Hiiraan Online

Thursday, October 03, 2013

Barclays’ decision to close the bank accounts of money services businesses has been in the spotlight this week for potentially hampering the flow of remittance dollars to Somalia. But the big picture behind the move is that regulatory concerns have led many banks to bar these companies from holding accounts.

U.S. banking regulators have signaled they consider these money services businesses to be higher-risk customers, experts say. That has led compliance-focused banks to carefully examine their dealings with these firms, especially in light of the large fines for inadequate anti-money laundering controls levied in recent years.

The scrutiny means that these MSBs, which include money transmitters and check-cashing firms, often have their bank accounts closed involuntarily or have trouble opening one at all. Bank accounts are especially crucial to the operations of these money-moving firms, experts say.

But many of those who run MSBs maintain that banks are subjecting them to undue scrutiny. Thousands of these MSBs are registered with the U.S. government, and they play a significant role in the global economy. For instance, the World Bank projects that international migrants will transfer about $400 billion in remittances to developing countries this year.

Tough Environment

In order for a MSB to convince a bank that it is a suitable customer, it typically has to build a strong Bank Secrecy Act/Anti-Money Laundering program and tout it to the bank, though that is not always enough to land an account or keep one open, said Brian Stoeckert, chief strategy officer at CoinComply, a firm that helps virtual currency firms, which are considered MSBs, build BSA/AML compliance programs.“There are a number of banks that continue to maintain MSB account relationships,” said Ralph Fatigate, a managing director at Alvarez & Marsal who advises firms on BSA/AML compliance. But he added that he has had some MSB clients with tight controls who still saw banks close their accounts.

Barclays’ move to close the accounts of some Somali money-transmitters, which facilitate remittances that play a large role in Somalia’s economy, is part of the bank’s broader strategy to close the accounts of MSB customers who don’t meet certain standards. Barclays hasn’t publicly specified exactly what those standards are.

Barclays moved earlier this year to close the accounts of about 250 MSBs, which accounted for about 75% of all MSB customers, the bank said. Four of those told their accounts would be closed send remittances to Somalia. The closure of one of the accounts was delayed until mid-October after the money transmitter sought an injunction to keep the account open, Risk & Compliance Journal reported earlier this week.

Fighting for Accounts

U.S.-based MSB banking struggles have led some to take legal action to preserve bank accounts or visit dozens of banks before finding one that will accept the firm’s business.

Check-cashing firm Bridge Capital Solutions Corp. in 2011 received a letter from its bank, First Trade Union Bank, saying it would close the the Hauppauge, N.Y.-based firm’s account because the bank had decided to sever ties with MSBs, according to court documents.

Bridge Capital sought an injunction to keep his account open, eventually reaching a settlement with First Trade Union Bank outside of court, according to the documents. Bridge Capital owner Michael Casalini said the firm was eventually able to find a new bank account. First Trade Union Bank didn’t respond to a request for comment.

Mr. Casalini is now part of the team behind a new consultancy, the Money Service Business Compliance Bureau, which works with MSBs to establish compliance programs that satisfy banks.

Megan Burton, chief executive of virtual-currency CoinX, a virtual currency exchange, said she met with more than 40 banks before landing four business bank accounts. HSBC Holdings PLC, PNC Financial Services Group Inc. and SVB Financial Group’s Silicon Valley Bank were among those who turned her firm down, she said, but she declined to name the banks that gave her firm accounts.

“We went through a tremendous number of banks to get a number that said yes. It wasn’t a matter of just walking in the door. We’ve had to speak with compliance officers and walk them through the business model,” said Ms. Burton.

Banks Shut the Door

Some of the banks that turned Ms. Burton say they generally don’t give accounts to MSBs.

“”As a result of a strategic review of the Money Services Business sector, HSBC is withdrawing from offering banking services to this segment,” the bank said in a statement, but a spokesman declined to comment on potential customers specifically.

“While we cannot comment on a specific customer, I can say that PNC unwound funding to core money services businesses about a decade ago and then again in 2009 after acquiring National City,” a bank spokeswoman said.

A Silicon Valley Bank spokeswoman also declined to comment on specific customers and said the bank works with “a couple virtual currency (bitcoin) companies, providing business checking accounts. Until regulatory guidance is clear on banking and payment processing for virtual currency companies, though, we will not be expanding this area of our business.” She said the bank worked with other MSBs on a “case by case basis.”

The best bet for things to change for MSBs is national legislation being passed that addresses the issue of bank account access, said David Landsman, executive director of the National Money Transmitters Association. Legislation was proposed years ago but eventually lost traction and has not been revived.

Write to Rachel Louise Ensign at [email protected]