Whitepaper by Connie Krebs, Blue & Co., LLC
Since 2012, the IRS has utilized their Small Business/Self-Employed Division (IRS SB/SE) staff to examine registered businesses for their Bank Secrecy Act (BSA) policy and procedures. This division has been quite active and has assessed large penalties to several of these companies.
They have found significant issues in all types of Money Service Businesses (MSBs), as discussed below. In most cases the issues fell under the realm of not having compliant policies or procedures or not reporting properly.
In this whitepaper, we give an overview of common infractions, risk factors, and possible solutions. The type of entity, their infractions, and the amounts fined are discussed below.
Recently, there was a grocery store in Lexington, Kentucky that failed to file Currency Transaction Reports (CTRs), and cashed at least $1 million a month in checks without tracking. In this case, the store owner was the BSA officer. He incorrectly filed CTRs and did not have a system to monitor transactions. The IRS fined the owner $10,000.
Another case was found during SB/SE examination of a registered MSB. The store frequently exchanged checks for cash with another money services business, an arrangement known as “wholesaling” or “bulk check cashing,” in which the owner failed to disclose. He attempted to conceal these transactions by withholding business records such as checks and adding machine tapes. These transactions accounted for over $2.1 million worth of wholesale-exchanged checks during the six-month examination scope. The owner stated that the company had been wholesaling checks for the past two years. However, further investigation revealed that the wholesaling arrangement had been in place for more than a decade.
This practice severely hampers following the money trail and money laundering scheme detection. He was fined $60,000.
A casino in Nevada had elaborate systems to determine who their customers were and how they could better serve them. However, their BSA Officer was thwarted by their own staff in preventing, detecting, and reporting of money laundering. The staff did not use their finely developed systems to monitor or report anything. The casino recently sold, but that did not stop Financial Crimes Enforcement Network (FinCen) from fining the former owners $1 million.
The casino blatantly failed to report even though they had capable systems. This is not the only casino to be recently fined for not meeting the Anti-Money Laundering (AML) Standards.
A former BSA Officer of a money transmitter was recently penalized $1 million because of his inactivity in detecting scams that were conducted by agents of the company. The company had records of the agents with the most losses, yet it continued to allow those agents to operate.
In addition to the officer’s fine, the company had already paid out millions – $13 million fined through court cases by the Federal Trade Commission (FTC) – to customers for the scams that took place.
The following Bulletin was issued by FinCen and outlines the responsibilities of MSBs and their agents. This includes check cashers, money transmitters, and grocery stores.
Keep in mind: The parent company will be held accountable for seeing these items are followed. The parent company approves agents to facilitate their business of transmitting money. These agents need more supervision as pointed out in all of these actions.
Risk factors that principals, such as money transmitter companies, grocery store chains, and/or check cashing companies, should consider when conducting agent monitoring include, but are not limited to:
• Identify the owners of the MSBs agents
• Evaluate on an ongoing basis the operations of agents, and monitor for variations in those operations
• Evaluate agents’ implementation of policies, procedures, and controls
The following outlines in-depth details for the agent monitoring processes above:
Background Check. Determine whether the owners are known or suspected to be associated with criminal conduct or terrorism.
Test AML Programs. Determine whether the agent has an established and adhered to AML program.
Monitor the Area Served. Critique the nature of the markets the agent serves, and the extent to which the market presents an increased risk for money laundering or terrorist financing. (This does not mean that principals with agents providing services involving regions affected by conflict or terrorism cannot manage such risks, but rather that principals must take steps to account for and mitigate such risks.)
Monitor Level of Services. Outline the services an agent is expected to provide and the agent’s anticipated level of activity and monitor frequently.
Assess How Long the Established Relationship is. Determine the nature and duration of the relationship. It is important when assessing the levels maintained and whether the volume is normal for the established office or other.
Many banks cater to small stores, restaurants, and mom-and-pop operations. These small businesses like to help their customers. In the past, some small businesses would cash customer checks so they did not have to go to the bank, or others which provided extra time for the customers check to clear.
Small businesses later gained the opportunity to become money service businesses when they sold money orders, travelers checks, and transmit money, or cashed checks over $1,000 a day to one person. However, some of these companies found that they could do more things, such as funnel back-room operations for crime without anyone knowing. The creativity of criminals has shifted into these other formerly unregulated businesses.
Although FinCen requires all MSBs to be registered, it does not have resources to find every single company that does not. The onus is left to banks that have these company accounts to require them to register if they want to be a bank customer.
A registered MSB should have the following items, and banks should also ensure they are completed:
Can banks be held more accountable for being the watchdog?
They can be if a scam or money laundering is detected in a bank customer’s MSB account that was not monitored or stopped by the bank. Regulatory agencies do not want to discourage banks from handling MSB accounts, however, it should be known that these accounts will take more time through monitoring and training to administer.
Banks should be sure to monitor their MSBs and require the proper documentation and registrations before opening an account and thereafter. They should also be sure to charge these accounts accordingly.
These risk assessments seem to be just a cost of doing business, because the volume of activity more than pays for the assessments. In all of these cases, since these entities are not regulated on a routine basis, they either did not have enough staff to correctly engage in the amount of activity they were involved, or they blatantly disregarded the requirements.
Despite these fines, the level of regulatory supervision is still lacking, and some of these companies will continue to be a large source of funding for money launderers and drug trade. Conscience and job duties do not prevail. The fines in the examples above may have sent messages, but they will most likely only deter good BSA officers from wanting to be a designee in a company where compliance is considered bad for business.
Perhaps a better method would be to have these businesses, upon chartering in their state, file their BSA policy and name the BSA officer before they can be approved in the state.
For this to happen, all states would need to require the same information. A purchaser of any of these businesses would also need to provide this information. If they are not going to handle cash, be a transmitter, a check casher, or sell money orders or prepaid cards, then they would need to make a statement of such proportion.
No more free entry. Those who are chartering for a bogus purpose then could have their license to do business in the state revoked and business confiscated if found to be doing any of these services without approval.
Please contact us if you have any questions.