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.

Don’t Bite the Hand that Feeds Millions

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Amidst all of the regulatory oversight and compliance scrutiny MSBs are faced with in the United States, it is easy to lose sight of how noble our cause is. Many of the world’s nations rely on money remittances to support their citizens. Our job as industry participants is to provide our niche client base with simple and affordable ways to support the world economy through international money transfers. It doesn’t take long to see the value US money transmitters bring to the underdeveloped nations after spending time within their borders.

A few weeks ago I had the opportunity to visit an underdeveloped region on a trip to setup correspondent partnerships and bank accounts for a money remittance company I’m involved in. I couldn’t have been more impressed by the region and their willingness to work with us. I was also astounded by the genuine gratitude the business and government leaders showed us after discussing our business plan.

Never before had they been approached by a money transmitter focused solely on supporting and growing their economy. Both banks and government entities welcomed us with open arms. Not only were they excited about our partnership, but they wanted to know how they could further help us reach their citizens. Make no mistake, there are other US money transmitters sending funds into their countries, but it was apparent that the perception of these mega companies was that they were extracting more value than providing. It takes more than a capitalistic desire to make money in order to make a positive difference in the lives of others and our new friends saw the difference immediately.

The highlight of the trip was receiving an invitation to present our business at an upcoming banking and economic development association conference for the region. I know my story is not unique, as many of you launched your businesses with the purpose of serving your people, but this experience opened my eyes to the positive impact our industry is making throughout the world. Regulatory, compliance and banking concerns are not going away, but at least we can take pleasure in the service we are providing millions of people across the globe.

~ Brian Nelson

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As a quick plug, I’m the event coordinator for the upcoming Virtual Currency Compliance Conference (VC3 2014) being hosted by the NMTA in New York on August 13th. We’d love to see you there. We’ll have the event page up shortly on http://www.nmta.us

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.

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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

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