Money isn’t necessarily the root of all evil. But when money changes forms or hands without an underlying transaction — for example, through conversion or transmission — it can be the root of money laundering.
These applications, known as money services, can take place not only at banks but also at a wide range of financial institutions, such as neobanks, fintech companies, check cashers, and more.
Because conversion and transmission carry a large risk of being used for money laundering, these money services businesses (MSBs) are subject to anti-money laundering (AML) laws and regulations.
What is a money services business?
A money services business (MSB) is any business, other than a bank, that facilitates the transmission, exchange, or conversion of money. Although many traditional banks also provide these services, they are excluded from the legal definition of an MSB.
Money services businesses are still considered financial institutions under the Bank Secrecy Act (BSA) and related laws. They are therefore subject to the same anti-money laundering, KYC, and due diligence requirements as all other financial institutions.
Types of money services businesses
According to the Financial Crimes Enforcement Network (FinCEN), the arm of the U.S. Department of the Treasury responsible for most anti-money laundering regulations, a business is considered an MSB if they:
- Exchange currency
- Transmit money
- Cash checks
- Issue or sell traveler’s checks, money orders, or stored value (prepaid) cards
- Redeem traveler’s checks, money orders, or stored value (prepaid) cards
These services are offered by a wide range of businesses. Remittance services, cryptocurrency exchanges, bill payment services, equity crowdfunding platforms, digital payment processors, peer-to-peer lending platforms, and many different fintech companies are all MSBs. Even the U.S. Postal Service is an MSB because it issues and cash money orders.
Examples of money services businesses
The list below represents some common MSB categories, but is not comprehensive. Some businesses can fall into multiple categories, and we listed these under their primary application.
Currency exchanges are businesses that exchange one currency for another. This includes the exchange of flat currencies as well as cryptocurrencies. Forex, Coinbase, eToro, Gemini, Binance, and Robinhood are all examples of businesses that offer currency exchange services to their customers.
Digital payment processors
A digital payment processor is a business that facilitates the digital transfer of money between two or more parties. PayPal, Cash App, and Venmo are the most popular digital payment processors in the U.S., but there are many others worldwide, including JumiaPay in Africa, Mercado Pago in Latin America, and SeaMoney in Southeast Asia.
Money transfer services
Money transfer services transmit money from one individual to another. MoneyGram, Western Union, Wise, and Flywire are some of the most well-known money transfer services.
Remittance processors facilitate money transfers from an individual to their family, friends, or acquaintances in another country. Remitly, WorldRemit, Instarem, and Xoom are examples of remittance processors. Many money transfer services also offer remittance services.
Regulatory requirements for MSBs
Many of the services provided by MSBs are particularly sought out for money laundering and other financial crimes. For example, a bad actor might use money transfer services and digital payment processors to move money and obscure its illegal origins. According to a recent report by the Financial Action Task Force (FATF), remittance processors and currency exchanges can be leveraged for all stages of the money laundering process — placement, layering, and integration.
MSB registration requirements
In the U.S., all money services businesses are required to register with the Department of the Treasury. To do so, the business must complete and submit FinCEN Form 107 within 180 days of establishing their business. Every two years, MSBs must renew their registration with the Treasury.
AML risk-based approach
All financial institutions subject to the BSA, including MSBs, are required to implement a risk-based approach to AML. In short, this means that the business’ AML policies must be tailored to its unique money laundering risks. This approach should be informed by both an internal AML risk assessment as well as a customer risk assessment, and should periodically be adjusted as the risk profile changes.
Know Your Customer (KYC)
Before providing its services to a customer, an MSB must first verify the associated person’s identity to ensure that they are not attempting to conduct unauthorized business and so all activity is traceable. This requires an established Know Your Customer (KYC) process. At a minimum, MSBs must collect a customer’s name, date of birth, address, and taxpayer identification number (SSN or TIN). Verification may be accomplished through a variety of means, such as government ID verification, database verification, or document verification.
Customer due diligence
Customer due diligence (CDD) is the process of evaluating a customer’s risk profile to determine whether it’s safe to do business with them. In addition to identity verification, CDD includes identifying and verifying the identities of all beneficial owners or companies or organizations seeking to open an account. The CDD rule also requires ongoing transaction monitoring.
Customers deemed to carry a high risk of money laundering may be turned away or subjected to an enhanced due diligence (EDD) process. This may include additional screenings, such as more stringent identity verification, source of funds verification, and other AML checks.
Suspicious activity reporting
Money services businesses providing certain types of services are required to monitor customer activity and report suspicious activity. These services include:
- Transmitting money
- Issuing, selling, or redeeming money orders
- Issuing, selling, or redeeming traveler’s checks
A suspicious activity report (SAR) must be filed for any transaction known or suspected to involve illegally obtained funds. A SAR is also required if it is believed that a transaction is structured to evade the reporting requirements of the BSA, or if there appears to be no lawful reason for the transaction to occur.
The MSB must file the appropriate SAR within 30 days of becoming aware of the questionable transaction.
Money services businesses are also required to submit a currency transaction report (CTR) for any cash transaction exceeding $10,000.
Getting started with AML compliance
If your business enables customers to send, transmit, convert, or exchange money, you’re most likely an MSB subject to the same AML, KYC, and CDD requirements as all financial institutions. Running afoul of these regulations can result in significant fines, regulatory sanctions, and even jail time depending on the severity of the transgressions.
You can start your AML compliance journey by making sure that you’ve implemented all five pillars of AML compliance, as established in the Bank Secrecy Act:
- You have a designated compliance officer.
- You have developed internal policies related to KYC, CDD, transaction monitoring, and suspicious activity reporting.
- You have created a training program for employees.
- Your program is regularly audited by an independent third party.
- You have deployed in-depth risk assessment as a part of the risk-based approach.
When selecting an AML or KYC solution, it pays to choose a partner that understands not only the relevant regulations, but also your business model, industry, geography, and the nuances that they can bring.
Here at Persona, AML compliance is in our DNA. We’ve designed our entire suite of identity tools to empower you to build the KYC, customer identification program (CIP), and CDD processes that you need to stay on top of regulations while still meeting the needs and expectations of your customers.