Risk Prevention Training: The Solution to MSB Fraud by Dr. Linda Eagle
in Finance / Banking (submitted 2010-12-22)
The term Money Services Business (MSB) was born in 1999, when the Secretary of the United States Treasury issued a ruling to revise the regulatory definitions of certain non-bank financial institutions (NBFIs) for purposes of the Bank Secrecy Act (BSA). As defined by federal law and regulation, an MSB is a type of financial institution that provides much needed services such as check cashing, money transfers, money orders, and prepaid value cards at convenient times and competitive rates to customers often located in "unbanked" or "self-banked" communities.
Even as NBFIs, MSBs are still required to adhere to laws and regulations. Similar to banks and credit unions, MSBs are subject to certain industry risks and are therefore held accountable for protecting their customers, their communities and related businesses. In addition to these responsibilities, MSBs must also contribute to nationwide money laundering and terrorist financing activity prevention efforts.
In recent years, the expectation and need for compliance regarding MSBs and the institutions serving them has increased significantly in response to these tough economic times. As a result of various scams, the increased number of victims and staggering amounts of money being laundered has placed a greater pressure on MSBs around the world. Now, more and ever, MSBs must be more careful about complying with BSA and Anti Money Laundering (AML) requirements and be extra vigilant in identifying signs of money laundering or other terrorist financing activities. Failure to do so can not only result in costly, legal consequences, but also lead to increased customer fear and distrust in the MSB and the financial industry itself.
The Problem
Money laundering costs governments hundreds of millions of dollars each year and contributes to illegal activities and terrorist financing. Additionally, internal fraud, deposit fraud, identity theft, kiting, phishing, fraud against the elderly, internet fraud, lottery scams, check cashing scams and mystery shopper schemes, have increasingly targeted MSBs.
MSBs have become a primary target for these scams because, unlike banks and credit unions, MSBs have the added issue of staffing both internal representatives, such as MSB employees, as well as external agents who use the MSBs as vendors, such as supermarkets that sell money orders. Additionally, many MSBs do not maintain a list of the people and employees who represent them in the marketplace. Even though there are over 3,500 registered MSBs in the US, some are not properly monitored, making it difficult to track errors, remain compliant and enforce training for their staff.
The Solution
To effectively prevent these crimes and protect their customers, MSBs must implement sound training programs to prepare their employees to prevent and detect money laundering and similar scams. MSB employees need to understand the importance of their job and always follow the MSBs' compliance procedures in order to protect their customers, communities and related businesses from the threat of fraud. To build a well-educated staff, MSBs must take the following steps.
1. Adhere to BSA/AML Requirements
The BSA was passed in 1970 by US Congress to help prevent money laundering and other financial crimes from occurring in the US. Since then, the BSA has set forth provisions for reporting and recordkeeping for many types of financial institutions, including MSBs. In order to remain complaint and avoid costly legal penalties, MSBs are subject to the following BSA requirements:
• Registering with the federal government.
• Reporting cash transactions of more than $10,000.
• Reporting suspicious activity.
• Implementing and maintaining an AML compliance program.
2. Identify Red Flags
In addition to becoming familiar with the types of fraud currently in use, MSB employees also must be trained on how to spot the red flags that may indicate criminal activity. Examples of red flags include but are not limited to:
• A customer providing insufficient and/or suspicious information.
• A customer presenting different identification each time a transaction is conducted.
• An individual or business customer cashing a large number of third-party checks.
• An individual or business customer asking to purchase traveler's checks or money orders in large bulk orders.
• Changes in a transaction or in patterns of transactions.
• A customer sending or receiving frequent or large volumes of wire transfers to and from offshore accounts.
• An MSB employee whose lifestyle cannot be supported by his/her salary, which may indicate receipt of tips or bribes.
By knowing the signs of fraudulent activity, MSB employees will be able to prevent a scam before it occurs.
3. Properly File Suspicious Activity Reports (SARs)
MSB employees must be trained on how to properly complete and file a SAR whenever they suspect that money laundering may occur. In the US for example, an MSB must file a SAR when a transaction or a series of transactions involves $2,000 or more, or $5,000 or more for issuers reviewing clearance records. All SARs must be filed within 30 days of the transaction.
To correctly file a SAR, an MSB must record all information on a Financial Crimes Enforcement Network (FinCEN) Form 190 Suspicious Activity Report by MSB (SAR-MSB) form, make a copy of the form, and send it to the Internal Revenue Service (IRS) Detroit Computing Center. The MSB is required to keep the copy of the form for five years.
Final Word
In today's changing economy, it is vital that MSBs have policies and procedures in place to take the necessary steps in protecting their customers and their organization from money laundering and fraud. By implementing company-wide training programs, MSBs will ensure that they are properly adhering to regulations, and that their employees know how to identify the red flags of money laundering and fraud and properly file SARs when necessary. An effective and comprehensive training initiative will help MSBs to protect their businesses, customers and communities from money laundering and terrorist financing now and into the future.
