Paying Attention to AML Compliance in Mergers & Acquisitions

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Mergers and acquisitions are of course very common occurrences in the American economy.  And normally when a merger is being planned and then announced, I have taken for granted that the appropriate financial review and regulatory documentation has been conducted.   After all, if there is some sort of financial impropriety or lack of necessary licenses and corporate registration then in all likelihood, an acquisition or merger would not be successful.

However, lately I have noticed that  Anti-Money Laundering and Counter Financial of Terrorism regulatory issues seem to be playing a crucial role in the above mentioned financial arrangements.  From the top of my head, there were two recent corporate announcements which did not go too well.

First, it was M & T Bank Corp.’s planned acquisition of Hudson City Bancorp Inc which ran into unexpected regulatory issues thus delaying its venture.  Apparently, the Federal Reserve observed wide-ranging problems with M & T Bank’s efforts to deter money laundering.  Most specifically, the Federal Reserve stated that there were problems with the internal controls of the Bank which was necessary to comply with federal anti-money laundering laws and the review of potential high risk customers.

The second incident involved Ebix and its anticipated merger with an affiliate of the Goldman Sacks Group Inc. which had to be cancelled after U.S regulators commenced an investigation into misconduct at the company.   According to a Bloomberg Report, part of this investigation was related to possible money laundering issues in cross-border transactions.  In addition, it was reported that the FBI and the Securities Exchange Commission had an interest in the Liechtenstein based Rennes Foundation which was Ebix’ s largest investor.

My point in bringing up these two incidents is that with today’s Anti-Money Laundering (AML) and Counter Financing of Terrorism (CFT) regulatory environment, no financial institution can afford to become too complacent in its close attention to such issues and more so when planning a merger or acquisition.   I do not know if any of these two institutions conducted any wrongful activities or had any deficient compliance programs but certainly a rigorous before merger/acquisition internal compliance should have addressed any possible compliance issues whether remote or not.  And if such issues were presented then a high level corporate decision could have been made as to whether to proceed or to delay a merger or acquisition.

A reliable and objective Compliance internal team has a wealth of information from official regulatory material such as the Federal Financial Institutions Examination Council Manuals in which to address Risk Assessment and Internal Controls for a Risk Based Bank Secrecy Act/Anti-Money Laundering Compliance Program.  And in the AML Compliance arena – professionals are well versed in the identification, verification of Beneficial Ownership and the accompanying due diligence to be applied.

Corporations and banking institutions will have to view their Compliance team as key members in their financial strategic plans and generally in their business development.  For without strict adherence to AML or CFT matters, such institutions will not be regulatory protected from a defensive position nor will they be able to execute any successful business moves from an offensive position.

Allan Ramlall

 

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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.

The Gaping Void Between Traditional MSBs and Virtual Currency Operators

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There is a gaping void between traditional money transmitters and the virtual currency world! In order for virtual currency exchangers and administrators to comply with FinCEN and state regulations RIGHT NOW, they must build working partnerships with traditional money transmitters. Believe me, there is no other way for a virtual currency operator to get licensed and bonded nationally in any reasonable amount of time. Unfortunately, the process usually takes over a year. So…why aren’t more partnerships being developed where a virtual currency operator hooks up with a nationally licensed money transmitter as an agent?

What I’ve found is many money transmitters are interested in developing relationships with virtual currency operators, but they don’t know enough about the industry to jump in just yet. On the other hand, virtual currency operators know they need to find a partner, but don’t have the connections or the relationships with traditional money transmitters to make it happen.

I have been working with a number of organizations in preparing a “match-making” event where traditional money transmitters and virtual currency operators can meet face-to-face to discuss possible partnerships. This would give both sides an opportunity to learn from each other while building valuable relationships. Our hope is that by bringing both sides together, we will see more partnerships being built and thus the foundation of the virtual currency industry being strengthened.

Unfortunately, this type of event is not being valued by conference directors. I’ve contacted multiple conference directors who either don’t understand why this type of “match-making” is important or just don’t care to add additional value to a conference schedule that is already set.

So…that begs the question; would a “match-making” event be valuable to you, either as a traditional money transmitter or a virtual currency operator?

Authored by Brian Nelson

State of California Fires the First Shot at Bitcoin Operators

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It was only a matter of time before the most over-regulated state in the country got involved in Bitcoin regulation. A new article from PaymentsSource describes the attack launched against the Bitcoin Foundation by regulators from the state of California. Interestingly enough, the Bitcoin Foundation should in no way be considered a money transmitter. Could it be that California regulators have delivered the cease and desist order to the Bitcoin Foundation simply to wrangle other Bitcoin operators in one fell swoop?

Read the full story HERE.

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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.

NMTA Logo

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

 

We Are NOT Liberty Reserve

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I am sure that you all have read the numerous articles and news accounts of the $6 billion laundered through Liberty Reserve.  My intention is to look at various aspects of the Liberty Reserve case which all of our fellow colleagues in the foreign exchange, precious metals and legitimate money transfer business would never implement.   We must not allow anyone to link our totally transparent business activities with an outfit such as Liberty Reserve.

