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FinCEN Proposes Changes to MSB Regulations

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By Richard Weatherington

Regulations governing Money Services Businesses were first proposed more than a decade ago. Since their creation, the industry’s regulatory environment has matured well beyond its developmental stage and now the Financial Crimes Enforcement Network — also known as FinCEN or the Agency — is proposing changes to the existing rules.

Currently, the term MSB includes (1) currency dealers or exchangers, (2) check cashers, (3) issuers of traveler’s checks, money orders, or stored value, (4) sellers or redeemers of traveler’s checks, money orders, or stored value, (5) money transmitters and (6) the United States Postal Service.

The Agency noted that MSBs have played a critical role in providing financial services to, among others, a segment of the population that generally does not maintain bank accounts. Law enforcement, FinCEN and other federal regulators have repeatedly stressed the need to prevent transactions that typically flow through these businesses from going underground. Because MSBs provide needed financial services to numerous communities throughout the country and often facilitate the transmission of money to those in foreign countries, they are vital to both domestic and foreign economies.

In 1997, the estimated MSB industry population, both principals and agents, was about 158,000, and provided approximately $200 billion annually in financial services. At that time it was estimated that fewer than 10 large businesses accounted for the bulk of MSB activity, involving money transmissions, money orders, traveler’s checks, and check cashing and currency exchange. These financial services were provided primarily through systems of agents.

In 2005, the MSB population and services had grown to approximately $305 billion annually. The increase reflected a growth rate for the MSB industry of about 50 percent over the previous decade. About half of all MSBs offered both check cashing and money order services.

Like other financial institutions governed by the Bank Secrecy Act, MSBs are required to: (1) Establish written Anti-Money Laundering programs that are reasonably designed to prevent the MSB from being used to facilitate money laundering and the financing of terrorist activities; (2) file Currency Transaction Reports and Suspicious Activity Reports and (3) maintain certain records, including those relating to the purchase of certain monetary instruments with currency; relating to transactions by currency dealers or exchangers; and relating to certain transmittals of funds. Most MSBs are required to register with FinCEN and all are subject to examination for BSA compliance.

Becoming More Accurate

After more than a decade of experience with the MSB industry, the Agency now believes the current MSB regulatory definitions should be revised to describe with greater accuracy the types of activity that would subject a business to the BSA rules.

For example, under the current regulations, to be deemed a check casher, a business only has to cash checks in amounts greater than the definitional threshold. The regulatory language does not provide insight, for instance, into the types of instruments a check casher may accept and does not detail what may be redeemed and whether it could be a combination of items, such as currency, another instrument, or a combination of instruments.

The intent of the proposed changes, noted the Agency, is to resolve these ambiguities so that the rules can be applied with more certainty by potential MSBs, the banks who maintain accounts for them, law enforcement, and regulators.

For check cashers in particular, the Agency has developed a large body of guidance and rulings to provide several examples of activities that do not meet the regulatory definition of a check casher, though they may involve check activity in amounts exceeding the regulatory threshold.

For example: (1) a payday lender that holds checks as collateral for repayment of the loan by the customer and does not deposit or negotiate the checks; (2) a business cashing its employees’ payroll checks; (3) a business cashing its own checks issued as payment for goods or services provided by non employees; (4) a tax preparer cashing its own refund anticipation loan checks for taxpayers for whom it has prepared tax returns; and (5) a consumer finance company cashing its own loan checks to borrowers.

Given the nature and scope of the interpretative rulings, the Agency said that it is appropriate to update, streamline, and clarify the MSB regulations by incorporating the rulings into the proposed revisions and extending them where appropriate.

No Name Change

In 1999, FinCEN added ”money services business” to the definition of ”financial institution” in the regulations. The term MSB was created to: (1) clarify the laws’ language in a way that effectively captured industry operations and (2) refine a subcategory of non bank financial institutions that were not subject to functional regulation at the federal level.

Over the years, MSBs have argued that using a single term to identify those engaging in particular diverse activities was inadequate for assessing money laundering and terrorist financing risks. The industry also complained that the term MSB has adversely affected their access to banking services. The industry asked the Agency to eliminate the term ”money services business” and instead describe the businesses as ”non bank financial institutions.”

The agency has decided against that change. It said that it would be ineffective and confusing to use the broader term, ”non bank financial institution.” Even in the late 1990s, the term ”non bank financial institutions” encompassed broker dealers in securities and casinos, as well as those businesses currently incorporated within the term MSB.

