De-banking MSBs: Damned If You Do, Damned If You Don’t?

Debanking MSBs Double Standard

On November 10, 2014 the Financial Crimes Enforcement Network (FinCEN) issued a statement encouraging the provision of banking services to Money Services Businesses (MSBs), including to money transmitters important to the global flow of remittances.

FinCEN’s statement primarily concludes that “MSBs play an important role in a transparent financial system” and when U.S. banks either indiscriminately terminate the accounts of all MSBs or direct their foreign correspondents not to process funds transfers of any foreign MSBs they frustrate the underlying transparency-driven focus of the Bank Secrecy Act (BSA).  Such over-cautious conduct by banks drives underground a whole segment of the population that is already less likely to use traditional banking service.

It’s no secret that the financial institutions have grown increasingly intolerant of regulatory risk arising from money laundering, terrorist finance, sanctions evasion, and reporting requirements.  The string of ever-increasing penalties, both civil and criminal, have driven this trend.  The Office of Foreign Assets Control (OFAC) seems to appear in the headlines every other week announcing another record-breaking civil penalty against a bank.  Across the country, U.S. Attorneys’ Offices issue press releases regarding criminal prosecutions of both banks and bankers caught violating various financial criminal laws.

As one would expect, many financial institutions adjusted their behavior to better comply with the law.  However, it appears now that the pendulum that is ‘regulatory risk management’ has swung so far over to the compliance side that it is actually frustrating the overarching goal of transparency.

When banks treat all MSBs as pariahs and deny them banking services they are effectively run out of business or forced to mask their activities through the use of intermediaries and hawalas.  This is troubling because large portions of the population rely on MSBs to undertake various innocent financial transactions.  These people do not normally use banks, either because no bank branches exist in their communities, they don’t have good enough credit, or because of cultural preferences for alternative financial service providers.  MSBs fill this gap and extend their services to those underserved communities (think Western Union at your local grocery store).  When MSBs are driven underground, so are the legitimate transactions of their customers.  This frustrates transparency and the role of banks as gatekeepers to the financial system.

Presumably, this was an unintended consequence of the efforts of law enforcement and regulatory agencies.  The situation appears to resemble the horseshoe theory in politics.  The reality of extreme over-compliance resembles the reality of extreme under-compliance.  For pointing this out, I give the folks at FinCEN major props.  It can’t be easy for a regulator to publicly announce that banks should take on more risk.  Hopefully other agencies identify the practical implications of their harsh enforcement efforts and adjust accordingly.

But until some assurances are put in place for banks I think the over-compliance trends will continue because relaxing enforcement might lead to under-compliance (which is a much more obvious evil for regulators to identify).  Therefore, unfortunately, many innocent people will be left with no practical option but to engage the services of money remitters that utilize nontransparent financial methods.

Disclaimer: Blog posts should not be relied upon as legal advice and are only provided for informational purposes.  Information contained in blog posts may also become outdated with the passage of time as laws change and U.S. foreign policy and national security objectives evolve.