The Unbanking Of Money Services

  Small to mid-size businesses that provide payment services to the unbanked have found themselves increasingly unable to find and keep bank accounts, thanks to a perfect storm of bank consolidations and banker nervousness about complying with anti-money laundering regulations.
  Licensed check cashers and money transmitters on the East Coast have been harmed the most by having their accounts closed. But even small businesses around the country, including mom-and-pop grocery stores that sell reloadable prepaid cards or that cash payroll checks for longtime customers, also potentially could be affected.
  Indeed, account closures could spread to all parts of the payments industry if the issues causing the problem are not solved now, says David Landsman, executive director of the National Money Transmitters Association. And it could spread even farther because any business or individual can fall under suspicion of money laundering under today's stricter rules, he says.
  "Any retail business that shows too much cash will have problems," Landsman says. "This could happen to you or me. Suspicious activity reports are being done if you have a bar mitzvah or wedding."
  The problem was exacerbated last July when the U.S. Office of the Comptroller of the Currency released a statement reminding banks that the money-services businesses, or MSBs, with which they work must be properly licensed in the states and countries in which they operate. Many MSBs, though, find the licensing laws of many states confusing, and many bankers and their examiners are just as confused. ("Prepaid Dilemma," April Credit Card Management)
  The OCC statement was directed at unlicensed MSBs. But many bankers interpreted the comments to challenge MSBs that appear properly licensed as having a higher risk for for involvement in money laundering than other businesses, especially if they help transfer funds across borders.
  "Some national banks also provide banking services to foreign MSBs, a line of business that can carry significant money-laundering risks," the OCC statement said. MSBs provide such services as money orders, traveler's checks, money transmission, check cashing, currency exchange and stored value.
  The statement also came on the heels of a high-profile money-laundering case involving not MSBs but banks. In May 2004 Washington, D.C.-based Riggs Bank was fined 25 million. Riggs, which handled the accounts of many foreign embassies and officials, some of them notorious, failed to file suspicious-activity and currency-transaction reports required under the act.
  Financial Scare
  In October, Birmingham, Ala.-based AmSouth Bancorp was fined 40 million for failing to have an adequate program to prevent money laundering. The case hit closer to home for compliance officers at many financial institutions, says a spokesperson for the Financial Crimes Enforcement Network, or FinCEN.
  "Most banks aren't like Riggs," she says, explaining that most do not work with foreign governments and their current and former leaders. "But when AmSouth came up, they said, 'Huh, there are banks that are similar [to us] getting fined.'"
  The Treasury Department formed FinCEN as an office in 1990 to administer the Bank Secrecy Act. Through administration of the act, FinCEN supports law enforcement, intelligence and federal bank regulatory agencies (such as the OCC) by sharing and analyzing certain financial intelligence that it collects. FinCEN was elevated to bureau status in 2001 and given the added responsibility of administering certain provisions of the Patriot Act.
  To be safe, financial institutions began to file a slew of SARs with FinCEN, and by March the submissions had grown to the point that the agency issued statements asking institutions to review the rules of due diligence but to cool it on the "defensive filings."
  Check cashers and money transmitters say the account-closure trend began even before the Patriot Act. The problem has intensified as banks consolidate and leave the MSB business.
  Indeed, not many major banks served MSBs in the first place, says Gerald Goldman, general counsel of the Financial Services Centers of America, a Hackensack, N.J.-based national trade association representing check cashers. But those institutions that did were reliable, he says.
  Then those banks merged with, bought or were bought by other financial institutions that were not interested in continuing relationships with MSB accountholders, and MSBs began getting letters or phone calls from their account representatives letting them know that their accounts would be closed in one to six months.
  "One bank will say, 'We love you, but we've decided to move on for business reasons.' Another one will say, 'We love you, but the requirements of the Patriot Act are not worth the relationship and the potential risk,'" Goldman says.
  Options Dwindling
  As they have been pushed out of other financial institutions, many New York MSBs have taken refuge at North Fork Bank and, to a lesser extent, Banco Popular. "The question is, when North Fork either gets bought or for whatever reason decides not to service the industry, therein lies the potential for total disaster for the industry," Goldman says. "There are thousands of locations throughout the country that have been terminated and have had to scramble for alternatives."