The term is even less helpful today, said the Agency, because there are more types of non bank financial institutions subject to BSA regulations, such as mutual funds, insurance companies, credit card system operators, dealers in precious metals, stones, and jewels, and futures commission merchants.

Despite the diverse risks posed across and even within MSB industries, the Agency noted that MSBs share certain qualities. In particular, they offer financial services that Congress grouped together in the BSA. The Agency said that it sees the continuing need to use the term MSB as a concise way to refer to certain non bank financial institutions that are without a functional federal regulator; that offer specific services, often in combination, and that have similar BSA requirements.

Doing Business

The current regulatory definition of MSB includes, in part, each agent, agency, branch, or office within the United States of any person doing business, whether or not on a regular basis or as an organized business concern, in one or more of the capacities listed in the regulations.

Whether a person is doing business as an MSB depends on all of the facts and circumstances. The Agency noted that it uses the term ”doing business” to mean the activity in which the person is engaged, rather than any status that the entity has either taken on itself or been assigned, such as a business licensed by a state.

Under the proposed changes, FinCEN said it would continue to regulate an MSB by its activity and not simply its status. Whether a person is a business in any formal sense should not determine whether it is subject to the MSB definitions, unless there is a statutory requirement to the contrary.

To avoid confusion that might result from the focus on the status of an entity and not its activity, the Agency proposes to revise the language in the MSB definition by deleting ”doing business” and replacing it with ”engaged in activities.” ”Doing business” had caused uncertainty which should be alleviated with the change.

The change, however, is not intended to broaden the application of the regulation beyond its present scope. To the extent that a person engages in one or more of the activities listed in the definition, it is an MSB.

Dollar Threshold

The current regulations include an activity threshold of $1,000 for any person in any one day that applies to all MSB categories, except money transmitters which do not have any activity threshold. Although FinCEN said that it does not propose amending the current threshold now, it is considering the need for a separate rulemaking to make possible adjustments to the threshold.

A lower threshold, noted the agency, may increase the amount of information available to law enforcement by expanding the scope of entities subject to BSA requirements, but would also add additional entities that conduct incidental and low value MSB activities. Conversely, a higher threshold may remove entities that conduct incidental and low  value MSB activities.

Moreover, noted the agency, the effect on the clients whom these MSBs serve would need to be carefully studied.

As part of the overall proposed rulemaking, the Agency is seeking information on the average daily transaction amount for the different MSB services offered: check cashing, money orders, money transmission, foreign exchange, stored value, and traveler’s checks.

It is also specifically seeking comment from law enforcement on how adjusting the threshold higher or lower would affect their investigations. Finally, it is seeking comment from community groups on how adjusting the threshold higher or lower would affect those who use MSBs .

Meaning of ‘Check Casher’

Currently, noted the agency, a check casher is defined as ”a person engaged in the business of a check casher (other than a person who does not cash checks in an amount greater than $1,000 in currency or monetary or other instruments for any person on any day in one or more transactions).”

The proposal is to amend the regulations to clarify the meaning of the term ”check cashing” by splitting the existing regulatory definition into two subsections — one defining check cashing activity and one excluding certain activity from that definition.

The proposed revision would change the definition of check casher to state in part: A person who accepts checks, as defined in the Uniform Commercial Code, or monetary instruments in return for currency or a combination of currency and other monetary instruments or other instruments in an amount greater than $1,000.

”In return” has been added to the definition to more accurately describe the activity that occurs when cashing a check or redeeming a monetary instrument. The Uniform Commercial Code reference has been added to provide a clear definition of ”check.” A reference to the definition of ”monetary instruments” has also been provided.

The term ”other instruments” is intended to capture those payment instruments that do not fall precisely into one of the other categories, including such things as a stored value card that is treated as a cash equivalent.

The proposal would also incorporate the redeeming of monetary instruments into the definition of check casher. Given its similarity to check cashing, the Agency said it was unnecessary to treat this activity separately from check cashing.

Accordingly, under the change, a person engaged in redeeming monetary instruments, including traveler’s checks and money orders, would be a check casher if it redeemed checks for currency or a combination of currency and monetary or other instruments.

The proposed revision also would clarify activities that would not be subject to the check casher definition. The definition would include in part: “Whether a person is a check casher … is a matter of facts and circumstances. The term ‘check casher’ shall not include: a person that sells closed loop stored value purchased with a check, monetary instrument or other instruments … a person that redeems its own checks; or a person that only holds a customer’s check as collateral for repayment by the customer of a loan.”

