Banking Issues Continue While Surety Bond Underwriters Embrace MSBs

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bnelson

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.

Myth Busters: No Widespread Use of Bitcoin for Crime

MSB Talk 4

***The following is a Bloomberg article written by Bitcoin insider, Carter Dougherty, and re-posted with his permission.***

Get the article on Bloomberg.com here.

Treasury’s Cohen Sees No Widespread Use of Bitcoin for Crime (1)
2014-03-18 15:55:31.842 GMT

By Carter Dougherty and Greg Farrell

The U.S. government sees no evidence of “widespread” use of virtual currencies such as Bitcoin to evade sanctions or finance terrorism, the Treasury Department’s top official targeting money laundering said.

“Terrorists generally need ‘real’ currency, not virtual currency, to pay their expenses -– such as salaries, bribes, weapons, travel, and safe houses,’ David S. Cohen, the undersecretary for terrorism and financial intelligence.

‘‘The same is true for those seeking to evade sanctions,’’ Cohen said in a speech at the New York headquarters of Bloomberg News.

Governments around the world are grappling with how to classify or regulate virtual currencies such as Bitcoin. Authorities in Russia, China and Israel have sought to restrict the payment system, while Treasury Secretary Jacob J. Lew said in January the U.S. needed more time to assess the ‘‘phenomenon’’ to ensure it isn’t used for unlawful purposes.

Cohen rejected arguments that regulation would drive virtual currency innovation out of the U.S., saying ‘‘the opposite is true’’ in this new industry.

‘‘Financial transparency can help bring stability to the virtual currency market and security to its users and investors,’’ Cohen said. ‘‘And that is what we are trying to do through sensible, flexible and -– to use a word from the tech world -– scalable regulation.’’

At the same time, Cohen emphasized that the government would err on the side of squeezing innovation if necessary for law enforcement purposes.

Choosing Transparency

‘‘There may be situations where we need to choose between innovation and transparency,’’ Cohen said. ‘‘Let me be clear: When forced to choose between the two, we will err on the side of transparency.’’

Cohen said that some virtual currency companies haven’t registered with Treasury’s Financial Crimes Enforcement Network, a requirement established in March 2013, and aren’t following record keeping and reporting requirements.

‘‘Those that do not comply with these rules should understand that their actions will have consequences,” Cohen said.

The Treasury Department’s Bank Secrecy Act Advisory Group will include a member of the virtual-currency community to help make regulations “better informed and more effective,” Cohen said, without saying who it will be.

The department has urged industry leaders to devise ways to prevent criminal use of virtual currencies rather than develop technology that “further obscures financial trails,” he said.

Bitcoin Origins

Bitcoin, the most popular digital currency, emerged from a 2008 paper written by a programmer or group of programmers under the name Satoshi Nakamoto. It uses a public ledger to record transactions made under pseudonyms, an aspect of the system that has fed mistrust among law enforcement.

The price for Bitcoins soared in November, topping $1,000 for the first time, as merchants including Overstock.com began accepting the virtual currency and speculators anticipated broader use of digital money.

Prices dropped this year amid mounting U.S. prosecutions of Bitcoin-linked money laundering, concerns that governments would restrict the currency and market disruptions including hacker attacks on online exchanges.

Bitcoin prices declined about 1 percent today, and stood at $612.50 at 11:08 a.m. New York time, according to the CoinDesk Bitcoin Price Index.

‘Grossly Inefficient’

The decline was “likely” connected to the outage at the website Blockchain.info, a popular Bitcoin wallet provider, said Jonathan Levin, a co-founder of Coinometrics, a research firm in Oxford, U.K. He also said that digital currency markets are “grossly inefficient.”

Cohen said that the Treasury Department places “real value” on financial innovation such as digital currencies.

“Advancements in technology that allow entrepreneurs and businesses to innovate, grow and hire are crucial to our country’s long-term success,” Cohen said.

Cohen has served as undersecretary since 2011. He first joined the Treasury in 1999 and, while working for its general counsel, helped draft part of the Patriot Act that granted the regulator new tools to thwart money laundering and terrorist financing after the Sept. 11 attacks.

The Treasury’s office for terrorism and financial intelligence seeks to prevent criminal networks from using the U.S. financial system and to cut off funding for terrorists. It includes the Office of Foreign Assets Control that helps enforce sanctions on nations, such as Iran, that have a history of providing support to terrorist groups.

Accepting Applications

New York financial regulators also have been working on a response to Bitcoin. Benjamin Lawsky, the state’s superintendent of financial services, announced last week that his office is accepting applications to operate exchanges for Bitcoin and other digital currencies. He plans to propose a set of rules for virtual-currency firms by mid-year.

Last month’s collapse of Tokyo-based Bitcoin exchange Mt. Gox, in which some customers lost their holdings, shows the need for “robust standards for consumer protection, cyber security and anti-money laundering compliance,” Lawsky said.

Federal authorities have been targeting misuse. Last year, they shut down Silk Road, an online drug and weapons bazaar where Bitcoin was the preferred medium of exchange. In January, they arrested Charlie Shrem, a Bitcoin entrepreneur, on charges of money laundering. He has denied the allegations.

To contact the reporters on this story: Carter Dougherty in Washington at cdougherty6@bloomberg.net; Greg Farrell in New York at gregfarrell@bloomberg.net

To contact the editors responsible for this story: Maura Reynolds at mreynolds34@bloomberg.net Anthony Gnoffo, Gregory Mott

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