Brandi Reynolds, CAMS-Audit
We all know there are challengers to ensuring compliance for any money services business (MSB). In fact, there may be too many challenges to count! So, I have summarized what I see as the top compliance challenges facing MSBs.
Identifying Beneficial Ownership
To comply or not comply…. covered financial institution or not… For covered financial institutions, the “Fifth Pillar” is a regulatory requirement. For MSBs, identifying beneficial ownership is a regulatory expectation or bank partner requirement. No matter the reason for compliance, there is an expectation that the financial institution should be able to verify or validate the beneficial owners. However, this can be quite difficult due to the lack of resources for verification. For this reason, many financial institutions rely on an attestation from their customer. Regulators consider understanding your customer, identifying the ultimate beneficial ownership (UBOs) along with their businesses’ nature as the most vital elements in fighting money laundering.
Change is the name of the game for compliance! MSBs must manage an ever-changing regulatory environment that may include oversight at both the federal and state levels. For state-licensed MSBs , the task can be daunting. Each state is essentially its own country with unique requirements. Most MSBs have multiple regulators and therefore, must manage legislative monitoring and tracking for each state to ensure the business understands new requirements that may affect their business model.
The impact of new requirements could be as extensive as a new state license or new suspicious activity reporting guidelines. Either way, the company must ensure compliance to avoid fines and penalties and, possibly the most detrimental, reputational damage.
To identify unusual or suspicious activity, financial institutions must monitor customer activity. Manual processes may be appropriate in certain instances; however, for most, a robust monitoring process must involve technology. Therefore, MSBs often find themselves integrating their data across systems, detachments, and geographic locations. Problems may arise when transactional data is held in separate sources and in numerous legacy systems from previous acquisitions. As a result, the multiple data sources from incompatible systems make it problematic to link common characteristics. Transactional monitoring and analysis will be constrained. Integration efforts may also be a costly and time-consuming endeavor.
Cost of False-Positives
Whether you are dealing with false-positive alerts in your onboarding process or during transaction monitoring, there is a significant personnel and technology cost to researching false-positive results. The higher the number of false positives, the more expensive it is to onboard customers and process transactions. Additionally, there may be regulatory scrutiny for not properly researching false positives matches. Researching false positives takes time and people away from another time-consuming endeavor, fine tuning systems to reduce the number of false positives, which is a must for a robust compliance program.
Compliance is challenging but the cost of non-compliance is even more challenging. Do not run the risk of dealing with more challenges due to potential fines and penalties or even the loss of a banking partner. The risk is not worth it. Instead, reach out to our compliance professionals for a free consultation. We will assist you with outsourced compliance, due diligence reviews, gap analysis, and much more!