WASHINGTON (AFX) -- The continuing crackdown on criminal and terrorist money networks has the government scrambling to enforce tougher rules against money laundering without over-burdening or even killing legitimate businesses.
Money services businesses -- non-bank financial institutions which do services such as money transmitters, currency dealers, check cashers -- are one example of an industry caught up in requirements of the money laundering laws.
Government agencies are pressing for more information from banks that do business with money services businesses, also known as MSBs. The financial institutions have to deliver that data, and carry the costs.
While there are unlicensed money services businesses operating outside of government oversight, state-licensed companies have to adopt programs that combat money laundering in order to stay in a multi-billion market.
But this has not always been enough to keep them in business.
'A lot of big American banks had begun to refuse to open accounts with money service businesses' because they are afraid those companies do not have strong anti-money laundering programs, said Elaine Carey, senior vice president at Control Risks in Los Angeles, a consultant firm.
David Landsman, executive director of National Money Transmitters Association Inc., representing 45 companies, said the situation is growing worse.
'We have reached a crisis' level, he said in a phone interview. 'We estimate that 95% of banks have made it a policy not to take money transmitters accounts.'
A money transmitter is an MSB whose core business consist of remittances -- transfers of money by foreign workers to their home countries.
'In this general atmosphere of cracking down, you have the mistaken notion that we are high risk because we've always been categorized together with unlicensed MSBs or foreign money transmitters, although we are not,' Landsman declared.
Dealing with the situation on a case-by case basis
Recently, Landsman said, Bank of America and SunTrust Banks decided to cut off money services business accounts, after many other institutions did the same in the last year.
Shirley Norton, spokeswomen for Bank of America, confirmed that it had given up some money services clients, but said the bank is not completely abandoning the money services sector.
'The regulatory requirements have become very expensive for banks to continue to do business with them,' she said. 'We had to allocate too many resources to monitor and review those accounts.'
One month ago, SunTrust Bank told a member of Landsman's association that it will cease providing services for money services business.
'This decision is not a reflection of any particular company but rather was a difficult business decision that we found necessary due to the expenses associated with the servicing and monitoring required for these types of accounts,' the bank officials wrote.
Hugh Suhr, a spokesman for SunTrust Banks, confirmed the content of the letter and said the bank is looking at MSBs on a case-by-case basis.
While acknowledging the banks' concerns, Landsman said that MSBs that have lost their bank accounts may end up closing their doors or switching to another business.
'We have fallen between the cracks,' Landsman said. He criticized the lack of a federal certification system for MSBs, saying that the state license 'is not given the respect that we think we deserve.'
'There is something wrong with the system,' he added.
Concern on Capitol Hill and in the administration
Rep. Charles Rangel, D-N.Y., has asked for changes. Two weeks ago, he wrote to Treasury Secretary John Snow, expressing 'gave concern' about the money transmitters' loss of bank accounts.
'I believe the problem must be addressed by federal banking regulators. This problem has been generated by regulators and only regulators can fix it,' he wrote.
In response to questions about Rangel's letter, Molly Millerwise, a Treasury spokeswomen, said: 'We remain concerned that banking institutions are still wary of dealing with money services businesses, and that money services businesses continue to experience difficulties in obtaining and maintaining bank accounts.'
She said the Financial Crimes Enforcement Network, a Treasury division that shields the financial system, 'is reviewing changes that might be made to the Bank Secrecy Act for money services businesses' and is looking at offering new guidance 'to bring clarity to the existing framework.'
Robert W. Werner, FinCEN's director, also drew the attention to risks stemming from MSBs access to banks services.
'It is critical for the health and safety of the U.S. financial system that MSBs obtain and maintain banking services and not be driven underground,' Werner said recently in a public statement.
He also said that MSBs play an important role in America's economy 'by providing valuable financial services to many Americans who do not, or cannot yet, take advantage of typical savings or checking accounts.'
