Patriot Act Compliance Featured

8:00pm EDT September 29, 2005
With heightened attention to financial transactions that could point to potential terrorist activity, new regulations extend the USA Patriot Act’s reach. Enhanced measures affect banks and money services customers.

Designed to prevent and detect money laundering, regulations under the Bank Secrecy Act require financial institutions to identify high- and low-risk money services businesses (MSB) and nondepository financial institutions (NDFI), assess these businesses’ transaction activity and ensure each complies with new federal requirements.

Essentially, banks are skimming their customer base to determine whether MSBs or NDFIs perform transactions that seem suspicious. (This could mean cashing one third-party check for $1,000 during a one-year period.) Banks must set up internal controls to identify, track and report suspicious transactions; MSBs must follow compliance requirements so banks can trust that their activity is legitimate.

But as both parties work to comply with Patriot Act provisions, some banks don’t want to confront serious legal repercussions and exorbitant fines of overlooking an MSB. Rather than worry about which accounts are risky business, some banks are cutting off service to MSBs. Meanwhile, these business owners struggle to find banks that will provide them services.

Are you an MSB or NDFI?

MSB designation is not limited to traditional money services businesses, such as payday lenders or wire-transfer firms. An MSB or NDFI is any business, small or large, that cashes third-party checks. This includes restaurants, gas stations and other service businesses. Banks must identify your business as an MSB or NDFI if you perform any one of the following transactions at any time, for any amount.

  • Money orders

  •  Traveler’s checks

  • Check cashing

  • Currency dealing or exchange

  • Wire transfers

Banks identify MSBs and NDFIs as either high- or low-risk accounts, depending on a number of factors. High-risk businesses are located in federally designated high-risk money laundering or drug trafficking areas, often urban environments. You are a high-risk MSB if you regularly allow customers to conduct high-amount transactions (more than $1,000 or repeated transactions just under $1,000) in high frequency, offer multiple MSB services, cash third-party checks or checks for commercial businesses, exchange currency, are a new business with less than two years at the same location or perform wire transactions.

You are a low-risk MSB if you are an established business that cashes weekly or bi-weekly paychecks, monthly bill payments and occasional gift card purchases. Low-risk MSBs offer only a single MSB service, do not accept out-of-state checks or third-party checks, only service local residents and wire funds only to domestic entities.

Whether you are classified as high- or low-risk, as long as you are an MSB or NDFI, you must put in place systems to record and ensure that all transactions are secure.

Compliance for MSBs

All business owners should perform transactions with increased awareness. Banks are monitoring MSB accounts for activity that warrants a risk-rating change. These include frequent checks from the same customer, change to multiple services and cashing third-party or out-of-state checks.

Compliance for high- and low-risk MSBs requires you to:

  • Comply with requirements set by the Bank Security Act/USA Patriot Act

  •  Apply for state and local licensing so banks can verify compliance

  •  Register with the Financial Crimes Enforcement Network (FinCEN)

  •  Purchase antimony laundering software to ensure all transactions are legitimate

Consult and prepare

Your financial institution can point you to resources and more information on how to comply with these new Patriot Act regulations. Most MSBs are unaware they perform transactions that designate their organizations as money services businesses, and fewer still have compliance methods in place.

Financial security and money laundering issues will continue to be a growing, hot issue for banks and customers who deal in transactional businesses. Proactive measures toward compliance are the best way businesses can ensure they meet requirements. A conversation with a banker will help MSBs discover if they are high- or low-risk, and how they can address their status and comply with regulations.

Craig Johnson is president and CEO of Franklin Bank in Southfield, Mich. Reach him at (248) 386-9860.