What is a Money Services Business? And How are They Regulated?

Banks and Money Services Businesses (MSBs) differ significantly in their scope of services and regulatory oversight. Banks offer a wide range of financial services, including deposit accounts, loans, and investment products, while MSB businesses specialize in specific services like money transfers, currency exchange, and check cashing.

According to FinCEN, activities like currency dealing, check cashing, and issuing or redeeming traveler's checks, money orders, or stored value must exceed $1,000 per person per day in one or more transactions to qualify as a Money Services Business.

What Is A Money Service Business (MSB)?

A lot of people wonder what is a money service business. A Money Service Business (MSB) is a financial institution outside the traditional banking sector that enables customers to trade, exchange, store value, and transfer money.

Subject to regulations like the Bank Secrecy Act (BSA) and Anti-Money Laundering (AML) laws, MSBs encompass various financial services, including remittance, currency exchange, and virtual currency platforms. Despite similarities with banks, MSB businesses operate under distinct regulatory frameworks, maintaining compliance with BSA requirements and AML regulations.

Types Of Money Services Businesses

Money Services Businesses (MSBs) encompass various financial entities that facilitate the transmission, exchange, or conversion of money outside the traditional banking sector. These include:

1. Remittance Services: MSB businesses that enable individuals to send money domestically or internationally to family, friends, or businesses.

2. Currency Exchange: Entities or MSB businesses that provide services for converting one currency into another, including both fiat and virtual currencies.

3. Money Orders and Traveler's Checks: Providers that issue financial instruments used for payment or remittance, often used as alternatives to cash.

4. Virtual Currency Platforms: Platforms that facilitate the buying, selling, or trading of cryptocurrencies.

5. Check Cashing Services: Businesses that cash checks for individuals or entities, providing immediate access to funds.

6. Prepaid Access Providers: Entities that offer prepaid cards or other prepaid access devices, allowing users to store funds and make purchases.

7. Stored Value Services: Businesses that allow customers to store funds electronically for future use or transfer.

8. Payment Processors: Services that facilitate payment transactions between consumers, merchants, and financial institutions, including online payment platforms.

Suggested reading: Hawala System: Economic Analysis & Regulatory Dynamics

Money Services Business Examples

Money Services Business examples are diverse and can be found in various financial industry sectors. Here are some real-life money service business examples:

1. Western Union

One of the most well-known MSB examples is Western Unio. Western Union provides money transfer and payment services globally, allowing individuals to send money to nearly any location worldwide.

2. MoneyGram

Like Western Union, MoneyGram is another MSB example and a major player in the money transfer industry, offering services for sending and receiving money internationally.

3. PayPal 

While primarily known as an online payment platform, PayPal also functions as an MSB, providing services for transferring money between individuals and businesses worldwide.

4. Coinbase

As a leading cryptocurrency exchange platform, Coinbase is another example of MSB. Coinbase enables users to buy, sell, and trade various cryptocurrencies, making it an example of an MSB operating in the virtual currency sector.

Money Services Businesses And AML Compliance

Each type of MSB operates within its specific niche, offering financial services that cater to diverse customer needs while adhering to regulatory requirements such as the Bank Secrecy Act (BSA) and Anti-Money Laundering (AML) regulations.

AML compliance for MSBs involves implementing strong policies, procedures, and controls to mitigate the risk of MSB money laundering and terrorist financing. Here are key aspects of AML compliance for MSBs:

1. Risk Assessment

Money service business AML risk requires careful assessment and mitigation to ensure regulatory compliance and financial integrity.

Conduct a thorough risk assessment to identify and understand the MSB money laundering and terrorist financing risks associated with the MSB's business activities, customers, geographic locations, and delivery channels.

Read more: The 6 Best Financial Risk Management Software in 2024

2. Customer Due Diligence (CDD)

Implement procedures to verify the identity of customers, assess their risk profile, and monitor their transactions. Enhanced due diligence may be required for high-risk customers, such as politically exposed persons (PEPs) or customers from high-risk jurisdictions.

3. Transaction Monitoring

Establishing systems and processes to monitor transactions for suspicious activity based on predetermined red flags and thresholds. This involves ongoing surveillance of customer transactions to detect unusual patterns or behaviors indicative of money laundering or terrorist financing.

Read more: The Top 5 Transaction Monitoring Software Solutions in 2024

4. Reporting Obligations

Fulfilling regulatory reporting requirements by submitting suspicious activity reports (SARs) to the appropriate authorities when suspicious transactions are identified. MSBs must also comply with currency transaction reporting (CTR) requirements for certain transactions that meet specified thresholds.

5. Record-Keeping

Maintaining accurate and up-to-date records of customer transactions, identity verification documents, and AML compliance activities. These records should be retained for a specified period as required by regulations.

Read more: What are the Five Pillars of AML Compliance? 

6. Training and Awareness

Provide AML training and awareness programs for employees to ensure they understand their roles and responsibilities in preventing money laundering and terrorist financing. Training should cover AML regulations, red flags, and reporting obligations.

Read more: Top 6 AML Software Solutions in 2024 Reviewed

7. Independent Review

Conduct periodic independent reviews or audits of the MSB's AML compliance program to assess its effectiveness, identify weaknesses or deficiencies, and implement necessary improvements.

How Are MSBs Regulated In Different Countries?

Money Services Businesses are governed across various countries worldwide. This section will provide an overview of how they are regulated in the USA, UK, KSA, and UAE.

1. United States of America

MSBs (Money Services Businesses) in the USA face stringent regulations to combat financial crimes. They must comply with the Bank Secrecy Act (BSA), register with FinCEN, and obtain state licenses. According to FinCEN, the registration of an MSB is the responsibility of the owner or controlling person of the MSB.

