Strangulation by Regulation

Is Over Regulation Killing the Industry?

Money Service Businesses (MSBs) are one of the most regulated entities in the financial services vertical.

In the United States the regulations are even more stringent. Yet, today, most MSBs are being denied banking access, as they are deemed risky.

The industry term used by banking institutions is to de-risk money service businesses.

Extensive compliance programs, been in business for over 10 years, no regulatory fines or slaps on the wrist, well documented KYC for customers, clean transactions, near zero risk on money movement and yet, MSBs are being labeled as high-risk.

They (the banks) make you feel like the business you’re in is something utterly dirty and unethical” said the CEO of one 12 year old Money Transfer business who recently lost access to banking completely. “They certainly didn’t feel that way when they had my business for over 9 years, why discriminate now?” he continues.

Another colleague I spoke to, called it “Strangulation by Regulation – they (banks and regulators) are killing me slowly”.

State Regulators are sympathetic, or so they say. They squarely lay the blame on the federal government and declare they have no say in making a bank keep its doors open for MSBs. The federal regulator (FinCEN) says they can only advise banks not to close MSB accounts.

So if everyone is pointing fingers, what is the actual truth?

The truth is, everyone is in this together. A State regulator decides who gets to play ball and who doesn’t. A bank calls up the State regulator and again they both decide who gets to play ball. If an MSB has deep enough pockets, they get invited to play.

Everyone else? They can just shutter down and go home.

So who is driving all this bad business? The local State Prosecutor is my guess. Operation Chokepoint was supposed to put a chokehold on illegal money movement. By including money transfer companies into that list, they did mitigate illegal money transmission, but the bank closure game got out of hand. Now, genuine MSBs businesses are being closed down and that is the price they are paying for being included on a list that is now determining their fate.

Enter the narcissist local State Attorney / District Attorney. These guys are just itching to find an excuse to shut down MSBs or heavily fine them. Because the banks were used, they go after them too, and hence the fear on the banking side.

Banks are tapped as accomplices to the crime(s) / violations that may have incurred on the MSBs side. Because of these crimes/violations (which are very, very few), banks are made party to the case and this is precisely what banks are trying to avoid.

However, the State Attorney or your local DA is not to be blamed all the time. FDIC, Department of Homeland Security, US Secret Service, US Department of Treasury, FBI, FinCEN, et. al. are all very closely monitoring bank and/or MSBs and literally deciding who gets to stay in business or not. There seems to be a zero dot zero tolerance for illegal or suspicious transfers.

Mending the memorandum for Operation Chokepoint seems to be the only way out, but I fear it is too late now. The de-risking tsunami has traveled around the world a couple of times. It would be extremely difficult to undo the damage.

As we all know, once you have strangled a situation, you just can’t un-strangle it.

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