Are you banking any unregistered money service businesses (MSBs)? In 2021, there were more than 70,000 Suspicious Activity Reports (SARs) filed for this type of risk. FinCEN defines what activity an entity must partake in to qualify it as an MSB; the requirements for some of these profiles are minimal. There are six MSB categories, requirements for which are outlined by FinCEN. This article will focus on the two most common types: money transmitters and check cashers. Determining when to classify an entity into one of these two categories and when to report them in a SAR is based on the type, frequency, timing, and dollar volume of the activity of the target. It’s probable that if you allow clients to perform these activities you’ll run across some unregistered MSBs, but you can minimize the risk to your institution and the financial system by being vigilant and informed.

Money Transmitter

Companies that send money to counterparties on behalf of their clients are classified as a type of MSB called a Money Transmission Service. Money transmission services like Remitly, Paypal, Venmo, or Western Union must be licensed by state and national regulators to facilitate money transfers between parties. These companies have done the work to obtain licenses and provide a regulated service. Others will skip the licensing process and use their personal checking accounts to operate as a business and facilitate money transmission services for a fee. To operate a successful business, an entity must onboard a diverse set of clients who will likely transact with many different counterparties. Detecting this type of activity requires systemic monitoring that considers both the number and diversity of counterparties in a given period. If a personal checking account is conducting transfers with hundreds of unique accounts in a week that should raise suspicion and necessitate further investigation.

These unregistered businesses present a huge systematic risk to our financial system. They provide services for end-users who have not been through a Know Your Customer process on your, or potentially any platform. The customers of the unlicensed individual could be included in sanctions lists or pose other risks that the institution does not have visibility into. Further, by commingling their activity with so many other users, other patterns of illicit activity might be obfuscated as it is dwarfed by normal activity carried out by the unregistered businesses’ other clients. Passing any dollar amount for a third party requires licensure.

Check-Cashing

There are large unbanked or underbanked communities that rely heavily on check-cashing services of varying degrees of scrupulousness. These communities present huge business opportunities making check-cashing a very popular form of unregistered MSB activity. To be considered a check-cashing business, an entity must receive checks from clients that are made out to those clients, and return cash to them.

While for money transmitters, any amount of money passed for a 3rd party could lead to a classification as an MSB, to be considered a check-casher, one needs to reach $1,000 processed on any given day. If a person cashes only one of their colleague’s paychecks for $900, then they are not a check casher.

There is a lot of activity check-cashers could facilitate that is way more sinister than cashing a check for a friend. Human trafficking and slavery rings often inflate payroll expenses to obfuscate the fact that they don’t pay their victims. Unscrupulous businesses may hide the fact that they pay less than minimum wages. They may do this by writing out checks to their “employees” and cashing them at an unregistered check-casher and depositing the cash into an account they control. In their books, it looks like they paid their employees. In reality, these employees are being illegally exploited. Registered check cashers must put their clients through KYC processes and have an AML monitoring regime that may deter or catch this behavior; their unregistered equivalents obviously have no such requirement.

SAR Filing Limits

Once a determination has been made that activity indicates that a client is an unregistered MSB, an investigator has to decide whether a SAR filing is necessary. Different industries will have different SAR filing minimum amounts. For financial institutions, a SAR should only be filed if there is at least $5,000 of activity when a primary subject can be identified. For licensed MSBs this threshold is $2,000. This means that even if you have unregistered MSB activity totaling $1 below your threshold on a checking account you do not legally have to report the activity. Institutions are allowed to report activity below their limits, it just comes down to that firm’s internal policy on what to do in those situations. It is important to note that FinCEN is overrun with SAR filings, and it may cause more harm than good to file tons of small-dollar value SARs as the important cases are drowned out by smaller cases.

If you need further help to determine MSB status, you can use FinCEN’s registrant tool here. To see money transmitter licenses you can use the Nationwide Multistate Licensing System (NMLS) lookup tool here.