AML compliance programs, including customer due diligence and transaction monitoring, are required. Reporting obligations include Currency Transaction Reports (CTRs) and Suspicious Activity Reports (SARs). Compliance examinations ensure adherence to regulations, aligning with international standards set by organizations like FATF. 

Explore further information regarding Money Services Businesses in the US and their registration requirements with FinCEN.

2. United Kingdom

In the United Kingdom, Money Services Businesses (MSBs) are regulated by multiple authorities to ensure compliance with anti-money laundering (AML) and counter-terrorist financing (CTF) regulations. The Financial Conduct Authority (FCA) oversees MSBs, requiring registration and adherence to strict AML/CFT guidelines. 

MSBs must also register with HM Revenue & Customs (HMRC) and comply with reporting requirements. The National Crime Agency (NCA) handles investigations and enforcement regarding money laundering. 

3. The Kingdom of Saudi Arabia

In Saudi Arabia, Money Services Businesses (MSBs) are regulated by the Saudi Arabian Monetary Authority (SAMA), the central bank of the Kingdom of Saudi Arabia. SAMA oversees and regulates the financial sector, including MSBs, to ensure compliance with regulatory standards and to maintain the integrity and stability of the financial system.

In accordance with the authority granted to the Saudi Central Bank (SAMA) under the Saudi Central Bank Law, as stipulated by Royal Decree No. (M/36) dated 11/04/1442H, and the Rules Regulating Money Changing Business, as outlined by the Minister of Finance's Decision No. (4686) dated 21/11/1441H, SAMA supervises and regulates financial institutions, including money-exchanging businesses, through licensing and control measures.

Read more: Anti-Money Laundering Compliance in Saudi Arabia: An Overview

4. United Arab Emirates

Before establishing your Money Services Business (MSB) in the United Arab Emirates, it's essential to determine the most suitable jurisdiction for your operations. Factors to consider are your target clientele, workforce availability, optimal office location, business expenses, as well as the legal and regulatory landscape across various jurisdictions.

In the United Arab Emirates (UAE), businesses have the opportunity to obtain either a Payment Service License or a Money Services License from free zone jurisdictions like Dubai International Financial Centre (DIFC) and Abu Dhabi Global Markets (ADGM) or from the Department of Economic Development in the UAE mainland. 

The specific criteria for obtaining these licenses differ based on the chosen jurisdiction. In addition, businesses engaged in the issuance of Stored Value (wallet services) must also obtain additional approvals from the Central Bank of the UAE. To secure a license to operate, business entities must fulfill the substance and compliance requirements stipulated by the Central Bank of the UAE.

Read more: An Overview of Anti-Money Laundering (AML) Laws in the UAE

The Pros And Cons Of Money Services Businesses

Money Services Businesses (MSBs) offer various advantages and disadvantages, both for the businesses themselves and for their customers. Let's explore some of these:

Pros Of Money Services Businesses

1. Financial Inclusion: MSBs often cater to underserved populations, including immigrants, unbanked individuals, and those living in remote areas. By providing services such as money transfers, check cashing, and prepaid access, MSBs help improve financial inclusion by offering alternatives to traditional banking services.

2. Convenience: MSBs typically offer convenient locations and extended hours of operation compared to banks, making it easier for customers to access financial services, especially for those with busy schedules or limited transportation options.

3. Speed: Money transfers through MSBs can be faster than traditional banking methods, especially for international remittances. This is particularly advantageous for individuals who need to send or receive funds quickly, such as during emergencies or for urgent financial needs.

4. Lower Costs: In some cases, MSBs may offer lower fees and exchange rates for certain financial services compared to traditional banks, especially for international money transfers. This can result in cost savings for customers, particularly for those sending money to relatives in other countries.

5. Specialized Services: MSBs often specialize in specific financial services, such as currency exchange or remittances, allowing them to provide expertise and tailored solutions to meet the needs of their target market.

Cons Of Money Services Businesses

1. Regulatory Compliance Burden: MSBs are subject to stringent regulatory requirements, including anti-money laundering (AML) and Know Your Customer (KYC) regulations. Compliance with these regulations can be complex, time-consuming, and costly, requiring significant resources and expertise.

2. Risk of Fraud and Financial Crime: Due to the nature of their services, MSBs are vulnerable to exploitation by criminals for money laundering, terrorist financing, and other illicit activities. Ensuring strong risk management and security measures is essential to mitigate these risks.

Money service business AML risk necessitates thorough monitoring and proactive measures to safeguard against financial crime and regulatory violations.

3. Transaction Limits and High Fees: Some MSBs may impose transaction limits or charge higher fees for certain services, which can be restrictive or costly for customers, particularly for large or frequent transactions.

4. Lack of Consumer Protections: Unlike traditional banks, MSBs may not offer the same level of consumer protection, such as deposit insurance or recourse mechanisms for disputes. This can expose customers to risks in the event of service disruptions, insolvency, or fraudulent activities.

FOCAL AML Solution for Money Services Businesses

FOCAL AML Compliance solution can provide significant assistance to Money Services Businesses (MSBs) in several ways:

1. Streamlining compliance processes.
2. Automating risk assessment and monitoring.
3. Generating comprehensive compliance reports.
4. Integrating with regulatory data sources.
5. Offering scalability and customization.
6. Delivering cost efficiencies through automation and optimization.

Conclusion

In conclusion, Money Services Businesses (MSBs) provide essential financial services such as money transfers, currency exchanges, and check cashing. While they offer convenience and promote financial inclusion, they also face challenges like regulatory compliance and risk management. Leveraging solutions like the FOCAL AML Compliance platform can enhance MSBs' ability to navigate regulatory requirements and mitigate financial crime risks effectively.