First of all, our fellow business entities operate within the confines of the U.S regulatory system.   Thus, many of us are registered with FinCEN as a MSB or obtaining a relevant State Money Transfer License.  Others would be registered appropriately in their various industry associations.   Liberty Reserve was blatantly conducting money transfer business and did not possess any such appropriate state licenses.  Without this license, with no regulatory oversight – who knows what due diligence if any was conducted with their customers and trading counterparties.

Second, with the mentioning of due diligence, it appears that Liberty Reserve accepted customers with the basic requirements of an e-mail address, a name, address and date of birth.  But what was not required, it seems was any verification of the customer’s identity.   What I am sure of – is that all of our upstanding fellow financial institutions have a strong Know Your Customer protocol prior to accepting anyone as a customer.  It is simply not worth the reputation risk of linking our institutions with criminal elements.

Third and here it becomes a bit confusing.  From the New York Times Article on May 29, 2013 ‘U.S Says Currency Exchange Was Online Hub for Laundering of $6 Billion’ customers did not directly fund Liberty Reserve. In fact the account holder would direct his or her regulated bank to transfer U.S Dollars to a Third Party Exchanger which was an unlicensed money-transmitting business located in Russia, Nigeria and Vietnam.  Then that Exchanger would then convert the money into digital or virtual funds for deposit into the holder’s Liberty Reserve account.

liberty-reserve1

It is here where I am positive that no such payment policy of ours even resembles that of Liberty Reserve.  We would require our accepted and approved customer to directly pay our institution’s account at a regulated bank in the U.S.  Not to have this simple requirement would mean there is no transparency.  And what I cannot comprehend is why the legitimate customers as opposed to the criminals would even conduct such a questionable payment process.  Would you or I just arbitrarily wire funds to an unknown entity in all places such as Russia, Vietnam and especially Nigeria!  And I would be curious to know what type of ‘due diligence’ were the regulated U.S Banks conducting when wiring funds to ‘questionable’ companies in High Risk Compliance countries.

I have mentioned these differences because I am hoping that the Liberty Reserve fiasco is not going to affect us in any way. I have no idea of what the fall out will be from this situation as it affects the U.S Banking System.  We certainly do not want the banks in the U.S to have any additional fears of dealing with legitimate non-bank financial institutions which conduct business with the general public.  And we have to disassociate ourselves with entities such as Liberty Reserve so that the legitimate public can trust dealing with us.

-Allan Ramlall

Surety Bond FAQ’s for Cryptocurrency Exchangers and Administrators

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Since the Bitcoin 2013 conference, I have been bombarded with questions regarding surety bonds.  In response to the many inquiries, I decided it would be best to provide answers to the most common questions in a blog post.  If you still have questions after reviewing the post, please contact me and I’d be happy to answer them.

Q. What is a money transmitter?

A. A Money Transmitter is a business that engages in receiving money from one customer or business and transmitting it to another customer or business both within and outside the U.S.  The methods of transmission include electronic transfers, wire transfers, and payment instruments like traveler’s checks.

Q. What is a surety bond?

A. A Surety Bond is a third party guarantee that an individual or a company will fulfill their obligations.  The surety bond is a three party agreement between the principal (the person or company requesting the bond), the obligee (the beneficiary on the bond), and the surety bond company (the third party guarantor that the Principal will perform their obligations).

Q. What is a Money Transmitter Surety Bond?

A. A Money Transmitter Surety Bond is a license and permit bond required by certain states.  A license and permit surety bond is a broad category of surety bonding that includes all types of surety bonds required by an obligee in order for the principal to obtain a license for performing some specific type of work within a specific state.

Q. What types of companies in the Cryptocurrency community are required to be licensed as a money transmitter?

A. According to the statutes and regulations released by FinCEN on March 18, 2013 regarding virtual currencies, administrators and exchangers of Bitcoin will be treated as money transmitters.

“An administrator or exchanger that (1) accepts and transmits a convertible virtual currency or (2) buys or sells convertible virtual currency for any reason is a money transmitter under FinCEN’s regulations, unless a limitation to or exemption from the definition applies to the person.

The definition of a money transmitter does not differentiate between real currencies and convertible virtual currencies.  Accepting and transmitting anything of value that substitutes for currency makes a person a money transmitter under the regulations implementing the BSA.”

Q. What is the process to get qualified for surety bonds?

A. Starting the surety bonding process begins with the company completing a surety bond application.  A surety bond broker will then use the information on the application along with personal credit history of the company ownership to evaluate the risk of default.

While some smaller bonds may be underwritten and approved based solely on the personal credit of the business owners, companies needing several bonds, such as Bitcoin exchangers, will be asked to provide one or more years of company financial statements and/or personal balance sheets on the company’s owners in order to further assist the review of the business.

Once approved, the surety bond(s) will be executed and the principal will be required to pay the premium.  Next, you will need to sign the bond and send it to the appropriate state department.