FinCEN issued guidance for MSBs as well as for those banks that offer services for them a year ago. 'We have not seen anything that may suggest they [MSBs] are not complying,' said Anne Marie Kelly, a spokeswoman for the FinCEN.
Because money services handle remittances, Carey of Control Risks said the issue is becoming a political question.
'If you look into countries like Mexico...[or regions like] Central America... money they get from immigrants is a significant portion' of their economy, she said.
A study by the Inter-American Development Bank estimated that official remittances from the U.S. to Central America were $7.8 billion in 2004, a 17 percent increase from the 2003 figure of $6.7 billion.
Landsman said U.S. residents remitted $60 billion globally.
How much is too much?
Currency transaction reports -- documents that financial institutions have to fill out for all cash transactions above $10,000 -- are another issue vexing the financial industry.
While banks and other financial institutions complain about the huge number of transaction reports they must file, law enforcement officials have a different view of the bureaucratic task. Again, lawmakers have to build a bridge.
'There are 13 million CTRs that banks fill out every year. Our question is how effective are they,' said John Hall, a spokesman for the American Bankers Association. He pleaded for waiving some of the requirements, especially for customers well known to banks.
Michael Morehart, an agent with the FBI's counter-terrorism division, agreed that 'certain categories of CTRs can be eliminated without harm.' But he warned that changing the requirements 'without a careful and independent study, could be devastating' to intelligence efforts in both the global war on terrorism and traditional criminal activities.
'Our experience shows that terrorism activities are relatively inexpensive to carry out and that the majority of the transactions reports are of value to us,' he said at the Senate Banking Committee last week.
The FBI has over 1,200 pending cases involving some aspect of money laundering, including organized crime, drug trafficking, fraud against the government and international terrorism.
Lawmakers are evaluating the CTR system for possible reform in an attempt to balance the need for information to fight money laundering activities against the cost that it is put on the private sector.
Prepaid cards under regulators' scrutiny
Meanwhile, financial industry watchdogs are dissecting the risks associated with prepaid cards. They are afraid these cards might become a common vehicle for money launderers.
'Regulators are looking at it right now,' said Hall of the American Bankers Association. He said that prepaid cards have a potential for abuse, but declared 'there are controls in place already' that would discourage money laundering operations through these instruments.
There are two types of prepaid cards: gift cards and preloaded cards. The latter are viewed as having a potential to carry 'dirty money,' because do they not require employment verification, credit check, bank account or security. They are an alternative to unemployed or low income people, who may find it impossible to secure a credit card.
Peter Djinis, a former official with the FinCEN and the founder of a law firm specialized in anti-money laundering legislation, explained the risks coming from prepaid cards. The holder of the card can take cash out of an ATM, or deposit funds, but an investigator would have difficulties determining the ultimate source of use of the money, Djinis said.
Regulators have also expressed concerns about the loopholes that advanced technology would create for money launderers.
Kevin Delli-Colli, a deputy assistant for investigations at the Department of Homeland Security, said technology is opening 'a new horizon of opportunity in the form of digital money laundering.'
At a Senate Banking Committee hearing, Delli-Colli warned that proliferation of Internet payment services could clear the way for illicit movement of money.
Djinis said regulators don't want to stop progress but have responsibilities to protect consumers and make sure that 'funds are not used in a way that makes then totally anonymous.'
More industries under scrutiny
After the Patriot Act broadened the definition of financial institutions subject to money laundering laws, regulators began identifying new industries to bring under their umbrella.
Car dealers, real estate and travel business might have to comply with money-laundering regulations starting later this year, said Kelly, the spokeswoman for the FinCen.
Kelly said the enforcement network is seeking input from businesses that may be subject to new money-laundering regulations. That would require the newcomers to file reports on all cash transactions over $10,000, and also any suspicious transactions.
The enforcement network has already required dealers in precious metals, stones and jewels, as well as certain segments of the insurance industry, to comply with money laundering rules. This story was supplied by MarketWatch. For further information see www.marketwatch.com.