Bank De-Risking MSBs

In my previous posts [Can’t find MSB Friendly Banks? Go ahead, scream. No one is listening -and- The Sandstorm that is blanketing the operations of money transfer companies] I discussed on how the whole paradigm shift that is happening in banking with respect to de-risking is sending ripples in the money transfer (remittance) industry.

While at the end of the day, MSBs and Bitcoin startups do manage to get a hold of a bank to work with, the Damocles sword is ever hanging. At a moment’s notice, the MSBs/Bitcoin-Startups can be served with a notice that the bank will no longer be maintaining their account and they have 30 days to move out.

I personally know of companies that now, as a matter of sad pride, have plastered all these rejection and account closing letters on to their walls.

The origins of de-risking can very well be traced with Barclays throwing the first punch, and perhaps rightly so because a few of the MSBs in UK that were using them, were not compliant and could have potentially caused the bank to be fined by the regulator.

The Domino Effect

However, the domino effect comes from Operation Chokepoint. One MSB gets banking cut-off, so they go to another bank. During the due diligence process, they see the MSB was previously banking with Bank A, so they call them up. Bank A confesses, the account was shut down due to the risk the account could possibly pose because of Operation Chokepoint hence they closed the account.

What do you think Bank B will do? They will do exactly what Bank A did! They will deny this MSB banking!

The vicious cycle continues, press covers it, the FUD (Fear, Uncertainty and Doubt) spreads more and more, and eventually it becomes a rumor game. No one knows how it got started, everyone is in on it, and no one wants to do business with MSBs.

The whole de-risking thing has gone global. It is no more a localized phenomenon.

There is a reason why I mention the acronym F.U.D. – Fear! Uncertainty! Doubt!

Before all this Operation Chokepoint, for many years, money services businesses were doing business with banks just fine. Remittances have been going on in the banking system for over 50+ years!

What is the sudden risk that came up that could not be mitigated to a very large degree using technology? Today, with the advent of electronic transactions, banks and regulators have more insight into a transaction than ever before. So why the risk reasoning?

Society cannot have a 100% leak-proof system. Period.

No matter how much policing you do, how many sanctions you put in play, money will find a path of least resistance and follow it, be it document or underground.

Over-Extending US LEAs?

Over zealous efforts by the US LEAs have a large role in this play. Department of Homeland Security has played a big role in arm-twisting banks worldwide to drop MSBs (Australia is a prime example). They don’t care how many livelihoods get affected, how many businesses go under, or how difficult it becomes for diasporas to channel money legally to their families. They just don’t care. One only has to look at the Somalia issue to get a deeper understanding of how Bank De-Risking is affecting lives in Somalia.

Does the DHS really think (illegal/illicit) money will not find its way into the wrong hands? If that is the case, why does the drug industry continue to thrive, despite the Billions of dollars put in the fight against it?

Let us question DEA then in the first place. I’d like to give them a report card.

Bullets and bomb-making equipment still finds its way in the hands of terrorists, which by the way is manufactured by the West via their defense industries. No one wants to talk about this for fear of being cited unpatriotic or colluding with the enemy.

We must talk about this elephant in the room.

Years from now, just like the War on Drugs, this war on money-laundering too will turn out to be a futile effort. This whole de-risking of banks will be nothing more than a slap on the wrist for those involved in illegal money transfer. They will continue to evolve.

Remember folks, crime is always one step ahead of the game.

The Solution

What we need is a proactive approach, not a reactive one. A proactive approach that is conducive to business, but at the same time mitigates the threats like Money Laundering and Terrorist Financing.

And it should start with the banks. Banks today are mere conduits for money. Most banks that were dealing with money service business, especially those involved in money transfer, refused to invest in system or offer capabilities to their clients for purposes of doing deep packet inspection for all the transactions that were being aggregated and traversing through their banking channels.

An analogous example would be airport security not checking your bags or immigration not asking you questions or customs not questioning you, all because your travel agent said, “Oh! They’re okay! Let them pass!”

The real-world doesn’t work this way. There are good people and a few rotten apples. Rather than shunning everyone out, banks need to work with MSBs and Bitcoin companies and share their compliance framework, if need be, adopt a newer framework to address some of the riskier elements that the banks would like to cover.

Visibility into the transaction, should be all the way through. No one party should ever have to an aggregated view or condensed view. Just by implementing this, the bulk of the threat that banks fear, can be mitigated.

Dilip Ratha (Lead Economist – Migration and Remittances, Head – Global Knowledge Partnership on Migration and Development (KNOMAD), Development Prospects Group, The World Bank) cites in one of his TED Global Talks cites that there is little or no data or any significant data to suggest a connection between small money transfer transactions and money laundering.

The problem is now so severe that The World Bank is now stepping in and conducting a survey directly with the MSBs affected, so they can have consensus data on the problem and then address.

MSB associations worldwide (from Australia, Canada, UK, US, Italy, Germany, Netherlands, etc.) are now huddling together to challenge these actions by banks that have essentially ostracized them from the banking community.

I think, things will get much more uglier, before they get better. Let’s see if sanity prevails, or the brute-force closure continue. Only time will tell.

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This page was last updated on August 4, 2015.