MSB Financial Access in the US, UK, Australia and New Zealand

| Tuesday, March 17th, 2015

MSB Money Service Businesses


  • Tougher regulatory scrutiny over the implementation of anti-money laundering and combating the financing of terrorism (AML/CFT) laws in recent years has strained money service businesses (MSBs) worldwide, threatening their ties to the conventional banking sector.
  • MSBs have asserted for decades that their bank accounts - which companies rely on to store and wire funds - are often closed with little notice, which raises the cost of transfers and puts businesses at risk.
  • The issue has come to the forefront in the last year, as several banks in the world’s largest financial markets, from the UK to New Zealand, Australia and now the US, have ceased dealing with the sector as a whole.
  • There remains a gulf between what the authorities say they want – greater financial inclusiveness – and what they are actually doing to achieve it. Banks will likely continue to respond to the increasingly strict regulatory environment with further “de-risking” – that is continuing to cut ties with money transfer businesses.

In this research we look at some of the major issues facing Money Service Businesses (MSBs) following on from the US Treasury Roundtable in early 2015 and how the US compares to the UK, Australia and New Zealand:


On January 13th, the US Treasury Department convened sector stakeholders in Washington to discuss obstacles related to AML/CFT compliance. FXcompared participated in the meeting (US Treasury Roundtable), which included regulators, banks and MSBs. Officials at the Treasury and the Federal Deposit Insurance Corporation (FDIC) have encouraged a more nuanced approach that would allow banks to continue to serve the MSB sector, while respecting AML/CFT guidelines and their own risk-management policies. This is a positive step forward for the industry; however, in the absence of regulatory reform or major incentives for banks to continue working with MSBs, it is unclear how effective efforts to encourage dialogue will be.

MSBs - which include a wide variety of businesses that offer services such as check-cashing, travellers checks, money orders, and domestic and international money transfers - undoubtedly pose a challenge for money laundering controls. However, the sector also serves a number of critical functions, including facilitating remittance flows, which provide an important source of income to the world’s most disadvantaged populations. Domestic money service businesses also help to provide financial services to households that may not be able to afford a traditional bank; according to the Treasury Department, over 25% of US households rely on some type of non-bank MSB to manage their finances.

AML/CFT Regulation

Most countries in Europe and North America have introduced new AML/CFT legislation in the last 10-15 years, requiring that money transfers of a certain type or value be monitored for potential illicit activity. Banks often bear the brunt of this scrutiny and can face heavy fines or even loss of licence if their AML/CFT compliance policies do not meet regulators’ standards. A handful of high-profile cases have unsettled banks around the world in recent years. In 2012, HSBC Holdings Plc. paid a US$1.9bn penalty to US regulators on charges that the bank did not apply sufficient AML/CFT controls, allowing dealings with blacklisted groups in Mexico, Iran and Libya to slip through the cracks. In addition, JPMorgan Chase & Co. paid a US$1.7bn fine in early 2014, also related to inadequate money-laundering controls.

As regulatory oversight tightens, banks in all major financial markets have looked to reduce their exposure to the sector. In November 2014, Westpac Banking Corp became the last of Australia’s top four banks to announce it would close all remittance providers’ accounts, prompting concerns that this will increase costs for migrant workers wanting to send money home. By default, remittance firms tend to work in the world’s poorest countries, where the risk of illegal money laundering and terrorism financing is also the highest. However, a wide swathe of Australian MSBs have seen their accounts closed in the last year, not just those that focus on more unstable markets. OzForex, a major forex firm that in 2013 processed worldwide transfers worth AUD$13.6bn (around US$13bn that year), also saw its accounts closed by Westpac on January 19th 2015. A bank spokesperson told the Sydney Morning Herald, “As we have previously indicated, the increasing need to satisfy international counterparties from a risk perspective and our own compliance requirements has led us to take the reluctant decision to withdraw from offering remittance services to OzForex.”

Westpac is understood to have come under pressure from its US correspondent bank, JPMorgan Chase, which cleared its US dollar transactions. The other main Australian banks, National Australia Bank, Macquarie Bank, Commonwealth Bank of Australia and ANZ, have also been retreating from the MSB sector similarly citing regulatory pressure.

