Banking Issues Continue While Surety Bond Underwriters Embrace MSBs

MSB Talk 4


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.


Customer’s Customer Compliance Issue

MSB Talk 4

I was reading an interesting article entitled ‘ Argor-Heraeus Rejects Allegations on Congo Conflict Gold’ By James Kraus of Bloomberg  – Nov 4, 2013.  Essentially, a non-profit Swiss organization by the name of TRIAL was accusing Argor-Heraeus SA , a Swiss gold refiner of illegally refining gold originating from the war torn – Democratic of Congo for the years 2004-2005.

TRIAL is stating the Argor-Heraeus refined close to 3 tons of gold pillaged from an armed group which used the gold proceeds to finance its operations.  From the article, Argor-Heraeus received the questioned gold from its customer Hussar Limited.

My commentary of this article is not to give my opinion as to whether the TRIAL accusation is true or not.  My interest is solely from a ‘Know your Customer’ point of view.  Most compliance experts would agree that a rigorous Know Your Customer policy would be one of the most important criteria in protecting an institution against money laundering or the financing of terrorism.

Should Hussar Limited have been the customer and thus delivered the gold for refining at Argor-Heraeus then the latter institution would have executed the KYC ( Know Your Customer) due diligence on the former institution.  Apart from the obvious customer identification and verification procedures,  Argor-Heraeus would have evaluated Hussar’s own compliance procedures on its own customers.   And most likely this documentation would have been satisfactory and thus Hussar would have passed the Customer Acceptance process for Argor-Heraeus.

But now it appears that the gold actually came from illegal sources via Hussar Limited and then passed on to Argor-Heraeus.   The question now becomes as to how much should Argor-Heraeus have to know as to its customer’s customer.  And should Argor-Heraeus have actually o assessed whether Hussar Limited was adhering to its own AML policy of accepting gold from only legitimate sources.  This is a tough call especially at least in the beginning stages of the transaction history.  Now, maybe if the transaction kept on continuing over time with larger volumes, then ‘red flags’ would have appeared.

Then once ‘Red Flags’ appear, the institution has to impose enhanced due diligence which perhaps Argos-Heraeus did.    And it does appear that Argor-Heraeus must have been concerned because by 2005 it had terminated the business with Hussar Limited.

Of course in retrospect, it is so easy to say the Argor-Heraeus should have known from the beginning that the origin of the gold was from illegal means.  And this observation could or could not be true  – I certainly do not know.  And we have to remember that the incident occurred in 2004 and not 2013 where we now work in a heightened state of compliance alert.  This situation is of interest because as a financial institution today, we just cannot take for granted anymore as to the compliance acceptance of a customer.  Now, unfortunately we have to run the extra step of actually knowing our customer’s customer compliance with laws.

– Allan Ramlall

Why We Need to Know Our Customers

MSB Talk 4

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