The Impact of AML/CFT Regulations in the US for MTOs/MSBs: Our Banking Crisis!

1. The Impact of AML/CFT Regulations in the US for MTOs/MSBs:Our Banking Crisis! Presented by: David Landsman, Executive Director National Money Transmitters Association, Inc. at the World Bank FPDFI Roundtable on AML/CFT Washington D.C. January 23, 2007

2. Money Services Businesses • Their role is vital and they won’t be replaced, so we had better start accepting it and make appropriate adjustments in our thinking (customers will not migrate en masse to banks; ‘bank-the-unbanked’ is a sometimes misguided effort.) • We want them licensed (or certified), not just registered. • We want them banked that they may survive….

3. Elements of State Licensure • Application, vetting, approval • Laws, Regulations • Regular reports • Regular Exams • Disciplinary proceedings • License is mandatory (18USC1960) • Can licensing be federalized? • Resistance to federal regulating….budgetary, or other reason? • Money Laundering Suppression Act of 1994 • Called for greater standardization and coordination-UMSA • Lack of state license becomes ML offense (18USC1960) • FinCEN told to start registry

4. Purposes of State Licensure • to protect the consumer • to assure the safety and soundness of the supervised firms • to assure transparency and disclosure in price and service • to instill public confidence • to promote sustainable growth for the industry • to promote competition and a level playing field • to assure the prevention and detection of financial crime

5. Typical State Application 1. Corporate Information and Documents EIN# Certified copy of Certificate of Incorporation Copy of By-laws Certificate of Good Standing List all shareholders List all names Provide compliance officer Certificate of Authority to Conduct Business as Foreign Corporation Copy of IRS MSB registration acknowledgment letter Audited Financial Statements for last 3 years Recent unaudited financial statement not less than 60 days old Pro-forma financial statement for 1st year of operation Corporate history from inception to present Business plan for jurisdiction applying to List of all agent and branch locations in jurisdiction List of all services to be provided Operations Manual detailing all normal business procedures Agent Procedures manual BSA/AML Compliance manual OFAC Compliance procedures Corporate Bond – amount varies between $25,000 up to over $1,000,000 per state Net Worth requirement – amount varies between $25,000 up to over $1,000,000 depending on state calculation methods. Permissible Investment requirement – amount varies depending on state calculation methods. Copy of receipt to be issued. Copy of authorized delegate agreement to be used. Information regarding any formal or informal regulatory proceedings, past or present. Disclose and describe businesses of all corporate parents, subsidiaries and affiliates. Provide list of all jurisdictions where licenses already held and bonds provided therein.

6. Typical State Application….continued 2. Personal information required for all Officers, Directors and Shareholders Biographical Information forms Prior Addresses, SSN, Education and Employment history, criminal history, bankruptcy history, immigration status, tax history, litigation history, and regulatory history. Personal Financial Statements Full balance sheets showing all assets and liabilities. Full Income and expense statements showing all income and expenses. Background Investigation Report Personal credit reports Fingerprinting Photographs 3. Bank Account information Name, address, account number and contact person at all banks where transmission funds will be deposited. 4. Foreign Correspondents Proof of licensing or no licensing required in all foreign jurisdictions where located. Copies of all agreements with Foreign Correspondents.

7. Background • Most of the MT industry has professionalized, unbeknownst to the federal government. • Old stereotypes persist or worsen due to 9/11 concerns. • Slow buildup, hop-scotching banks, then sudden crisis on Black Friday, Oct. 9, 2004. • All attempts to solve the problem have only made it worse.

8. Consequences of Unlicensed Activity • The Brazil-US Case: The relationship between parallel markets in different countries. • Avoiding contagion: Recommendations to sending and receiving countries. • FinCEN’s “Interpretive Release 2004-1- Anti-Money Laundering Program - Requirements for Money Services Businesses With Respect to Foreign Agents or Foreign Counterparties” Dec. 14, 2004.

9. A Logical Progression of Events • 9/11 • Patriot Act • Riggs scandal • Congress criticizes OCC • OCC Beefs-up AML Exam Modules • Examiners become aggressive • Banks get scared to have MSB accounts • All attempts to help only make things worse

10. How Have We Survived?(We need access to branch banking to collect cash from our agents.) • Bank relations a full-time job. • Small community banks • Credit Unions • Armored car service / check casher-qua-bank • Personal pickups • ‘Virtual Vaults’

11. Consequences of Banking Crisis • Distortions in the market • Increase in unlicensed competition • Ongoing industry consolidation • Less competition means higher prices • Sends are disappearing from formal sector • National AML efforts suffering

12. What Has Been Tried? • Guidance • Clarification • Outreach • Training / Education …..and so on….. But nothing has helped….

