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Recently the Deposit Insurance Corporation of Ontario (DICO) released “Operational Risk Advisory #2: Potential Risks Associated with Providing Banking Services to Money Services Businesses; January 2012” which outlines the procedures they expect credit unions to follow when providing banking services to Money Services Businesses (MSBs). Since the advisory has immediate effect, credit unions need to determine the extent of their offerings to MSBs, and embed DICO’s expectations into their procedures. In this article we summarize the risks and rewards of serving MSBs, the procedures DICO’s suggests, and outline the MSB screening and monitoring services.
An MSB is a business that helps members of its community send and receive money from other countries, exchange currency, or redeem money orders and other monetary instruments. In Canada, MSBs are often culturally based and their clients are often newcomers here, sharing the success they achieve in Canada with relatives in their country of origin. The Philippines, for example, receives and depends on the equivalent of 11% of its GDP from foreign remittances. Some countries, like Somalia, depend on MSB networks to survive in the absence of a developed banking sector. MSB money transfers are cost effective too – many MSBs do not charge a transfer fee and charge only a 1-3% spread on the exchange of currency – a fraction of what banks or mainstream money transmitters often charge. Much like credit unions, MSBs depend on their reputations for security and trustworthiness to attract and retain clients.
MSBs require some combination of the following four principle services to operate:
MSBs use EFT services to facilitate settlement of their transactions with their counterparts in the other country, and foreign exchange/treasury services to deal with exchange and redemption transactions.
DICO raises the spectre of two principal categories of risk: regulatory and financial.
There is a risk that a credit union may fail to comply with their obligations under Canada’s anti-money laundering (AML) legislation by providing banking services to MSBs (or to any member, for that matter). A credit union might be subject to a penalty if it fails to appropriately assess and mitigate the money laundering risk associated with MSBs it services, report suspicious transactions conducted or attempted by MSBs, or to record adequate information about transactions conducted by MSBs. In addition to its regular risk assessment and mitigation plan, credit unions should consider developing an MSB-specific risk assessment and mitigation plan. The money laundering risks associated with serving MSBs (and other sectors such as securities dealers and car dealers) are well documented by authoritative sources, as are the techniques to deal with those risks. Key aspects of risk management for MSBs include a rigorous screening process at the application stage, the application of a comprehensive agreement, limits and controls for successful applicants, ongoing transaction monitoring, and periodic reviews.
Finding and reporting suspicious transactions depends on adequate monitoring and a deep understanding of the MSB and their operations. It is also strongly advised that credit unions screen applicants against a clear set of risk criteria, and evaluate their behaviour based on the assessed level of risk at regular intervals.
In terms of record-keeping obligations, each credit union has responsibilities to ensure minimum information appears in prescribed electronic funds transfers, for instance, and can depend on the MSB to provide it. This process is very similar to the one in place for credit union centrals that process wires for their credit union members.
Financial risks that MSBs pose are typical of most commercial members – including the risk of charge-backs and NSF cheques. As with those other commercial members, credit unions should follow good banking practices by applying and maintaining holds and sufficient reserves to manage that risk.
DICO is asking for four primary things from credit unions that are involved with or contemplating involvement in MSB banking services:
DICO asks that the Board approve the entry/continuance of activity in the MSB banking space, and each MSB account opened, supported by a business case.
DICO and FINTRAC are clear that each credit union must assess, document, and manage their money laundering risks; DICO asks that MSBs receive their own separate consideration.
DICO asks that the credit union ensure that the MSB is appropriately registered/licensed and that they have strong management and financial performance.
DICO asks that the credit union regularly verify the MSB’s standing (registration) with FINTRAC and monitor their transaction activity on a risk-sensitive basis.
DICO also mentions their expectation that outsourcing relationships for MSB screening and monitoring should be structured to minimize conflicts of interest. Those risks can be successfully managed with transparency, sufficient oversight, and agreement design, as with any outsourcing or external review relationship.
Some credit unions have recognized the banking services needs of the MSBs in their communities, including the income and channel benefits they can provide. Most recently in 2011, Luminus Financial’s offering to MSBs was recognized at the Central 1 Credit Union Innovation Awards ceremony for capturing that opportunity, together with a comprehensive and rigorous risk management program. In their recognition of the program, the award judges noted that Luminus had grown its asset base by $4 million, increased its income by 8%, and was profiting from access to MSB’s clients through channel arrangements for mortgage products.
MSBs, properly managed, can help credit unions grow their asset bases and increase their income.
For more information on how your credit union can benefit from dealing with MSBs, contact me, Matthew McGuire, National AML Practice Leader at MNP at 416.263.6959 or [email protected]
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