Banking Issues Continue While Surety Bond Underwriters Embrace MSBs

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Authored by: Brian Nelson, Bond Manager at Alpha Surety Brokerage

Why are MSBs are locked out of the traditional banking sector while at the same time surety bonds are becoming cheaper and underwriting requirements continue to loosen? I know I’m oversimplifying this a bit, but surety bond underwriters understand that claims on MSB bonds are typically caused by a breach in compliance. Naturally, banks understand the same. However, as banks continue to close MSB accounts, surety underwriters are issuing approvals on lower underwriting requirements and at premiums that have previously been reserved for only the top revenue companies. It used to be that new money transmitters, check cashers and prepaid access companies would pay at least 3% for their bonds if they could even qualify based on verification of substantial personal assets or substantial cash in the business bank account. Things have changed. Recently, a company with neither a large amount of cash in the bank or a strong personal financial statement for the owner, received an approval for 1.5% on a multi-million dollar aggregate bond need. According to the underwriters, the reason for the low quote was because competition for these types of bonds has increased significantly. (For a state-by-state list of bond amount requirements, click State by State Bonds.)

Wouldn’t it be nice if banks felt the same way about competition? MSBs around the country are dying to find banking partners that will treat them fairly. I recently spoke to an MSB about a potential partnership that would have brought them a substantial amount of new business. After my presentation, I was told that their bank wouldn’t allow for them to partner with other MSBs. I’m still confused by the comment because both entities involved in the partnership would have been licensed money transmitters. Since when does a partnership between two licensed companies create a compliance risk for banks?

Unfortunately, it is the poor, underserved and deprived populations that suffer the most when MSBs are cutoff from serving them. Organizations like the NMTA, NBPCA and others have been fighting the banking battle for years with little to no progress. We can only hope that newer industries like the digital currency and the electronic payments industries will bring their resources, connections and energy to the fight. Without them, I’m afraid we’ll be talking about the same banking issues for many more years.

If you know of any groups or efforts focused on the non-banking issue, please share details in the comments section.

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Upcoming Event: Industry Symposium for Legislative Action

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Members of the MSB industry are invited to participate in an industry symposium for legislative action. The event will be held in Washington DC on February 18th. The event and registration page can be found HERE.

The National Money Transmitters Association is hosting the event in an effort to create legislative change that would benefit the society and our industry. Below is a copy of the most recent email communication regarding ISLA. A great list of current attendees is found at the bottom of the page.

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January 16, 2014

Dear Colleague,

Usually, new regulatory legislation comes as a ‘crackdown,’ a reaction to some problem or abuse that has occurred, bringing stricter standards imposed from the outside, resisted by industry, and seen as bad for business.

In a previous email, I listed the benefits reform would bring to society. But here is how we in the money transmitting industries would benefit from regulatory reform, and why we should advocate for change:

  1. To overcome an image problem
  2. To defend against unfair competition from less-compliant market participants
  3. To establish orderly, predictable business conditions
  4. To maintain a level competitive environment
  5. To enable reasonable access to banking services
  6. To forestall more onerous, misguided legislation from elsewhere
  7. To reduce redundancies that exist in the present system
  8. To establish common standards and credentials that certify compliance

The money transmitting industries have become so numerous, complex and varied, that intelligent regulation (and sustainable growth) is no longer possible without a permanent, centralized  agency, one that appropriately understands the industries and can establish consistent norms and recognized certifications.

These are just my opinions. I certainly do not claim any monopoly on wisdom.The Symposium is a place for many different points of view. Anyone can sound off on what they think is wrong with current regulation – or could be done better – and come up with suggestions on how to fix it. Of specific concern, is the banking problem.

Sticking to that theme – and time – are the only restrictions. I am asking people who wish to, to write a 1 or 2-page monograph, outlining their ideas, for collation and posting on the conference page.

If you would like to speak, please fill out our very short Speaker Request Form, indicating your desired topic and desired length of talk. This will help schedule the sessions and distinguish between people who would like to speak less than 5 minutes (your name will automatically be put on a list) from those who would like to speak more than 5 minutes (in which case, I will contact you to discuss.)

You do not have to prepare a paper or a presentation if you would like to speak. So far we have 44 people registered and more signing up every day (see list below). The Choate Room has a maximum capacity of 90 persons, so please do not delay, we are already halfway to capacity.