13. Why Have All Attempts Failed? • No maximum limit to perceived EDD requirements • Total uncertainty even if all requirements were met • No maximum limit to consequences, Adverse consequences are still un-measurable • Examiners are still hawkish, their MSB demands, unlimited • Atmosphere is super-charged • All types of AML problems illogically result in more MSB closings • “Safe Harbor” is an abomination to regulators • No national regulator for MTOs, other regulators shrugging • No advocate for our industry • Disenfranchised customers don’t vote • Federal ignorance of / disrespect for state licenses • Admitted inconsistency of state license requirements But mostly, the ‘guidance’ in the BSA Examination Manual that was supposed to clarify things, only served to make regulatory expectations seem high, and made us look riskier. Here was all this new stuff to learn, new stuff that was expected. And we just happened to fall into most of the risk categories listed in the new manual, to wit….

14. Risk Factor Categories Applicable to MSBs From the BSA Exam Manual: Correspondent accounts (domestic and foreign) Cash-intensive businesses MSBs (or NBFIs) Checks, wires and money orders (monetary instruments) Cross-border transmittal of funds Privately owned automated teller machines Concentration accounts HIFCAs, HIDTAs We send money to foreign jurisdictions of high money laundering concern with lax money laundering controls. We deal with nonresident aliens and foreign individuals Third-party payment processors (agents) Brokered deposits (agent deposits) Business entities The Risk-Based Approach: Too over-generalized to be useful?

15. What Does FATF Have to Say? "Experience over the last decade has shown that ARS (Alternative Remittance Systems) can be misused for illegal purposes, including for both money laundering (ML) and terrorist financing (TF). Although the alternative remittance sector is largely composed of legitimate operators, some categories of ARS have nevertheless been involved in the transfer of funds related to illegal activities – or are themselves operating without proper authorisation from an oversight authority. The FATF has focussed (sic) on ARS activity in a number of previous typologies exercises. ARS continue to be the source of concern as far as their vulnerability to misuse for ML or TF purposes; however, increasingly other considerations have also become more evident, such as balancing the prevention of misuse with the need to ensure that flows of legitimate funds are not unnecessarily interrupted or pushed underground. The FATF has thus once again decided to examine the subject so as to provide a basis for further discussion of AML/CFT policy implications."(Emphasis added.) FATF Money Laundering & Terrorist Financing Typologies, 2004-2005, 10 June 2005 Continued….

16. What Does FATF Have to Say?….continued 6. Licensing means a requirement to obtain permission from a designated competent authority in order to operate a money/value transfer service legally. 7. Registration in this Recommendation means a requirement to register with or declare to a designated competent authority the existence of a money/value transfer service in order for the business to operate legally. 8. The obligation of licensing or registration applies to agents. At a minimum, the principal business must maintain a current list of agents which must be made available to the designated competent authority. An agent is any person who provides money or value transfer service under the direction of or by contract with a legally registered or licensed remitter (for example, licensees, franchisees, concessionaires)...... Continued….

17. What Does FATF Have to Say?….continued Licensing or Registration and Compliance 11. Jurisdictions should designate an authority to grant licenses and/or carry out registration and ensure that the requirement is observed. There should be an authority responsible for ensuring compliance by money/value transfer services with the FATF Recommendations (including the Eight Special Recommendations). There should also be effective systems in place for monitoring and ensuring such compliance. This interpretation of Special Recommendation VI (i.e., the need for designation of competent authorities) is consistent with FATF Recommendation 26." (Emphasis added.) Paragraphs 6, 7, 8 and 11 of FATF'sInterpretative Note to Special Recommendation VI: Alternative Remittance

18. NMTA Legislative Proposal Title I: Remove onus from banks by carving out license exemption Title II: Start voluntary, non-preemptive, AML-only federal certification of MSBs Title III: Formal role for self-regulatory organizations Title IV: Re-organize those parts of Treasury responsible for MSBs

19. NMTA Legislative Proposal….continued Title I: To Mitigate the Danger of Regulatory Uncertainty • Check for State License. • Check for FinCEN Registration. • Customer Self-Certification (as Foreign Correspondent Banking is treated.) • Regular CIP to same extent as with any comparable non-financial customer. • Remain alert to red-flags to same extent as with any comparable non-financial customer. • Baseline and ongoing volume monitoring as with any comparable non-financial customer. This is all a banker really should have to do to bank a licensed MSB.

20. NMTA Legislative Proposal…continued Title I continued: To Mitigate the Danger of Prosecutorial Uncertainty ML prosecutions of any sort against depository institutions will require consent from FinCEN, USDOJ and the institution’s primary federal regulator, before they can proceed.

21. Conclusion • Legislative action is needed in the US to solve the banking problem and further formalize the MT industry. • Emergency guidance needed from FATF… • Prevent the spread to other countries • Stop ‘risk-based’ over-generalization, recognize licenses, implement more voluntary regulation • Use the carrot more, the stick less