In Reversal,
Some Banks Value MSB Account Fees Over AML Risks?


Dozens of small banks and credit unions have begun courting money services businesses over the past year, offering financial services to the high-risk clients in exchange for compliance-related fees.

The marketing effort is a reversal in the often fractious relationship between the companies, known as MSBs, and banks that have either turned away the businesses or charged high fees for taking on the associated anti-money laundering (AML) compliance risks. Faced with a tougher market, some small financial institutions are opening their doors to the businesses and offering lower fees to draw new clients, say MSB owners.

“An increasing number of smaller banks and credit unions are realizing MSBs can boost the bottom line as fee generators,” said Jeff Sklar, managing director of SHC Consulting Group in Bellmore, NY. Over the last eight months, he has encountered more than 30 financial institutions that have either started banking MSBs or inquired about how to tweak their AML programs to do so, he said.

Talking to an accountant like Sklar, who specializes in advising small businesses, before you make too many key decisions can help you think through what it means to want to sell the business as opposed to nurturing it and its employees.

The opposite has been the case for the last decade, as many small MSBs have had to win over bank officials after the U.S. Treasury Department's Office of the Comptroller of the Currency (OCC) warned that the businesses were high-risk in a 2000 advisory letter. The agency repeated the warning at least twice over the next six years, further prompting banks to drop their MSB customers.

The banking troubles pushed hundreds of MSBs and thousands of agents out of the market, and contributed to industry consolidation, said Michael McDonald, an independent AML consultant based in Miami, who believes the trend is now reversing.

“I don't mind jumping through AML hoops and paying a bit more in fees if it means I get piece of mind and I don't have to be constantly juggling banking relationships,” said Alan Friedman, president of La Nacional, a New York-based MSB that has more than 80 locations nationwide.

Several smaller banks across the country have “woken up to the fact that you can get a big increase in fee income banking MSBs because they are huge consumers of cash,” he said, adding that in some instances banks are still restricting deposits to only $2,500 a day, which “doesn't do us any good.”

How regulators will view the decision by some small financial institutions, with relatively fewer compliance resources than large banks, to take on new AML risks remains uncertain.

While banking MSBs “can help strengthen the banks' financials, they have to realize that we may disagree with the adequacy of the controls they have in place if we believe their MSB customers are higher risk and require additional monitoring,” said a federal bank examiner in Texas, who spoke on condition of anonymity. “That will be reflected in the exam.”

The increase in MSB accounts at New York-based Actors Federal Credit Union (AFCU) have meant “an education for us in terms of understanding what AML risks are involved and how to mitigate them,” said Chuck Brown, director of check cashing services at institution. The company has opened more than two dozen accounts for money remitters and check cashers, and plans to open its first currency exchange firm account, he said.

“We have a thriving MSB department,” said Brown, adding that the credit union's examiners “are well aware of what we are doing and seem supportive.”

To mitigate its risk, AFCU has employed third parties to vet related accounts and a secondary transaction monitoring system that allowed the credit union to review all of the transactions of its MSB clients, he said. AFCU has since determined that the transaction monitoring system is no longer needed, he said.

Officials at the credit union request AML program documents from MSBs and conduct annual, onsite visits to see how their clients are meeting their Bank Secrecy Act requirements, he said.

“We wanted make sure they have strong customer identification and know-your-customer programs,” Brown said.

For some MSBs, bank accounts remain elusive, however, according to Friedman. Even when the companies agree to stringent AML certifications and deposit limits, banks may choose to drop the accounts with little warning, he said, adding that La Nacional lost banking services recently due to an acquisition.

The new chairman “told us we were a great account, but, sorry, they didn't want it,” he said.