If you are interested in attending the ISLA, please visit our new website and click on “Events” to register. If  you have any questions, please respond to this email, or call me at (917) 921-9529. The ISLA wll be held at:

The Carnegie Endowment for International Peace
1779 Massachusetts Avenue NW
Washington, DC 20036

I look forward to seeing you in Washington!

Regards,

– David Landsman

* The AML Training is a separate event taking place the day before the ISLA, on February 17, 2014. This will be an all-day, “Total Immersion ” AML Compliance Crash Course, also covering state licensing issues. The registration for that day is $445. Please visit our new website and click on “Events” to register.

Attendees as of January 16, 2014

 Company or Agency First Name Last Name
A & B General USA, Inc. (Thailand) Thanyarat Nualsirisakul
AML Experts, Inc. Connie Fenchel
Baird Holm Terrence Maher
Banking Committee, US Senate Jeanette Quick
Bitcoin Solutions DC Darrell Duane
Bitcoinmagazine.com Dmitry Murashchik
Bryan Cave Judith Rinearson
Caribe Express Raquel Olivo
Chartered Forex Carmen De Jesus
Columbia University Portia Crowe
Consumer Financial Protection Bureau Rebecca Smullin
Dolex Laybaa Hernandez
Embassy of El Salvador Enilson Solano
Embassy of El Salvador Luis Aparicio
Federal Reserve Jennifer White
Federal Reserve Lee Davis
Financial Service Centers of America Scott McClain
GCC Exchange (Dubai) Joshua Suresh
GCC Exchange (Dubai) Maninadar Iyadurai
GCC Exchange (Hong Kong) Kishore Iyadurai
InteliSpend (Prepaid access) Wendy Lewis
Internal Revenue Service Sandra Stolt
Legislative Solutions Ann Vroom
LeveLup (MobilePayments App) Katie Alexander
Macfarlane Group Cary Chan
m-banco Mobile Money Randolph Kantorowicz
Mondato Julienne Lauler
National Money Transmitters Association David Landsman
Optima Compass Group Jorge Guerrero
Patton Boggs Carol Van Cleef
Pontual Money Transfer Fernando Fayzano
Qikcoin Stephen Sunderlin
Retail Grocers Association of Kansas City Jon McCormick
Skrill Elena Sabkova
Skrill Mary Lozada
The Law Office of Marilyn D. Barker Marilyn Barker
Transmit International Inc Mohammed M Islam
Unidos Financial Juan Llanos
United States General Accounting Office Toni Gillich
Washington DC Bitcoin Meetup Richard Weston
Western Union Meredith Cipriano
Western Union Susan Smith
Wilmer Hale Katrina Carroll
World Bank Alana Fook

IMTC Conference Review – Industry Disruption: New Payment Protocols

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Mohr World Consulting along with the NMTA held another great conference for money transmitters in Miami Florida last week. The IMTC Miami conference has become the world’s largest conference dedicated to the money transfer industry and continues to grow year over year. It was great to see old friends and new faces as we all work together in building a more compliant and accepted industry throughout the world.

My main take away: New technologies are beginning to disrupt the money transfer industry.

Bitcoin

Although they are still in their infancy, protocols such as the Bitcoin protocol and Ripple are starting to compete with Swift as a transfer settlement tool. The new technologies are making money transfers easier, cheaper and more secure. However, it is apparent that these technologies still have a long road to travel before they have the traction and volume to make a big impact on the industry.

Traditional money transfer companies are hesitant to make any changes with their operations because of the potential compliance issues associated with using the new protocols. But…that will quickly change if companies like Ripple succeed in landing a couple big name money transmitters.

It was apparent during the Virtual Currency panel, that traditional money transmitters are still not convinced of the power of Digital Currencies. However, a number of individuals in the room later expressed interest in either partnering with Bitcoin companies or using a service that would provide a better settlement tool using the Bitcoin protocol. Now that the ball is rolling, it’s only a matter of time before the industry adopts new protocols to facilitate money remittances.

All in all, I truly enjoyed the conference and look forward to reconnecting with everyone again soon.

– Brian Nelson

Are Money Transmitters Risking Licenses By Partnering With Virtual Currency Operators?

