Money Services Business (MSB) — AML Compliance Guide

A money services business (MSB) refers to an entity engaged in activities such as transmitting, converting, or exchanging money. This term is commonly used when talking about Anti-Money Laundering (AML) compliance, especially when trying to identify which MSBs are the obliged entities. This term includes a much broader spectrum of all kinds of financial institutions. Learn more.

Today, numerous businesses are in competition to provide cost-effective and diverse options for transferring money. These financial institutions, which also include traditional banks, are known as money services businesses, or MSBs. Non-traditional banks, like neobanks and cryptocurrency service providers, also fall into the MSB category. ‍

However, while money services businesses offer essential services to many users, they also have a notorious title for being an attractive money laundering channel. That’s exactly why MSBs must implement AML measures, including Know Your Customer (KYC) and customer due diligence (CDD) processes. 

In this blog post, we’ll cover what defines a money service business, which businesses usually fit this category, and outline the key anti-fraud and AML compliance requirements for MSBs.

‍What is a Money Services Business (MSB)?

A money services business (MSB) is any financial entity, excluding traditional banks, engaged in money transmission, exchange, or conversion. MSBs differ from banks even though they offer similar services. That’s why the term ‘Money Services Business’ describes various financial institutions, including those involved in crowdfunding, e-commerce, or cryptocurrency services. 

Money services businesses remain classified as financial institutions according to the Bank Secrecy Act (BSA) and other related regulations. As a result, MSBs must comply with the same AML/KYC rules as other financial institutions. Naturally, failure to comply with these regulations presents substantial risks for MSBs. 

In 2016, the Financial Action Task Force (FATF) updated its risk assessment for money service businesses. Any company that delivers funds to recipients in cash or through a transaction is categorized as a money transfer business. To be classified as an MSB, the company’s transaction’s value must be equal to or greater than $1,000 per day. 

What Doesn’t Count as an MSB?

As per FinCEN, banks are not money services businesses because they have their own set of regulations. Additionally, individuals or entities registered and regulated by the Commodity Futures Trading Commission or the Securities Exchange Commission are also exempt from the category of MSB. 

How are MSBs Regulated?

Money Services Businesses are required to establish AML compliance programs. They help companies implement protective measures to deter money laundering and other illicit financial activities. In addition to AML programs, MSBs are obligated to register with the United States Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN), and in many regions, they must also register with the state where they operate. 

To combat fraudulent activities, MSBs must also provide comprehensive training to their employees, implement established AML procedures, and report transaction histories in instances where transfers exceeding $10,000 are completed within a single day. 

Quickstart MSB AML Compliance Checklist

The 5 key pillars of AML compliance require money services businesses to:

  1. Have a designated compliance officer that would be responsible for managing the AML program.
  2. Develop internal AML/KYC/CDD policies that also include transaction monitoring and reporting of suspicious activities.
  3. Regularly train your employees to stay up-to-date with regulatory compliance.
  4. Review and audit your AML program by an independent third party.
  5. Implement a risk-based approach to AML compliance and deploy risk-assessment measures.
Money Services Business MSB AML Compliance Checklist

Note: We talk more about MSB examples and regulatory compliance below. 

Types of Money Services Businesses

Money services businesses are the type of companies that require regulation due to their involvement in money transfer or currency conversion. As per FinCEN, which is responsible for the majority of AML regulations, a business is an MSB if they are a:

  • Currency dealer or exchanger (including fiat-to-crypto)
  • Issuer of traveler’s checks, money orders, or stored value (prepaid cards)
  • Seller or redeemer of traveler’s checks, money orders, or stored value
  • Money transmitter
  • Check casher

While traditional banks are automatically included, various other types of businesses also fall within the MSB category. Some examples include e-commerce and payment processors, foreign currency exchanges, crypto platforms, remittance services, bill payment services, P2P platforms, and even post offices. 

Types of Money Services Businesses

Money Services Business Examples

Anytime you engage in activities like using prepaid cards, wiring money, or exchanging foreign currency independently of a traditional bank, you are interacting with a money services business. 

To give you more context about MSBs, we’ve compiled a short list of the common money services business examples:

Money Transfer Services

These MSBs offer electronic transfers of money from one location to another. Common examples include wire transfers, mobile payment services, and digital wallets. A well-known example is Western Union, which played a pioneering role in developing the technology for wire money transfers. Despite discontinuing its telecom operations in 2006, Western Union stands as one of the world’s largest money transfer companies. Today, Cash App, Venmo, and PayPal have also emerged as some of the most widely used examples.

Currency Exchanges

MSBs that provide currency exchange services offer their users the ability to buy and sell different currencies and exchange one currency for another. MSBs often offer competitive exchange rates and lower fees compared to traditional banks. Currency exchange services are crucial for businesses involved in international trade. They need to convert foreign payments into their local currency and vice versa. For example, today’s popular currency exchange services include Coinbase, Binance, and eToro.

Digital Payment Processors

A digital payment processor is an MSB that facilitates electronic transactions, allowing users and businesses to send, receive, and manage digital payments. Such companies simplify online payments among two or more parties. A well-known example of a very popular payment processor is PayPal. It works by connecting to a user’s financial accounts to create a digital fund. It then can subsequently be employed for making payments at specific merchants, primarily online retail stores, or for transferring money to another individual’s PayPal account.

Money Services Businesses and AML Compliance

Money Services Businesses must implement an effective AML program. For MSBs to stay compliant, the AML program must align with the risks associated with the company’s operating industry,  size, nature, and volume of financial services they offer.

All types of MSBs, which include check cashers, money transmitters, currency exchangers, issuers and sellers of monetary instruments, as well as providers and sellers of prepaid access, are required to conduct a risk assessment tailored to their specific operations to establish a risk-based AML program.

