Counterterrorism Blog

Money Services Businesses (MSBs) provide important services to a large segment of our society. According to FinCEN, MSBs refer to five distinct types of financial services providers: currency exchangers; check cashers; issuers, sellers, or redeemers of traveler’s checks, money orders or stored value; the United States Postal Service; and money transmitters. MSB customers mostly consist of the “unbanked.” This client base tends to be more transient, consist of low income households, who generally prefer not to deal with banks, and engage in short term transactions. Many of these individuals are immigrants who rely on MSBs to cash checks and/or send money back to their families in their home countries. Either real or perceived, there is an impression that many MSBs possess lax anti-money laundering (AML) programs.

In order to successfully operate and continue to provide services to their constituencies, MSBs require maintaining specific banking services. Between the perceptions of lax AML programs, the transient customer base and fact that MSBs are cash intensive businesses they are inherently considered high risk customers by banks. Because of this inherent risk, many banks either do not service MSB accounts or have closed MSB accounts. This problem has been seriously exacerbated by two distinct areas of vulnerability which have been easily exploited by terrorists, drug dealers, criminals and money launderers alike. These two areas are:

1. Unregistered and unlicensed MSBs
2. MSB agents or operators who facilitate money laundering

It is important to point out that many MSBs are credible businesses possessing adequate to comprehensive AML programs. Invariably, the credible MSBs are registered with FinCEN and licensed in their state(s) of operation. As of April 10, 2008, the FinCEN MSB registration list contained 41,049 MSBs. The problem is that this represents less than 20 % of the MSBs operating in the United States (U.S.). This means that the overwhelming majority of MSBs are unregistered, unlicensed and illegal. Most, if not all of these illegal MSBs do not have AML programs and are extremely vulnerable to terrorist and criminal exploitation. It should be noted however, the majority of MSB transactions are attributable to the seven largest MSBs, which are legitimate sophisticated operations. None the less, the overwhelming number of illegal MSBs is troubling.

MSBs range from simple mom and pop businesses to complex chain operations. There is a broad variance between these types of businesses. In servicing MSBs, banks must understand they are dealing with various levels of risk. Hence, assessing MSB risk is challenging. There cannot be a standard model to assess risk applied to all MSBs. Banks must demonstrate flexibility and assess the risk of MSB clients on a specific client by client basis.

In those situations where the bank is aware the client is an MSB, the risk assessment and monitoring process should be easier to manage. Based on geography; the type of operation, mom and pop versus chain; type of business, ranging from check casher to money remitter; the bank should be able to reasonably assess the level of risk. Based on the risk factors, the bank can determine how to monitor the MSB account, to include planning onsite visits; the extent of onsite reviews; and the frequency. This process should be consistent and well documented.

The greater concern to banks should be the fear of the unknown. Most banks in actuality have MSBs as clients but do not know it. For a multitude of reasons, the MSBs were not identified at account opening as MSBs and were listed as other business entities, such as grocery stores, restaurants, travel agencies or other types of businesses. In addition to their normal services, these businesses offer some type of MSB function. There is a reasonable chance that many of these businesses are not properly registered with FinCEN or licensed by the individual states they operate in.

In the majority of instances, where banks do not identify a customer as an MSB, they are dealing with check cashers. According to industry experts, a lot of small businesses will offer check cashing services to their customers but don’t understand the legal impact or responsibilities. Typically, banks can find MSBs by looking at their customer’s transaction activity. There will be a pattern of depositing a large number of checks such as third party or payroll checks. There will also be a pattern where the amount of cash deposited decreases or the amount of cash back increases, depending upon the type of business, and whether it’s cash intensive or not. Money remittance businesses will have extensive outgoing transfers, usually by wire. Many of these transfers will go to the country of the ethnic community serviced by the business.

Two examples of illegal activity emanating from money remittance operations with a nexus to terrorism involved the Carnival Ice Cream Shop in Brooklyn, New York and Operation Cash Out, a wide ranging multi-agency undercover operation.