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Since March of this year, when FinCEN released new guidelines requiring virtual currency operators to be licensed as money transmitters, the subject of compliance has been the main topic of conversation within the virtual currency world. Conferences devoted to federal and state regulations such as the Virtual Currency Compliance Conference “VC3” hosted by the NMTA two weeks ago are being held in order to connect and learn from regulators, traditional money transmitters and virtual currency operators. And although the efforts of conference organizers are valiant, one huge piece of the compliance puzzle is being overlooked; Surety Bonds.

The process of getting licensed and bonded nationally is onerous for emerging startups in the money transmitter space. For that reason, a number of traditional money transmitters have expanded their business models to include an agent program that allows virtual currency operators to “piggyback” off of their licenses, and by extension, their surety bonds. But there is a mounting problem with that business model. The surety bond carriers that are denying bond applications from virtual currency operators are the same carriers that are currently providing the bonds to the money transmitters offering agent programs to the virtual currency industry. Surety bond carriers are beginning to question their desire to continue providing bonds to money transmitters interested in opening their licenses and bonds to be piggybacked on by virtual currency operators.

A leading underwriter for a large surety bond carrier expressed his concern for the business model in a recent message where he points out that one misstep by an agent could be a money transmitter’s demise and easily cause a claim on one of the bonds. He goes on to say that he understands that they are only underwriting the money transmitter, but that they are ultimately relying on the principal’s ability to underwrite the agents. The pinnacle of his concerns is this; “They (traditional money transmitters) are getting into the Bitcoin arena, which is a class of business we are not comfortable with at the moment.”

It is yet to be seen if surety bond carriers will take action against traditional money transmitters that partner with virtual currency operators by cancelling their bonds and therefore rendering them unlicensed. However, we do know that bond carriers have the right to cancel a bond at renewal for whatever reason they deem appropriate. For example, virtual currency companies that have been issued a money transmitter bond in the past are now seeing those bonds being cancelled upon renewal due to the uncertainty of the virtual currency industry. Without the ability for companies to secure the necessary surety bonds, there is no hope for a legitimate virtual currency market.

The success of math-based currency relies on the efforts of advocates involved in each aspect of compliance. Alpha Surety is working hard to educate surety bond carriers on the virtual currency industry by representing both virtual currency operators and traditional money transmitters seeking to provide solutions to emerging technology companies.

The Virtual Currency Compliance Conference (“VC3”) by the NMTA

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I am participating in the Virtual Currency Compliance Conference (“VC3”) being held in New York on Wednesday the 14th. The conference is being hosted by the NMTA and will focus on the issue of compliance for virtual currency operators. If you or your company have any interest in virtual currency, then you don’t want to miss VC3. Below is a great article about the conference provided by PRWeb.

– Brian Nelson

Former FinCEN Director Freis to Address the Virtual Currencies Community

On Wednesday, August 14th, at the New York City Bar Association, former Financial Crimes Enforcement Network (“FinCEN”) Director James H. Freis, Jr. will address the first Virtual Currencies Compliance Conference (“VC3”), proudly hosted by the National Money Transmitters Association (http://www.nmta.us)!

Few can speak as authentically as Mr. Freis on the federal approach to regulation of new money transfer technologies. It was during his tenure that FinCEN first issued rules on how the BSA would treat prepaid access (or stored value) products, including mobile and internet money transfer.

Recent guidance from FinCEN further clarified that virtual currency Exchangers and Administrators were also to be considered money services businesses (“MSBs”) under the Bank Secrecy Act (“BSA”). A short time later, Cease and Desist Orders were sent to many Bitcoin operators by the State of California, due to their lack of state licenses.

Some virtual currency entrepreneurs, well aware of their anti-money laundering (“AML”) and state licensing obligations, integrated regulatory compliance into their business plans from the start. Some, however, may not have planned on the expense of compliance. They will now have to implement AML programs, get state-licensed and register with FinCEN, or risk facing criminal charges.

Industry members who come to VC3 will be enlightened by Mr. Freis and seven other compliance experts in interactive sessions, and by a panel of their industry peers at the end of the conference day.

There will be ample time to meet and chat with the experts and each other during a continental breakfast, buffet lunch and two coffee breaks. The day will finish with a networking cocktail mixer from 5:15 p.m. to 7:00 p.m.!