Finally, said the Agency, under the current regulations, redeemers of traveler’s checks and money orders have SAR obligations while check cashers do not. Because the Agency is proposing to combine these two current categories of MSB, it seeks comments on whether future regulations should require check cashers to report suspicious activity.

Would such a requirement be necessary, considering, for example, that issuers of traveler’s checks and money orders will continue to have SAR reporting requirements?

Other Comments

The agency is also seeking other comments, including:

1. Should there be an exemption or other relief for certain types of lower-risk checks, such as federal, state, or local government entitlement checks?
2. Should there be any other exceptions or limitations on the check casher definition?

In addition, the agency is inviting comments on the impact of the proposed changes, if any, on current business practices.

Meaning of ‘Issuer or Seller of Traveler’s Checks or Money Orders’

The Agency proposes to replace existing sections that reads ”issuer of traveler’s checks, money orders, or stored value” and ”seller or redeemer of travelers checks, money orders, or stored value” with a new section, ”issuer or seller of traveler’s checks or money orders.”

The proposed new section defines an issuer or seller of traveler’s checks or money orders as a person that (1) issues traveler’s checks or money orders that are sold in an amount greater than $1,000 for any person on any day in one or more transactions or (2) sells traveler’s checks or money orders in an amount greater than $1,000 for any person on any day in one or more transactions.

The proposal would eliminate the current ”redeemer” language from the definitions. Although current rules include those who ”redeem” traveler’s checks and money orders, traveler’s checks typically are redeemed by their issuers, making a separate redemption category redundant.

Moreover, said the Agency, redeeming a traveler’s check or money order by a non-issuer is close enough to the activity of a check casher that it believes it can be incorporated into that definition.

The Agency is seeking comments on the proposed change to travelers checks and money orders:
1. Is it appropriate to link the definitional threshold for an issuer to the value at which the money orders and traveler’s checks are sold?
2. In light of the proposed definition of a check casher, is the ”redeemer” provision no longer necessary for traveler’s checks and money orders?

Foreign-Located MSBs

The BSA authorizes FinCEN to define a domestic financial institution without reference to its physical presence in the United States. The term ”domestic financial institution” applies to an action in the United States, not to the physical location of the financial agency or institution taking the action.

The Agency proposes to amend the regulations to ensure that certain foreign-located entities engaging in MSB activities in the United States are subject to the requirements of the BSA. The proposed revisions would state that an entity is defined as an MSB by the activity it conducts within the United States, and not exclusively by physical presence.

The term ”money services business” would include a person, wherever located, engaged in the activities that take place wholly or in substantial part within the United States. This includes but is not limited to maintenance of any agent, agency, branch, or office within the United States.

Technological advances, said the Agency, make it increasingly possible for MSBs to offer financial services through mechanisms other than ”brick and mortar” locations. Foreign entities can and do offer services in the U.S. through other means, such as the Internet or a U.S.-based bank account. The proposed changes would ensure that a foreign-located entity engaging in activities in the United States would be regulated as an MSB.

If a foreign-located business is an MSB according to the regulations, then it would have the same reporting, recordkeeping, and other requirements as an MSB with a physical presence in the United States.

FinCEN said it also wants to ensure that the AML regulations apply equally to all persons engaging in activities in the United States as MSBs. The U.S. system is not fully protected when some MSB transactions are covered and others are not. The Agency said it was concerned that the Internet can increasingly be used to conduct business within the United States from a foreign jurisdiction.

The Agency is seeking comments on the effectiveness of the proposed changes regarding the application of the MSB definition to certain foreign located MSBs. The agency is also seeking comment on whether it should expand the definition of “foreign financial institution” in the foreign correspondent account rule to include check cashers and issuers or sellers of traveler’s checks or money orders.

‘Dealer in Foreign Exchange’

Current, regulations define a ”currency dealer or exchanger” as a currency dealer or exchanger (other than a person who does not exchange currency in an amount greater than $1,000 in currency or monetary or other instruments for any person on any day in one or more transactions).