The Risk of “De-Risking”

Major banks in the UK have made similar moves in recent years. The last of the major UK lenders to serve the remittance sector, Barclays, closed a number of money transmitter accounts in 2013; a leading company in remittances to Africa, Dahabshiil, launched a high-profile legal campaign to protest the closure of its Barclays account in May 2013. Dahabshiil won a court injunction allowing its account to remain open temporarily, but had changed banking partners by the end of 2014.

In New Zealand, central bank authorities recognised in January that the country was experiencing a similar “de-risking” trend, where banks are beginning to cut international money transfer clients loose as part of a general policy to reduce their exposure to domestic and international penalties. The New Zealand Reserve Bank warned against this approach in January 28th 2015 statement, saying that “the Reserve Bank considers that banks’ obligations under the [AML/CFT] act require measured risk management and do not justify blanket de-risking.” Remittance providers in the US have reported similar pressures in the last decade, as regulatory oversight of transfers to more volatile markets ramps up. However, reluctance to work with companies that transfer funds to areas with a poor rule of law and widespread criminal activity, such as Somalia, is beginning to spread to the MSB sector as a whole, as US banks sign join the general “de-risking” trend. In early February, Merchants Bank, a California based banks that handled most of the US’s outgoing money transfers to Somalia ceased providing services to that country.

Indeed, the issue of AML/CFT regulation extends beyond money transfer companies to the banking sector as a whole. A January 2015 report from the Financial Times confirmed that global banks are increasingly withdrawing from higher-risk emerging markets, often for fear of incurring penalties related to money laundering or other illicit activity in the partner market. The FT report indicated that three of the world’s biggest banks have ended correspondent banking relationships in 30 markets worldwide, making it more difficult for companies there to clear USD-denominated transactions. The issue of loosening privacy policies, in order to allow banks to share more information on their clients and better comply with law enforcement, was discussed at the 2015 January World Economic Forum in Davos.

Encouraging the US Market

US Treasury officials have recognized that a number of factors make it difficult for banks to assess the level of risk posed by MSBs, including the fact that many do not collect detailed information on their clients, or require dealing with correspondent banks in countries where AML/CFT regulation may not be stringently applied. However, reducing MSBs’ access to the formal financial sector stands to handicap the money transfer industry; regulators warned that this would limit non-banked households’ access to financial services and could stem the flow of remittances from the US. Furthermore, sector officials warn that the loss of banking partners will force MSBs to raise transfer costs or cease operating entirely, forcing money flows onto the black market. Remittances that pass through conventional channels are difficult enough to monitor; pushing these flows underground only raises the risk of illicit transactions.

The Under Secretary for Terrorism and Financial Intelligence, David Cohen, told the US Treasury Roundtable, “In short, it is our firm belief that banking organizations can continue to serve the MSB industry without compromising their obligations to detect and report illicit financial activity and without exposing themselves to excessive regulatory risk.” To this end, Treasury officials have emphasized the importance of not treating the MSB sector as a whole, encouraging banks to consider each MSB client on a case-by-case basis. In this regard, the Federal Deposit Insurance Corporation (FDIC) published a letter on January 28th 2015 encouraging supervised institutions “to take a risk-based approach in assessing individual customer relationships, rather than declining to provide banking services to entire categories of customers” is an encouraging development. The letter stated explicitly that close customer relationships can help to reduce risk and identify any wrongdoing, and that banking services should not be denied any entity. This is a time- and cost-intensive process, but one that is necessary to ensure that risks are effectively mitigated.

However, one of the primary challenges of this approach is understanding the “customer’s customer”, i.e. clients of MSB services. Developing a consensus of how to collect and analyze this information will be a critical step for banks and money transfer companies in the future. Assistant Attorney General Leslie Caldwell told Roundtable Participants that while financial institutions have a “particular responsibility to be attuned to the risks involved” in banking MSB clients, US regulators would only pursue institutions that wilfully violate the Bank Secrecy Act (BSA), which requires banks to monitor and report suspicious activity.

The US has a long way to go to streamline financial regulation and support MSBs, while still ensuring that effective AML/CFT guidelines are followed and banks only take on risk that they can safely manage. Issues related to the collection of information on MSB customers and improved information sharing between banks and regulators remain unresolved. But while the Treasury’s proactive stance and its effort to encourage dialogue should help to ensure support for compliant MSBs in the future, there appears little prospect of any easing of AML/CTF demands, nor of any measures to encourage banks to act with more nuance in dealing with MSBs or other sectors considered high risk. As such, banks will see little incentive to reverse this de-risking trend by themselves.

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