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Money Service Business

16 October, 2023

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A Money Service Business (MSB) does not only include banks but also fintech companies, neobanks, check cashers, etc. An MSB is a convenient tool to transfer and exchange money quickly and anonymously. However, the business has become a fertile ground for scammers to conduct illicit activities, such as money laundering, in this age of widespread digitization. The giant MSB Western Union agreed to pay a fine of $586 million a few years ago, admitting that it ignored the fact that criminals used it for money laundering and crime.

What is a Money Service Business?

An MSB is a non-bank financial firm that allows clients to trade, store value, and facilitate money transfers. Like banks, MSBs also fall under the Bank Secrecy Act (BSA) and Anti-Money Laundering (AML) regulations. Money service business is a broad term used for financial services. The FATF updated the risk assessment for remittances and money service firms in 2016. Any financial service business paying beneficiaries through a transaction or cash is called a money transfer business. For a business to be considered an MSB, the value of the transaction should be equivalent to or greater than $1,000.

Types of a Money Service Business

As per the US Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN), an entity is considered as an MSB money service business if it:

  • Exchanges currency
  • Transfers money
  • Checks cash
  • Sells or issues money orders, traveler’s checks, or prepaid cards
  • Redeems money orders, traveler’s checks, or prepaid cards

All such services are offered by multiple businesses, considered as FinCEN money service businesses, such as:

  • Cryptocurrency exchanges
  • Remittance services 
  • Equity crowdfunding platforms
  • Bill payment services
  • Digital payment processors
  • Different fintech firms
  • Peer-to-peer lending platforms
  • The US Postal Service as it issues and redeems money orders
money service businesses

MSB Compliance with KYC/AML Regulations

Money Service buisnesses are witnessing a surge in the number of fraudulent cases in this digital age. MSB AML compliance is crucial to ensure the integrity of global economic system and prevent illicit activities. Here is how a money service business can adhere to AML and Know Your Customer (KYC) regulations:

Regulatory Framework

Money service businesses must adhere to AML regulations established at national and international levels. Such laws are enforced by legislative authorities, like regulatory authorities or central banks. They may also include legislation, including the European Union’s Fifth Anti-Money Laundering Directive (5AMLD) or the BSA in the United States.

Risk-Based Approach (RBA)

Money service business AML risk approach means identifying and analyzing money laundering and other financial crime risks linked to their operations. Thus, they must implement robust controls and procedures to mitigate the risk of white-collar crime.

Customer Due Diligence (CDD)

MSBs should conduct CDD checks to verify their clients and assess their risk levels for different illicit activities. CDD includes gathering and authenticating customer data, understanding the purpose and nature behind client relationships, and analyzing and updating customer data periodically

Enhanced Due Diligence (EDD)

MSBs are required to perform EDD on high-risk clients or transactions. Enhanced due diligence involves getting additional information, performing comprehensive background checks, and screening transactions thoroughly to fulfill AML requirements.

Suspicious Activity Reporting (SAR)

Money service businesses are legally bound to report unusual activities or transactions to relevant bodies like the Financial Intelligence Unit (FIU). MSBs must establish internal mechanisms and processes to detect and report suspicious transactions timely while maintaining privacy and safeguarding the integrity of the reporting procedure.

Record-Keeping

MSBs have a legal obligation to maintain the records of transactions, including their date, nature, and amount. The records must be kept for a particular duration, ranging from a few years to several decades, and they must be made accessible to regulatory bodies upon request.

Effective Compliance Programs

MSBs must maintain effective AML compliance programs, outlining policies, processes, and controls to combat money laundering and other financial crimes. The programs must be checked and updated regularly to meet the evolving regulatory landscape.

Regulatory Oversight

Regulatory bodies monitor and supervise money service businesses to ensure they comply with AML regulations. Regulatory oversight may include checking and assessing an MSB’s compliance programs. Failure to comply with AML regulations may lead to sanctions, heavy penalties, or revocation of licenses.

International Collaboration

MSBs operating globally must adhere to local and global AML regulations. They must deploy solutions to meet international standards and cooperate with relevant bodies to exchange information and fight against cross-border financial crimes.

Thus, a money laundering service business plays a crucial role in the economic system, and its compliance with AML standards is necessary to mitigate the risk of illicit financial activities. By implementing effective compliance programs and promoting AML awareness, MSBs can contribute to a trustworthy economic environment.

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