This is crucial not only for compliance but also to prevent financial crimes. For example, bad actors exploit MSBs to move funds discreetly, obscuring their money laundering activities. Notably, remittance processors and currency exchanges can be used in all money laundering stages, including initial placement, layering, and integration.

These are the AML regulatory requirements for MSBs:

1. MSB Registration Requirement

In the United States, every money services business must register with the Department of the Treasury. That means the company needs to fill out and submit FinCEN Form 107 within 180 days of commencing their operations. 

MSBs must renew their registration with the Treasury every two years. Furthermore, each MSB is required to retain a copy of the registration form, along with any supporting documentation, at a physical location within the US for a minimum of five years.

2. Risk-Based Approach to AML

Under the BSA, all financial institutions, including MSBs, must adopt a risk-based approach to AML. This means they must perform a risk assessment to identify and assess the particular money laundering and terrorist financing risks associated with the user’s activities

Companies should customize and build their own risk-based approach. As part of this approach, MSBs should create controls and procedures that match the specific risks they’ve identified.  A risk-based approach to AML also means that the risk profiles can change; therefore, they should be updated to align with changes in the risk profile.

3. Know Your Customer (KYC)

KYC requirements oblige money services businesses to gather and verify customer information as a part of a broader Customer Due Diligence (CDD) program. The KYC process is necessary to prevent unauthorized transactions and to maintain a traceable record of the customer’s financial activity. 

For financial institutions and MSBs, a customer is defined as:

  • A person or entity with an account or a business relationship with a financial institution.
  • A person for whom an account is maintained.
  • Recipients of transactions facilitated by professional intermediaries.
  • Any person or entity involved in a financial transaction that could pose a significant risk to the bank.

At a minimum, MSBs must gather specific customer information, including their full name, address, date of birth, and taxpayer identification number (TIN) or social security number (SSN). In the case of non-individual entities, MSBs can request documentation that proves the entity’s existence, such as articles of incorporation, a partnership agreement, or an official government-issued business license.

Typically, MSBs choose how to carry out the KYC process. Popular types of verification methods include document verification, biometric verification, or database cross-reference checks. These combined efforts help MSBs accurately identify customers and their business connections to prevent illicit transactions.

Related: What is the Difference Between CIP and KYC? 

4. Customer Due Diligence (CDD)

Customer Due Diligence (CDD) is mandatory for all transactions, regardless of their size. Both KYC and CDD processes are crucial for verifying customer identities and evaluating the risk of money laundering and terrorist financing. CDD also helps determine the true nature of customer relationships. This process involves regularly reviewing and updating customer information.

CDD measures applied to MSBs include:

  • Gathering and scrutinizing fundamental identity information.
  • Cross-referencing the customer’s name with pertinent databases.
  • Assessing the customer’s risk of engaging in financial crimes like money laundering, terrorist financing, or identity theft.
  • Establishing an anticipated pattern of the customer’s transactional behavior.
  • Continuously monitoring the customer’s transactions to align with these behavioral expectations.

Through CDD, companies collect and verify customer data to spot the red flags, which often lead to potentially suspicious activities. If illicit activities go undetected, this data can be instrumental in enabling law enforcement to locate and prosecute the individuals behind such crimes.

Related: What is the Difference Between CDD and EDD?

5. Suspicious Activity Reporting (SAR)

Money services businesses must file a Suspicious Activity Report (SAR) in cases of identifying a suspicious transaction. 

To fulfill this obligation, financial institutions must create internal procedures and systems that enable the prompt identification and reporting of suspicious activities. These procedures should uphold confidentiality and safeguard the integrity of the reporting process.

In general, MSBs must submit a SAR when:

  • a transaction is known or suspected to involve unlawfully acquired funds, 
  • is suspicious and involves $2,000 or more,
  • when a transaction seems structured to avoid BSA reporting requirements
  • or when there is no apparent legal justification or legitimate purpose for the transaction.

To file a SAR, MSBs should use the SAR MSB form. This form must be completed and submitted within 30 days of becoming aware of a suspicious transaction.

AML KYC Compliance Requirements for MSBs

What Happens in Cases of MSB AML Non-Compliance?

In cases of MSB AML non-compliance, there are several consequences and repercussions, as regulators and authorities take AML compliance very seriously. First of all, if an MSB lacks proper AML practices, it creates concerns among customers who start to doubt their safety. Consequently, this leads to a decline in the customer base and, as a result, reduced profits.

The presence of criminal activities and fraud within an MSB not only raises concerns among customers but also reduces the confidence of investors. A good illustration is when PayPal’s AML policies came under scrutiny, leading to suspicions about the adequacy of the company’s procedures. Almost immediately, this led to a 1.5% drop in share prices.

That’s why disregarding AML compliance regulations is no longer an option. With stringent measures against money services businesses, non-compliance can lead to fines that can potentially shut down MSBs completely. 

Ensuring Money Services Business AML Compliance Easier

As a money services business, you are responsible for ensuring that your customers’ data is safe and your company is compliant with ever-evolving regulations. Manual AML and KYC procedures are both costly and prone to errors, as well as time-intensive. 

Thankfully, there are automated AML compliance solutions specifically designed to align with your obligations as a money services business, helping you establish a robust AML program and transition to a fully automated compliance workflow. 

iDenfy’s fraud prevention hub has all the AML tools you need in one place, including AML screening and ongoing monitoring, PEPs and sanctions screening, adverse media screening, as well as identity verification services — both document and selfie checks and, if needed, additional real-time manual KYC checks to improve accuracy. 

Get started today.

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