Money services businesses (MSB) — including money transmitters and foreign exchange providers — are at least a multi-trillion dollar industry, ranging from small, owner-operated businesses to sophisticated, global organizations. Compliance with anti-money laundering (AML) laws and regulations in this industry is perceived to be fractured with varying degrees of compliance. To add to the perception, Canada's financial intelligence unit, the Financial Transaction and Reports Analysis Centre of Canada (FINTRAC), under the Canadian AML laws — that is the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA) — has increasingly been penalizing and publicly disclosing the names of organizations that fail to meet regulatory requirements.

With the greater focus by regulators, MSBs and their partners, including their bankers and financial correspondents, are closely scrutinizing the industry and some are refusing to bank or transact with MSBs. Canadian MSBs, understanding the risks of money laundering and terrorist financing and increasingly, the importance of managing their relationship with their partners are seeking solutions as well as an understanding of what others in the industry are doing.

The anti-money laundering (AML) team at Grant Thornton created a benchmarking report with the goal of providing MSBs and financial institution organizations — both with AML compliance objectives — with a critical tool to assist in evaluating the results of an AML compliance program review, understand the level of scrutiny the industry is undertaking and more importantly, what the MSB industry needs to strive for.

This benchmark report can help both MSB and financial institutions by establishing today's benchmark and tomorrow's goals for AML compliance programs. Specifically, to assist with:

• Identifying and evaluating the prevalence of compliance practices found within the MSB industry;
• Determining the impact that specific practices can have on a compliance program's effectiveness;
• Establishing effective compliance practices and to determine the relative standing of an an MSB organization within the industry;
• Managing an MSB's relationships with financial institution partners; and
• Regulators in understanding the industry's compliance practices and to evaluate the pace at which changes in the industry are progressing.

Profile of MSB population

The majority of MSBs included in the benchmark population provide money remittance services and close to half of the population provide currency exchange services. Other services provided include cheque cashing, money orders, and payday loans. Many of the MSBs provide a multiple of these services.

Of the MSBs that provide money remittance services, we found that a majority typically serve a specific geographic region and just over a quarter provide remittance services broadly to regions around the world — either using established global networks or using their own proprietary networks.

The report also analysed the benchmarking population to understand how the MSBs interacted with their customers. The percentage of MSBs providing online access to customers was only 2 percent, while 48 percent interacted in person/face-to-face access and 50 percent provided multiple forms of access. For those organizations providing multiple interaction types, these were usually only provided after an initial face-to-face meeting.

Provided below is a summary of some of the main areas benchmarked.

Compliance officer

Regardless of whether the organization's compliance officer was the owner or a hired employee, there were no discernible differences between having recordkeeping and reporting deficiencies. However, only a small percentage of the compliance officers had relevant AML credentials (such as a CAMS). We see this changing already as more and more individuals in the compliance officer role are seeking training and certification.

While there were many MSB's where the compliance function was operated by a single individual, larger MSB's have the resources to support a team of people. Surprisingly, where the compliance officer was supported by a team, we noted that recordkeeping and reporting deficiencies were higher; while having a team can be beneficial to the organization, the compliance officer needs to ensure that the quality and consistency remain high.

The risk assessment

The risk assessment document itself really needs to be the foundation of your organization's AML program. A good risk assessment documents money laundering and terrorist financing risks specific to your individual business and includes mitigating controls. Once your higher risks are identified, ensure you are actively monitoring for these higher risk customers and transactions. Protect yourself and your business by executing on your documented controls including obtaining source of funds information before you take on responsibility for facilitating the transaction.

While the majority of the organizations we reviewed had a documented AML risk assessment, many were still in the process of making the document a practical reality; 84 percent of the MSBs had not identified any high-risk areas in their risk assessment. Unexpectedly, we noted that those that had identified high-risk areas were less likely to identify and report suspicious activity to FINTRAC. In some cases we see that the identification of higher risk areas is really a prevention control — high-risk transactions and clients are quickly identified and declined at the outset, limiting the money laundering exposure to the organization.

Training

Using testing as part of an AML training program can secure an understanding of the requirements and lock in your training investment dollars. In our benchmark review, less than a quarter of the MSBs actually had incorporated testing in the training.

Documented on-going training of the compliance program requirements must be maintained. There are now MSB industry-tailored training resources available that organizations can access online and can also use to track employee completion and test results.

Training should include materials that are relevant to the employee's role within the organization, and should provide an understanding of AML as well as specific knowledge necessary for that person to perform their part of the MSB's AML strategy. Training is now expected to be tailored to the role and position of your staff.

It's also important to train and review your specific recordkeeping requirements with staff. Use examples specific to your organization to make it effective.

Recordkeeping

Although most MSBs had a good understanding of the AML requirements, a high percentage, 76 percent of the MSBs, had record keeping deficiencies. The more typical record keeping deficiencies were:

• Staff was unclear as to what the specific recordkeeping requirements were;
• Occupation information was either not obtained or what was documented was unclear
• Corporate beneficial ownership information was not obtained or documented, also details of the individuals authorized to transact for the corporation were not collected or recorded; and
• No documented inquiries were made to determine whether the transaction was being conducted for a third-party or politically expose foreign person (PEPF).

Suspicious transactions

While most MSBs understood the importance and requirement to report suspicious transactions, most organizations had never submitted a suspicious transaction report (STR). Organizations that had submitted were typically larger and had an automated transaction system to help identify unusual customer transaction patterns.

It's critical that all staff (front counter, back office/processing, and management) are properly trained and aware of how to recognize the red flags of an unusual transaction that raises suspicion of money laundering or terrorist financing.

What's apparent from our research and experience is that the anti-money laundering compliance programs of MSBs are now starting to deliver the desired results. However, it is also apparent that many MSBs need to start focusing on the identification of potentially suspicious transactions — perhaps this is simply an evolution of the compliance regime exercise now that the rest of the program elements are in place.

Above all, financial institutions who are working with high-risk clients need to implement and maintain transparency to their banking clients; having a rigorous and effective anti-money laundering and terrorist financing deterrence program in place is a critical success factor for today's MSB organizations.

Canada's MSB industry is a vital segment to many cultures and the unbanked, as well as providing an alternative and a competitive method to transfer funds. The industry will continue to face its own challenges but with a better understanding of the regulatory requirements the industry will evolve and distinguish those MSBs that abide by and exceed the requirements, especially those that can identify suspicious transactions. 

For more information, or to read the report in full, please visit: www.GrantThornton.ca/AML

Patrick Ho, CPA, CA, CBV, CAMS, senior manager, Grant Thornton, LLP, Toronto, ON, Canada, Patrick.Ho@ca.gt.com

Jennifer Fiddian-Green, CA.IFA, CMA, CFI, CFE, CAMS, partner, Grant Thornton, LLP, Toronto, ON, Canada, Jennifer.Fiddian-Green@ca.gt.com