects to determine risk levels such as: Geography Physical location of member or business Transaction locations across all delivery channels Volumes and Velocity of Funds Daily Aggregation BSA Reporting Related households Peer Comparisons Anomalous Behaviors Account Classification System Manual

16 Poll Question? Does your Credit Union use an automated BSA solution to risk rate your members? YES NO

17 How do you monitor high risk accounts? The same tools that help you to identify a high risk account, will also help you to monitor the high risk accounts that you have identified. But what are you looking for when you monitor? Changes to frequency of deposits or withdrawals Changes to average dollar amounts of deposits or withdrawals Transactions that don t match the stated business Cash intensity Accounts with the same addresses but different ownership Geographical changes in the movement of money Domestic vs International Wire Activity Funnel Account Activity-Deposits in one location and withdrawals in another Debit Card Activity (high risk locations)

18 Programming your Monitoring System to help you identify an undisclosed MSB. If you are seeing this activity, you may have identified an MSB. It is especially important to be familiar with the expected transaction activity for a certain type of business. NAICS codes help identify the industry. One of the more obvious clues that you may be banking an MSB is the volume and frequency of cash requested by the entity in comparison to what was stated at account opening. Volume of check deposits Ensuring that you have a way to review ACH activity within an account will help you to monitor electronic flows Debits from Western Union, Money Gram, Amex or other money transfer services Be careful if you offer Remote Deposit Capture for your members/business accounts. You have to monitor them more closely since a staff member isn t processing the check deposits in the conventional way.

19 Other ways to identify an undisclosed MSB Evasive or vague answers to questions regarding the source of or reasons for elevated cash or check deposit activity New signage appears at the business location offering services that would qualify the business as an MSB and no updated documentation received from the business owner Is the business still operating within the transaction parameters that were stated at account opening? Don t forget about the informal value transfer system (Hawala): Wire Activity vs. Cash Activity Geographic Monitoring

20 Poll Question?? Does your credit union have a way to identify an undisclosed MSB based on the information presented today? YES NO

21 Examiner Expectations for Banking an MSB Whether you are monitoring manually or using an automated system, your Examiner expects you to be able to demonstrate the following: Due diligence: Verification of MSB Registration Documented monitoring processes Strong MSB Policy Board Approval Records for verifying the following: Registration Compliance Program Compliance Officer/Responsible Individual Account monitoring

22 Examiner Expectations for High Risk Accounts You will be expected to have clear procedures for identifying and monitoring high risk accounts whether using a manual process or an automated system. Manual system Clear, consistent methodology Rating is calculated impartially and consistently Automated System Be able to produce the risk rating model that is used Demonstrated proof of rating frequencies and outcomes Demonstrate an understanding of the modeling methodology Evidence of Risk Model updates Management of 3 rd parties (if applicable)

23 North Dade Community Development FCU Cautionary Tale North Dade, a small credit union with $4 million in assets and only five employees, contracted with a third-party vendor and money services business (MSB) to provide services and subaccounts to 56 MSBs located in high-risk jurisdictions far outside its field of membership, including locations in Central America, the Middle East, and Mexico.

24 North Dade Community Development FCU The revenue generated from these accounts constituted 90% of North Dade's annual revenue. In 2013 alone, the total transaction volume through North Dade by MSBs included $1.01 billion in outgoing wires and $984 million in remotely captured deposits. One member was connected to 60% of all transactions Fun Fact- I worked for a billion dollar plus CU with an international presence and our outgoing wire total was roughly that size.

25 FinCEN asks where was the regulator? FinCEN Director Jennifer Shasky Calvery: "This case raises pretty obvious questions that no one seems to have asked. Why would MSBs located all over the world choose a small Florida credit union to conduct close to $2 billion in transactions? Credit unions pride themselves on close and low-risk relationships with known neighborhood customers. However, North Dade welcomed customers far beyond its field of membership, without adequate policies and procedures to ensure AML compliance."

26 NCUA Exam report The NCUA cited North Dade for many of its BSA violations in a C&D Order dated September 6, 2013 On November 25, 2014, FinCEN assessed a $300,000 civil money penalty against North Dade Community Development Federal Credit Union for significant Bank Secrecy Act violations. North Dade's anti-money laundering (AML) failures exposed the United States financial system to significant opportunities for money laundering and terrorist financing from known high-risk jurisdictions.

27 North Dade Today On April 1, 2015 NCUA announced the liquidation of North Dade Community Federal Credit Union in Miami Gardens, Fla., because of what it deemed to be violations of the credit union s charter, bylaws and federal regulations. North Dade is the second federally insured credit union to be liquidated this year. Chartered in 1997, it served 616 members and had assets of $3 million

28 North Dade Today

29 Summary If your credit union is offering banking services to Money Service Businesses, you must demonstrate a sound due diligence and monitoring process. Ensure MSB s are covered in your risk assessment. Your credit union must also have appropriate resources to manage the risks associated with offering services to MSB s. You must have a way to effectively manage the identification and monitoring required for all high risk accounts at your institution. You must be able to successfully demonstrate to your examiner that you understand the risks associated with offering services to high risks accounts and that the credit union has expertise, personnel, procedures and policies sufficient to address these risks.

30 Useful Links Electronic Code of Federal Regulations (ecfr) FFIEC BSA/AML Examination Manual: NCUA Examiner s Guide: Appendix 18A er18.pdf FinCEN MSB Registration Page: FinCEN MSB Registrant Search Page:

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32 Questions?

33 If you have any questions regarding the presentation you have just seen you may contact me directly. Lynn M. English