The proposed changes would revise the regulations to state: Dealer in Foreign Exchange. A person who accepts the currency, or other monetary instruments, funds, or other instruments denominated in the currency, of one or more countries in exchange for the currency, or other monetary instruments, funds, or other instruments denominated in the currency, of one or more other countries in an amount greater than $1,000 for any other person on any day in one or more transactions, whether or not for same day delivery. “Dealer” is intended to include all persons who are in the business of engaging in transactions involving the current or future acquisition or disposition of funds denominated in a particular currency by exchanging them for funds denominated in another currency.

The Agency said it is proposing to remove the word “currency” from the name of the category to make clear that businesses that meet this definition may be exchanging not only currency but also other monetary instruments, funds, or other instruments that are denominated in currency.

Inserting the word ”foreign” clarifies the Agency’s consistent position that any exchange that occurs in the United States could be covered, even if it does not involve U.S. dollars.

The proposal also clarifies that dealing in foreign exchange is not limited to the physical exchange of the currency of one country for the currency of another country. The phrase ”currency, or other monetary instruments, funds, or other instruments” clarifies which mediums of exchange are included. “Other instruments” is intended to capture payments that do not fall precisely into one of the other categories but nevertheless are readily recognizable as payment instruments.

‘Money Transmitter’

The Agency is proposing to revise the regulation that defines funds transmission as ”a licensed sender of money or any other person who engages as a business in the transmission of funds, including any person who engages as a business in an informal money transfer system or any network of people who engage as a business in facilitating the transfer of money domestically or internationally outside of the conventional financial institutions system.’”

The proposed definition of money transmitter would read, in part, “a person who provides money transmission services.” The term ”money transmission services” means the acceptance of currency, funds, or other value that substitutes for currency from one person AND the transmission of such currency, funds, or the value to another location or person by any means.
”Any means” includes through a financial agency or institution; a Federal Reserve Bank or other facility of one or more Federal Reserve Banks, the Board of Governors of the Federal Reserve System, or both; or an electronic funds transfer network.

The proposed definition of money transmitter would remove the phrase ”engages as a business” found in the current regulations. The proposed definition would also remove the phrase ”whether or not licensed or required to be licensed.”

The proposed definition of money transmission services includes the phrase ”or other value that substitutes for currency” to state that businesses that accept stored value or other currency equivalents as a funding source and transmit that value are providing money transmission services.

By including the transmission of value, the proposed definitions would include informal  value transfer systems, including hawalas. A hawala is an alternative remittance system that operates outside of, or parallel to, ”traditional” banking or financial channels. Such activity is money transmission, and the providers are money transmitters subject to the requirements of the BSA.

The proposal also adds the phrase ”to another location or person.” Transactions involving the acceptance of currency from one person at one location and the return of that currency to that same person at the same location would not be considered a money transmission service.

‘Stored Value’

Under the current rules, the Agency addresses traveler’s checks, money orders, and stored value under two separate definitions: issuers and sellers or redeemers of those products. FinCEN proposes to group issuers, sellers and redeemers of stored value together.

Although FinCEN said it did not intend to substantively amend the category of issuers, sellers, or redeemers of stored value in this proposed change, it is considering possible future revisions.

Seeking Comments

The Agency said it was seeking comments on all aspects of the proposal to revise the MSB definitions and related regulations. Those commenting who are currently an MSB, should indicate in their response which MSB services they offer and whether they offer the services in an agent capacity.

In addition, the agency is also seeking comments on the following:
1. Aggregating MSB Services. Should transactions involving multiple MSB services be aggregated for purposes of determining whether definitional thresholds have been met?
2. For ease of compliance, should the regulatory threshold remain uniform for the categories of MSBs that have a threshold or should the threshold differ among the types of businesses to distinguish between the risks of certain types of activities? How would this affect the operations of businesses providing multiple MSB services?

Comments on the proposed rulemaking should be submitted by Sept. 9, 2009. You may submit comments by any of the following methods: Federal e rulemaking portal: www.regulations.gov. Follow the instructions for submitting comments. Refer to Docket number TREAS FinCen 2009 0002. Mail: FinCEN, P.O. Box 39, Vienna, VA 22183. Include RIN 1506 AA97 in the body of the text. Further information may be obtained through the Regulatory Policy and Programs Division, FinCEN (800) 949 2732; select option 1.

These are only parts of the proposed revisions. For a complete and comprehensive overview of what specific changes are being proposed, check cashers should send an E-mail to cases@cnsus.org with FinCEN-MSB 2009-Text in the subject line for a text copy of the Notice of Proposed Rulemaking or FinCEN-MSB 2009-PDF in the subject line for a PDF copy.


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