From 7:00 p.m. to 8:30 p.m., VC3 attendees who want to help shape and protect the future of their industry are welcome to attend a discussion of lobbying and self-regulatory strategies.

This meeting will be chaired by Ms. Constance Choi, General Counsel of Payward, Inc., one of the more than seventeen companies that have formed the Digital Asset Transfer Authority (DATA), a new self-regulatory effort that is making rapid progress and has garnered broad support from a large number of important industry players.

Do not miss this intensive learning and networking experience, register now. Early Bird pricing has been extended to August 14, 2013. Please call David Landsman at (917) 921-9529 to see if you qualify for affinity discounts.

Why We Need to Know Our Customers

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I was reading a fascinating true fraudulent situation on ‘U.S Charges Eight with Multi Million-Dollar cybercrime’ dated June 12, 2013 in CIO Magazine.  Essentially hackers were able to gain access into the accounts of various banks and organizations which included the U.S Military’s Defense Finance and Accounting Service.  In addition, the hackers allegedly submitted fraudulent tax returns to the U.S Internal Revenue Service seeking refunds.

The funds received from these institutions were then directed on to pre-paid debit cards and various bank accounts.  In the case of the pre-paid debit cards, money was obtained from ATM withdrawals and purchases which were converted into cash.  Cash was then deposited into bank accounts in amounts below reportable thresholds limits.

Apart from reading this ingenious scam operation, I could not help but think of the consequences to our legitimate business.  Once the funds were in bank accounts and even the pre-paid debit cards, it could have easily been used to purchase products or services offered by our institutions.  And even applying the standard Know Your Customer rules when conducting business with a new client, I can imagine that there is a possibility of such activity still passing through our business unwittingly.

We would then only be aware of a problem when the authorities made their investigation.   And at this point, the scenario becomes a regulatory nightmare for any legitimate business which would have accepted these transactions.   Apart from possible financial losses we would then be faced with a regulatory issue of how we could have allowed this transaction to be passed through our organization.

The end result is that business in general is tough as it is.  But with sophisticated cybercrime, we now have additional financial and regulatory problems.

Allan Ramlall

Not a Big Deal to Follow the Money Transmission Rules

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Allan-Ramlall-NMTAI would like to make some observations after reading the article ‘Virtual Currencies Draw State Scrutiny’ by Robin Sidel and Andrew Johnson in the Wall Street Journal.  The newly virtual currency exchanges must have developed a business plan specifying in detail the type of financial service which they planned to provide.  In addition, as in many cases these firms could have used attorneys to legally incorporate their businesses.   Whether it should have been the relevant attorneys, their bank officer who opened their bank accounts or the owners – it appears that the money transfer experts were not consulted.

Those of us in Money Transfer Compliance would have easily recognized that a money transfer license would have been necessary for the Bitcoin type of business module.  And even if the activity was in a ‘grey area’ – a simple call to the U.S regulators would have solved the issue.  In any case, one cannot go back in time but must deal with current reality – which is a Money Transfer license is required for a given relevant state in the U.S.A.   Yes – it is a bit cumbersome to obtain a license state by state since we do not have in place one National Money Transfer license covering the entire United States.

However, to attain a state Money Transfer License is relatively painless if you consult with the Money Transfer experts.  We can apply for one or multiple state licenses at a given time for a reasonable price and not a huge fortune.  And you do not need an attorney to execute this task.  Leave it to the experts who have the experience in this field.

And please – as long as the virtual currency exchanges have an objective of only conducting legitimate business then they should welcome the anti-money laundering requirements which come along with a state Money Transfer License.  Again the money transfer regulatory experts can assist you to set up policies, procedures and controls to mitigate the infiltration of the criminal elements in your company operations.

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Yes – you do need surety bonds for the Money Transfer licenses in the various states.  But do not be afraid of the numbers – such as having to obtain a surety bond of $300,000 to $2 million.  Again the money transfer compliance experts can have the surety bond specialists quote you the premiums which you will need to pay – and I assure you that if your company has a good business, those premiums can be quite satisfactory.

So please my friends – do not be afraid.  Be brave – especially if you have confidence in your product and service and wish to conduct only legitimate business.   The government regulators will work with you as long as you follow the rules.

-Allan Ramlall