What is a Money Services Business?
A money service business is one that is in the business of currency exchange or money transfer. It is a legal term used in certain countries, such as the United States and Malaysia, and often refers to non-bank financial institutions. Money services businesses may also be known by other terms in different jurisdictions such as currency exchange or foreign exchange. The terms bureau de change or forex bureaus may be used in some parts of Africa, money changer is used in Singapore, and money service operators is used in Hong Kong. Despite these different names, they all refer to a global financial sector that is focused on foreign exchange and remittance. Often, there is an overlap where a money service business may conduct both money exchange and transfer.
Money Services Businesses and the Unbanked
Money services businesses are particularly important in developing countries where banks may not have branches in remote areas. Often, they provide essential financial services to the 1.7 billion unbanked population in the world. According to Massimo Cirasino, Head of the Payment Systems Development Group, World Bank, “MSBs are crucial to the international remittances industry and provide relevant services for many migrants and their families. They also help extend reach and access to remittances and other financial services since they operate in many remote locations where banks aren’t present.”
In some developing countries such as Somalia, up to 40% of the population may depend on remittances from overseas family members. Reducing the high cost of remittances is thus a global sustainability goal to alleviate poverty. Bank de-risking and the subsequent closure of money services businesses such as money transfer operators severely impacts the livelihoods of the poor who are dependent on remittances from overseas diaspora.
Bank De-Risking in the Money Services Industry
Money services businesses are considered particularly vulnerable to money laundering. The nature of their trade where they deal with cash and often untraceable one-off transactions makes them a risk. In recent years, money services businesses have found it difficult to maintain or open a bank account. Banks would rather avoid the risk of dealing with them entirely, by closing their accounts, rather than face penalties from regulatory authorities for improperly managing such risks. This process is known as derisking, and threatens both the livelihoods of money service operators as well as the people depending on them for those essential financial services. Banks deem that the costs of anti-money laundering and countering the financing of terrorism (AML/CFT) compliance and risks of servicing money services businesses outweigh the slim margins of having them as a customer. The onus unfortunately, falls on the money services businesses to proactively adopt a risk-based approach when assessing the risk of different transactions and customers.
AML Compliance and Regulation in the Money Services Industry
There are different ways in which money services businesses can identify risky customers and transactions.
High risk countries: The Financial Action Task Force, which sets the global standards for AML/CFT compliance, has identified certain high risk countries that have not been able to comply to certain recommendations. Money services businesses should run Know Your Customer screening checks - customers that are foreign nationals of or sending money to these countries would be considered high risk.
Large transactions: Money services businesses should be more cautious in transactions where a large amount of money is being exchanged. These should often be red flags for a KYC check.
Frequency: If a customer is frequently performing transactions that may just fall under trigger amount for record keeping requirements, this may bear some investigation as well.
Money services businesses need to conduct customer due diligence to identify risks or escalate the issues to a regulatory authority as part of their suspicious transaction reporting responsibilities for resolution. The identification of risks can be managed or automated through a custom compliance policy based on scoring risk factors. A custom compliance policy can be configured based on the local regulation set out by jurisdictional authorities. Money services businesses will have to adhere to different regulations by regulatory authorities based on the jurisdiction they are in.
|Hong Kong||Hong Kong Monetary Authority|
|Malaysia||Bank Negara Malaysia|
|Singapore||Monetary Authority of Singapore|
|United Kingdom||Financial Conduct Authority|
As money services businesses come under increasing scrutiny by their regulators, they will need to invest in a system that not only streamlines their operations, but facilitates their AML/CFT compliance, and enables them to keep up with competition as well as new innovations in financial technology.