Q. How long will it take to get approved for the surety bonds? 

A. After submitting the required information and documentation, an initial review will be conducted by a surety bond company underwriter.  Based on the results of the initial review, the surety bonds will either be approved or you will be asked to submit supporting documentation to assist in the underwriting process.  In all, you can expect to receive a definitive answer from the underwriter in one to two weeks if all requested documents are submitted in a timely manner.  Please note that state approval of your business license will take considerably longer.

Q. Do we need to be licensed and bonded in all 50 states?

A. You are only required to be licensed and bonded in the states where your customers reside.  With that being said, the business of a Cryptocurrency exchanger or administrator is primarily transacted online where customers access the business from all over the world. Unless you can prove that you don’t have customers in a given state, you will be required to be licensed in all 50 states and bonded in the 48 states that currently require a bond. (47 states plus Washington D.C.)

Q. What is the total amount of surety bonds we’ll be required to have?

A. Surety bond amounts are set by each individual state.  Some states have a statutory or set bond requirement while other states have a fluctuating bond requirement.  States with a fluctuating bond requirement start with a minimum bond amount that will increase and fluctuate yearly based on your volume of transactions, number of “agents” or number of physical locations.  Needless to say, the minimum total amount of surety bonds you’ll need to be licensed nationwide is approximately $7,000,000.

Q. How much do surety bonds cost?

A. The cost of a surety bond is called the “surety bond premium”.  Similar to credit card rates, the surety bond premium is based on available information, including business and/or personal finances.  Because of this, not every company receives the same rate even though they may have the same type of surety bond.

Standard money transmitter bond premiums range from 1% – 3% of the bond amount.  However, the premium can be much higher if the company and/or company owner’s finances are not strong enough to support the lower rate.  Collateral can also be required if deemed necessary.

Q. Is there any way around getting licensed and bonded as a money transmitter?

A. Yes.  A very limited number of nationally licensed money transmitters allow other companies to “piggyback” off their licenses for a fee. They may also require you to submit a “financial guarantee” surety bond as a small form of protection against any wrong doing your company may get involved in.  However, please note that both the current money transmitter and your company will share each other’s risk in this situation.  It is always best to stand on your own if possible.

Q. Why should we get licensed and bonded as a money transmitter right now?

A. No Cryptocurrency exchange or administrator wants to find themselves in the position multiple companies like Mt. Gox are in.  The state regulators and the Feds have shown that they will take action based on the guidelines released by FinCEN if they deem necessary.  Also, although only the state of Texas has officially adopted the FinCEN guidelines, it is only a matter of time before every state follows their lead.  The companies that proactively get licensed and bonded as money transmitters in all applicable states will be in compliance from the start.  Business will run as usual for them while the rest of the industry is playing cat and mouse with the Feds and catch up with the states.

Q. What should we look for in selecting a surety bond company?

A. Not all surety bond companies are alike.  Cryptocurrency exchangers and administrators don’t have time to educate their surety company on the industry.  You should only work with a surety bond company that has substantial experience in the money transmitter industry and also understands Cryptocurrency.

It is also important to find a broker well versed in the money transmitter industry as well as the Cryptocurrency community.  The broker will approach one or more surety bond companies on your behalf to get the best terms possible.

Brian Nelson, MSB Surety Bond Specialist

http://www.linkedin.com/in/briannelson36

bnelson@alphasurety.com

FinCEN to Bitcoin Administrators & Exchangers – You are Money Transmitters

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According to the statutes and regulations released by FinCEN on March 18, 2013 regarding virtual currencies, administrators and exchangers of Bitcoin will be treated as money transmitters.

An administrator or exchanger that (1) accepts and transmits a convertible virtual currency or (2) buys or sells convertible virtual currency for any reason is a money transmitter under FinCEN’s regulations, unless a limitation to or exemption from the definition applies to the person.

The definition of a money transmitter does not differentiate between real currencies and convertible virtual currencies. Accepting and transmitting anything of value that substitutes for currency makes a person a money transmitter under the regulations implementing the BSA.

Bitcoin

What does it mean to be classified as a money transmitter in respect to surety bonds?

Although money transmitters are regulated at the federal level, surety bond requirements are set by each individual state. The majority of US states require a company licensed as a money transmitter to post a surety bond as part of the state licensing process. Bond amounts range from $25,000 to $2,000,000+ based on a statutory or variable amount set by the state’s regulators.

A nationally licensed money transmitter is required to post approximately $7,000,000 in total surety bonds. At a premium cost of 1-2% of the aggregate total, Bitcoin administrators and exchangers with clients on a national scale will pay $70,000 – $140,000 for their surety bonds and the opportunity to be in business.

Since Bitcoin is a virtual currency, it would be extremely difficult to operate on anything other than a national scale. Therefore, any administrator or exchanger that is unable to qualify or pay for the $7,000,000 in surety bonds will be forced to close their doors or face legal action.

The question is, what will the impact be on the Bitcoin market as the number of administrators and exchangers decrease due to new regulations?

Please share your thoughts in the comments section.