FinCEN Acknowledges the Problem, But a Solution Will Require More

By: David L. Beam

Money services businesses (“MSBs”) have been losing access to banking services. Increased scrutiny by bank regulators of MSB relationships have led banks to conclude that providing services to MSBs carries increased compliance and reputational risk. Even if these risks can be managed in theory through appropriate due diligence and controls, many banks have decided that costs and risks of offering banking services to MSBs outweigh the revenue that they generate.

The predictable result is that many banks have been dropping MSBs as customers and refusing to open new accounts for MSBs.

On Tuesday, FinCEN released a “Statement on Providing Banking Services to Money Services Businesses.” The Statement shows that FinCEN recognizes that there is a problem with “the wholesale debanking of an important part of the financial system.” However, the Statement alone is unlikely to resolve the complex concerns banks have about providing banking services to MSBs.

The Statement begins by acknowledging that MSBs are losing access to banking services, and that this “may in part be a result of concerns about regulatory scrutiny, the perceived risks presented by money services business accounts, and the costs and burdens associated with maintaining such accounts.” It then reaffirms that MSBs play an important role in the financial system by serving people who are often underserved.

The Statement noted that “there is concern” that banks are refusing to provide banking services to any MSBs or refusing to open new accounts for MSBs. FinCEN says that a “wholesale approach” like this “runs counter to the expectation that financial institutions can and should assess the risks of customers on a case-by-case basis.” “FinCEN,” the Statement says, “does not support the wholesale termination of MSB accounts without regard to the risks presented or the bank’s ability to manage the risk.”

So what should banks do instead? Rather than refusing to provide banking services to MSBs as a class, a bank “should assess the risk associated with [each] particular MSB customer.” This risk assessment “should include considering whether customer risks can be managed appropriately.” After the account is opened, the bank “should maintain levels of controls commensurate with the customer risks presented.”

The Statement also makes clear that the bank is only required to “understand the MSB’s business model and the general nature of the MSB’s own customer base.” The bank is not required to “know the MSB’s individual customers to comply with the Bank Secrecy Act.” Further, the Statement says that the BSA does not require, “and neither does FinCEN expect,” banks to “serve as the de facto regulator of the money services business industry any more than of any other industry.”

So Will It Matter?

The Statement acknowledges the problem and says the right things. However, aggressive enforcement by bank regulators and the Department of Justice’s Operation Choke Point (which has heightened bank concerns about liability for their customers’ misbehavior) are contributing factors to the current situation. Just blaming the banks without calling out the bank regulators or the DOJ is certainly good politics for FinCEN, but it ignores the complex causes of the problem.

The problem is not that banks did not know that the BSA allowed them to provide banking services to MSBs, subject to appropriate due diligence and controls, so simply affirming these facts in generalities is not going to resolve banks concerns about providing services to MSBs. Banks perceive that their examiners have been ratcheting up their scrutiny of banking relationships with MSBs and, at times, holding banks to an excessively high standard of diligence with respect to this class of customers. At the very least, banks are concluding that the regulatory and reputational risks are not worth the revenue from MSB accounts.

A long-term solution will require coordination with the bank regulators and the Department of Justice to provide banks with clear supervisory standards.