Money services businesses (MSBs) represent a vital sector within the financial industry, providing a suite of essential services that facilitate the smooth operation of global financial transactions. These entities are recognized for offering accessible financial services, bridging the gap for consumers and businesses that traditional banking institutions might underserve. In essence, MSBs enhance financial inclusion by providing alternative channels for a variety of financial activities, including but not limited to money transfers, currency exchange, and check cashing.
Money Services Business (MSB), Defined
An MSB is defined as any financial entity other than a traditional bank that is engaged in the exchange, conversion, or transmission of money. MSBs include a wide range of financial institutions, like those involved in e-commerce, crowdfunding, or cryptocurrency services. Financial regulations like the Bank Secrecy Act (BSA) classify money services businesses as financial institutions. With this classification comes great responsibility. MSBs are required to comply with anti-money laundering (AML) and Know Your Customer (KYC) rules, just like all other financial institutions. Failure to do so can lead to substantial risks for money services banks. For instance, the Financial Action Task Force (FATF) updated its risk assessment for MSBs in 2016. It states that any enterprise that delivers funds to recipients through a transaction or cash is considered an MSB. However, the transactional value must equal or exceed $1,000 daily.
What are the Different Types of Money Services Businesses?
Due to their involvement in currency conversion or money transfers, money services businesses are regulated. The Financial Crimes Enforcement Network (FinCEN) is a division of the US Department of the Treasury that defines a wide range of business activities that classify it as an MSB. According to FinCEN, an enterprise is an MSB if it is involved in one of the following:
- Currency Exchange: Essential for global trade and travel, providing the means to convert one currency into another
- Money Transmission: Enabling the movement of funds between parties is crucial for remittances and online payments.
- Check Cashing: Offers immediate access to funds, circumventing the waiting periods associated with bank deposits
- Issuance and Redemption of Monetary Instruments: Includes traveler’s checks, money orders, and prepaid cards, providing secure and convenient alternatives to cash and bank deposits
Each of these services plays a unique role in the financial ecosystem, collectively ensuring that consumers and businesses have access to flexible and inclusive financial solutions.
Examples of MSBs
While there are several types of money services businesses, the following are the most common:
Currency Exchanges
Currency exchange is the process of exchanging one currency for another. These financial entities facilitate international trade and investment by enabling businesses and individuals to convert their capital into foreign currencies. Their services are crucial for tourists, multinational corporations, and small businesses engaging in international transactions. Currency exchange can include flat currencies as well as cryptocurrencies. MSBs are often more convenient than traditional banks because they offer lower fees and competitive exchange rates. Some popular MSBs that conduct currency exchange include eToro and Binance.
Digital Payment Processors
A digital payment processor is an MSB that handles the digital money transfer between parties, allowing users and businesses to receive, send, and manage digital payments. The rise of e-commerce and digital transactions has propelled digital payment processors to the forefront of the MSB sector. These platforms offer secure, efficient, instant payment solutions, supporting the burgeoning global digital economy. MSBs that offer digital payment processing provide a convenient way for users and businesses to conduct transactions online. Some of the most popular digital payment processors include PayPal, Venmo, and Cash App.
Money Transfer Services
Money transfer services are designed to transmit money from one party to another.
These services are a lifeline for global workers and their families, enabling the secure and rapid transfer of funds across borders. They play a critical role in supporting economies in developing nations, where remittances constitute a significant portion of national GDP. Some popular money services businesses include Western Union, MoneyGram, and Flywire.
Remittance Processors
Specializing in cross-border transactions, remittance processors facilitate the flow of funds from migrants and expatriates back to their home countries. Their services not only support individual families but also contribute to the economic stability of entire regions. Some popular examples of MSBs that handle remittance processing include Xoom, WorldRemit, and Remitly.
MSBS can cross over into more than one type category. Other types of MSBs include several kinds of fintech companies, equity crowdfunding, and peer-to-peer (P2P) lending platforms. Since it handles cash orders, the U.S. Postal Service is considered a money services business.
What are the Regulatory Compliance Requirements for MSBs?
Navigating the regulatory environment is a significant aspect of operating an MSB. The landscape is designed to prevent misuse of the financial system for illicit activities like money laundering and terrorism financing.
MSB Registration Requirements
Registration with relevant authorities ensures MSBs operate within the legal framework, promoting transparency and accountability in their operations. For money services businesses operating in the U.S., registering with the Department of the Treasury is required. MSBs must complete and submit the FinCEN Form 107 within 180 days of establishing their enterprise. The registration must be renewed every two years with the Treasury.
AML Risk-based Approach
Like other financial institutions under BSA, MSBs are required to implement a risk-based approach to anti-money laundering. Each MSB has unique money laundering risks and terrorist financing risks that can be associated with user activities. An MSB’s AML policies need to be tailored to meet those risks. MSBs can create procedures and controls to counter the specific risks to their enterprise. The approach is based on internal AML risks and a customer risk assessment, which needs to be adjusted periodically as risk profiles change.
Know Your Customer (KYC)
KYC measures are critical for the initial vetting of customers, ensuring that MSBs understand with whom they are conducting business, thereby mitigating potential risks. Before providing service to a customer, an MSB must verify the person’s identity to ensure that only authorized, traceable business is conducted. To do so, MSBs need to establish a KYC process. For instance, MSBs should obtain the customer’s name, address, date of birth, and social security number (SSN) or taxpayer identification number (TIN).
Customer Due Diligence (CDD)
CDD goes beyond KYC, requiring ongoing monitoring of customer transactions to identify and prevent suspicious activities. With customer due diligence, MSBs evaluate a customer’s risk profile and decide whether it’s safe to do business with them. It also requires continuous transaction monitoring. If a customer is found to be at high risk for money laundering, MSBs may turn away their business or subject them to enhanced due diligence (EDD). With EDD, high-risk customers may undergo additional screening, including tighter identity verification and source of funds verification.
Suspicious Activity Reporting (SAR)
The obligation to report suspicious activities to authorities is a cornerstone of the regulatory framework, enabling the detection and investigation of potential financial crimes. MSBs are required to report suspicious activity around services, such as transmitting money and issuing, selling, or redeeming money orders or traveler’s checks. An SAR must be filed for any transaction that is suspected or known to involve illegally obtained funds. It also includes any transaction that appears to be structured in an attempt to evade reporting requirements under BSA. Money services businesses have up to 30 days to report the SAR once the transaction in question comes to light. A currency transaction report (CTR) is required for cash transactions above $10,000.
Common Money Service Businesses FAQ’s
What is considered a money services business?
An entity other than a traditional bank is classified as a money services business (MSB) if it engages in activities like money transmission, currency exchange, issuing or cashing checks, and handling money orders or prepaid cards. These businesses must adhere to specific regulatory requirements aimed at preventing financial crimes like money laundering and financing terrorists.
What are the risks of a money services business?
MSBs face several risks, including compliance with stringent anti-money laundering (AML) regulations, operational challenges of managing high-volume transactions, susceptibility to fraud, reputational damage from regulatory missteps, and market risks from fluctuating currency values. Effective risk management and robust security measures are crucial for mitigating these risks.
What is the difference between a bank and an MSB?
While both banks and MSBs offer financial services, banks provide a wider range of services, including deposits and loans, and are subject to a comprehensive banking regulatory framework. MSBs specialize in services like money transfer and currency exchange and operate under regulations focused primarily on anti-money laundering and counter-terrorism financing.
What is an MSB bank account?
An MSB bank account is tailored for money services businesses, addressing their specific banking needs and ensuring compliance with anti-money laundering regulations.
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