The Carnival Ice Cream Shop’s annual average revenue was approximately $185,000. Yet between 1997 and 2003, Carnival’s owner Abad Elfgeeh, an American citizen born in Yemen, illegally wired $22,000,000 overseas, mostly to Yemen. The funds were wired through a major New York City bank. Most people wiring money were of Yemeni decent. The FBI became aware of Elfgeeh’s activity during the course of a terrorist investigation involving Sheik Mohammed Ali Hassan al-Moayad. Elfgeeh illegally transferred money to al-Moayad, a radical Yemeni Sheik who raised funds for Al Qaeda and Hamas. Al-Moayad had close ties to Osama bin Laden. The FBI arrested al-Moayad in an undercover sting operation in a hotel room in Frankfort, Germany, in 2003. Al-Moayad was lured to the hotel under the pretext that undercover agents intended to provide him with $2,000,000 for Al Qaeda and Hamas. Al-Moayad was convicted in 2005 and sentenced to 75 years for conspiring to provide material support to terrorism.
The government elected not to charge Elfgeeh with terrorism. Elfgeeh was convicted on charges including operating a money transfer business without a license and avoiding currency reporting laws. A vexing question for banks is how many customers do they have, who function like the Carnival Ice Cream Shop and facilitate money transfers for terrorists and criminals alike? A more vexing question is does the bank have the capability of identifying such illegal accounts?

Operation Cash Out was a four year multi-agency undercover operation that focused on illegal money remittance or hawala activity conducted through a number of businesses ranging from money transmitters to convenience stores. Hawalas operate throughout the world. They function as an underground banking system, operating parallel to the formal banking system. In all, 46 defendants in the U.S., Spain, Canada and Belgium were arrested in September 2007. In this case, subjects laundered more then $2,200,000 for cooperating witnesses they believed were drug dealers. In at least one instance, a subject believed he was moving money intended for terrorists. This case has yet to be adjudicated. However, it cuts directly to the heart of the problem for financial institutions. What can and should banks do to better “know their customer” and identify businesses operating as unregistered and unlicensed MSB customers?

In addition to manual reviews, banks should use AML systems that alert the bank to possible MSB activity through transaction monitoring. The best method for banks to identify MSB customers is on the front end at account opening and/or in the initial due diligence process. Bank employees should be trained to ask the right questions at account opening. In addition, the due diligence process should be thorough and include mechanisms to identify potential MSB red flags.

Each of the above cases also involves the second area of vulnerability for MSBs which can be easily exploited by terrorists, drug dealers, criminals and money launderers. MSB agents working for MSB chain operations and the small mom and pop MSB operators can either operate within the framework of the law and adhere to all AML reporting requirements or they can operate in an illegal manner and facilitate illicit activity. Many MSB agents and operators are honest individuals who run legitimate businesses. However, many others are not. In the case of the small MSBs, the onus falls on the bank to know their customer. With agents, the responsibility for their activities rests with the MSB.

The vulnerability to MSB agent malfeasance was manifested in the case against the MSB Sigue. Sigue has more that 7,000 agents located throughout the U.S. providing money transmission services from the U.S. to Mexico and Latin America. Between November 2003 and June 2006, it was determined that Sigue’s AML program was deficient in all four core elements. Namely, Sigue failed to implement effective internal controls, designate compliance personnel, conduct effective independent testing, and provide training to ensure compliance with the Bank Secrecy Act. As a result, a significant amount of drug money was laundered through Sigue agents. As part of a DEA drug investigation, 47 Sigue agents structured transactions and/or knowingly laundered drug money for undercover DEA agents.

It is incumbent that MSBs maintain strong oversight of agents and operate robust AML programs to identify transactional patterns indicative of money laundering. MSBs must adequately vet potential agents through proper due diligence and they must provide ample and consistent agent training. Agent onsite reviews should be conducted on a scheduled and unscheduled basis and re-reviews conducted of select agents.

MSBs under the best of circumstances face perception problems. The two areas of vulnerability discussed herein, unregistered and unlicensed MSBs, and MSB agents or operators that facilitate money laundering make it challenging for MSBs to establish and maintain bank accounts. More importantly, these vulnerabilities present opportunities for terrorists, drug dealers and criminals to launder money.

Issues involving MSBs are complex and require government oversight and guidance. One step in the right direction is that FinCEN is developing an MSB examination manual. According to a FinCEN representative at a recent AML conference, FinCEN hopes to publish the MSB examination manual in the fall. Based on the steady stream of law enforcement cases reported in the media involving illegal money transmission activities, select Congressional Committees should revisit and assess this issue.