  Licensed money-transmitter businesses, especially small- to medium-size ones that operate out of travel agencies and grocery stores to help immigrants send money overseas, cannot even get accounts at North Fork. In March, North Fork and J.P. Morgan Chase & Co. told about 20 transmitters with hundreds of East Coast outlets that their bank accounts would be closed within a couple of weeks.
  In May, North Fork Bankcorp., the bank's parent, reported that the New York State Banking Department and the Federal Deposit Insurance Corp. had found flaws in its anti-money laundering compliance program. John Kanas, North Fork chairman and CEO, reportedly said the compliance flaws were tied to North Fork's check-cashing business.
  North Fork told federal regulators that examiners found "supervisory issues" around compliance with the Bank Secrecy Act and the Patriot Act and expected the bank to enter into a memorandum of understanding to fix the problems.
  At a hearing of the Senate Committee on Banking, Housing and Urban Affairs on April 26, Landsman said that what is happening now is "the culmination of 20-odd years of various arms of the federal government demonizing all nonbank financial institutions as hotbeds of money laundering, not making any distinction between licensed and nonlicensed entities."
  As recent statements by government regulatory agencies seemed to cast suspicion on all MSBs, things went downhill rapidly, Landsman adds. "Even banks that were committed to our markets realized they had not only regulators but prosecutors threatening criminal charges to worry about," he says. "That tipped the scale for even the most courageous bank."
  Individuals in the open-system prepaid card business are seeing their accounts being closed, too, though not as often as are money transmitters and check cashers, says Judith Rinearson, who specializes in prepaid product law as a partner in the New York office of law firm Bryan Cave LLP.
  Rinearson says that international remittance cards are a popular target. These cards allow a prepaid cardholder in one country to deposit money into an account that can be tapped through an ATM by the holder of a sister debit card in another country.
  Fighting Back
  But supporters of other cards, and all aspects of the reloadable stored-value business, are fair game. These include marketers, independent sales organizations and the stores that sell the cards to customers.
  "Some of these are fairly large companies," Rinearson says, declining to disclose names. "Sometimes it's the middle men, who are the cobranders, not just the sellers."
  Many bankers have been apologetic, even tearful when they have had to follow the advice of examiners or the organization's top decision-makers to close accounts of customers they have worked with for years, some MSB representatives say.
  Several bankers and credit-union operators had FinCEN officials on the hot seat at a trade conference in April, saying that some federal examiners that oversee them told them outright to close accounts of small MSB businesses.
  Donald Carbaugh, assistant director of FinCEN's Office of Compliance, told the group that FinCEN has been hearing about the account closures for about a year. "This chatter, quite frankly, grew to a crescendo, and when we started to look into it more we saw that in addition to the concerns that were being addressed by MSBs, we were having equally significant concerns being expressed by banks," he said. "Things like they were told by their primary financial regulators that all MSBs were high risk, or we were hearing that banks really didn't understand the nature of what MSBs did and what the components were, what the business models were. And banks were saying if we don't understand it, we can't evaluate it for risk."
  Regulatory agencies and lawmakers also got an earful from bankers and MSBs at account-closure hearings in March and April.
  In response, regulators issued a series of statements, often jointly through FinCEN, asserting that properly licensed money transmitters and check cashers serve a vital and beneficial role in the world economy and, given the same due diligence, are no more likely to launder funds than any other customers that handle money.
  Though the caution of financial institutions has been extreme, Rinearson believes it is understandable. "It's a difficult situation for the banks and for the industry," she says. "The banks are anxious about holding funds when they don't know the source of those funds."
  Rinearson believes FinCEN's new guidelines are a step toward reversing the account-closure trend. "It does seem to answer some basic questions and provide some clarity," she says.
  Carbaugh says FinCEN is committed to providing clearer guidance on behalf of federal regulators to the banking and MSB industries. He adds that while banks are expected to conduct due diligence in making sure their MSBs are in compliance with federal and state rules, they are not expected to be "de facto regulators."
  Many in the financial-services industries say they are pleased with the clarifications FinCEN and federal regulatory agencies have issued during the past few weeks and the promise to continue to improve clarity with future guidance. But others worry the steps may be too late for many MSBs.
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