The Money Services Banking Crisis: A Complex Solution for a Simple Problem

Jun 20, 2016   

Commentary by Andrew S. Ittleman
Daily Business Review

Money services businesses, a broad category of nonbank financial institutions running the gamut from brick-and-mortar money transmitters, check cashers and currency exchangers to more modern e-wallet and prepaid access providers and bitcoin exchangers, provide millions of Americans with financial services they cannot receive from banks.

To show how critical MSBs are to the functioning of the U.S. financial system, a 2013 Federal Deposit Insurance Corp. survey found 9.6 million U.S. households did not have bank accounts and 24.8 million households — 20 percent of the U.S. population — were underbanked, meaning they had bank accounts but also used alternative financial services outside of the banking system.

Today, MSBs worldwide are caught in a banking crisis showing no signs of relenting. Based on real and imagined enforcement risks, most banks have categorically decided against providing accounts to MSBs, while others have been ordered by regulators to stop serving MSBs. This process of “de-risking,” by which banks terminate relationships with “high-risk” customers, has been brutal for the MSB industry and resulted in unforeseen consequences, including:

• Banks as de facto regulators.

Banks have become the primary MSB industry regulators, a role they neither desire nor can fulfill. Even for MSBs with the required state licenses and Financial Crimes Enforcement Network registration, banks hold the exclusive authority to decide which MSBs live or die, and exercise this authority without due process or standards comporting with the rulemaking requirements of any first-world jurisdiction.

• Elimination of MSBs.

Many longstanding MSBs have ceased operations because of a lack of access to banks. Startups offering digital and virtual solutions for their customers have failed for the same reason. All of this leads to fewer choices, poorer service and higher prices for MSB customers.

• Unsafe and unsound financial activities.

Some MSBs have clouded the nature of their businesses to open bank accounts, defeating the banks’ anti-money laundering programs. By deceiving banks, numerous MSBs have committed federal felony offenses and been criminally prosecuted. In other cases, as recently reported by the Wall Street Journal, money transmitters have been forced to fly cash-filled duffel bags to Dubai for distribution throughout the Middle East and Africa because banks in the U.S. have ceased providing accounts to MSBs serving the African diaspora. Rather than allowing these transfers to occur bank-to-bank and under the U.S. government’s watchful eye, the banking crisis has driven huge volumes of money underground, benefiting none more than the international black-market financial system.

Buy-in Needed

As simple as the problem may be, the solution requires the full buy-in and cooperation of regulators, banks and the MSB industry.

While various domestic and international governmental bodies — including Financial Action Task Force, Federal Financial Institutions Examination Council and FinCEN — have made clear that banks can and should service the MSB industry commensurate with their anti-money laundering responsibilities, these announcements are not binding on the agencies regulating banks or the agencies’ employees and examiners. Without consistency in these announcements, banks will remain concerned about inconsistent enforcement, and continue making financially motivated business decisions to stay away from MSBs.

But blaming banks for the banking crisis accomplishes nothing. They have only recently emerged from a historical era of government enforcement with billion-dollar fines stemming from unsafe, unsound and/or fraudulent business activities. No wonder they want to avoid high-risk accounts. If banks should be criticized for anything it is lack of vision or a failure to recognize the benefits MSB clients bring. In addition to dealing in money as their inventory and often being required to maintain sizable cash deposits to remain compliant with state licensing laws, MSBs have access to advanced financial technology, customer bases, and international partners that could benefit US banks suffering from a generational shift in trust and goodwill.

So, who should take the lead in this issue? Without a doubt, the MSB industry — and with a single voice. Among other critical issues that the industry must continue to champion is how MSBs can support law enforcement and anti-money laundering initiatives, encourage financial inclusion and accelerate international commerce.

The International Money Transfer Conferences are an excellent platform for this discussion, and hopefully the conferences continue to expand. The Money Services Businesses Association, which I helped create with key members of the industry and other MSB attorneys and consultants, also provides a valuable resource and platform. Through these combined efforts and ideally with the with the help of the international banking community and its regulators, MSBs will soon find banks that wish to have them as customers.

Andrew S. Ittleman, a founder and partner of Fuerst Ittleman David & Joseph in Miami, concentrates his practice in white-collar criminal defense, anti-money laundering compliance, and food and drug law. He litigates extensively against the U.S. government in civil and criminal matters. He may be reached at aittleman@fidjlaw.com.

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