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What Are Money Service Businesses and How They Can Do Anti-Fraud Management?

Employees of MSBs can commit fraud by stealing customer funds or manipulating financial records. For example, an employee might steal cash from the register or alter transaction records to embezzle funds. Commonly, it involves the theft of funds by an employee with usually an authoritative position or sensitive access to the finances of the company. This access can be direct or indirect.

Misbah Tayib

Compliance Journalist

What is MSB?

A Money Service Business (MSB) is a financial institution or business that provides services such as currency exchange, money orders, wire transfers, and remittances. MSBs may also provide other financial services such as check cashing, prepaid debit cards, money transfers, microloans, crowdfunding, and even investment services. While MSBs can have diverse clients ranging from individuals to corporate entities, they are more lucrative for the unbanked population.

There are 2 types of Money Service Businesses:

1) Conversion MSBs

They convert cash and provide foreign currency exchange services with a minimum threshold of $1000 per day per transaction to be classified as an MSB. Conversion MSBs also provide check cashing services.

2) Transmission MSBs

Transmission MSBs transfer money to local and foreign jurisdictions with no minimum limit set to be classified as an MSB.

As per FinCEN’s classification of MSBs, banks do not fall under the MSB category. But all MSBs are financial institutions including crypto exchanges, e-commerce platforms, and crowdfunding platforms.

Just like other financial institutions these businesses too are regulated by federal and state agencies in order to prevent money laundering and other financial crimes. Some examples of MSBs include currency exchange offices, money transfer companies, and check-cashing stores. In order to operate as an MSB, a business must typically register with the appropriate regulatory agencies and comply with certain requirements, such as conducting customer due diligence and reporting suspicious activity.

Well-known MSBs in the world

Some well-known MSBs that operate globally and have a large customer base include:

Western Union Western Union is a US-based multi-national financial services company, headquartered in Colorado that offers money transfers, foreign exchange, and bill payment services in more than 200 countries and territories.
MoneyGram MoneyGram is a US-based P2P payments company that offers money transfers, bill payments, and money order services in more than 200 countries and territories. It is headquartered in Dallas.
Paypal Paypal is an online payment platform that facilitates individuals and businesses to send and receive payments electronically. Its corporate headquarters are in San Jose, California.
Ria Money Transfer  Ria Money Transfer is a subsidiary of Euronet Worldwide Inc. It initiates payment transfers via networked agents and stores that are owned by it. These stores are located in different locations around the world. Ria’s headquarters are located in Buena Park, California.
Xoom Xoom is a remittance service and funds transfer service that allows customers to send, receive, and manage money through mobile phones. It operates in 131 countries including US and Canada. Its headquarters are in San Francisco, California.

Financial Fraud in Money Service Business

Money Service Businesses are vulnerable to financial fraud too. Since large amounts of cash, digital currency, and other forms of money are involved on a daily basis in an MSB, Here are a few examples of financial fraud that can have MSBs’ involvement.

1) Money Laundering

MSBs can be used by criminals to conceal the real sources of cash and then pose them as legitimate funds. For example, a drug mafia might use an MSB to transfer money obtained through drug trafficking to different accounts or countries, making it difficult to trace the real owner of the funds. Also Read: 3 Stages of Money Laundering

2) Insider Fraud

Employees of MSBs can commit fraud by stealing customer funds or manipulating financial records. For example, an employee might steal cash from the register or alter transaction records for embezzlement. Commonly, it involves the theft of funds by an employee with an authoritative position or sensitive access to the finances of the company. This access can be direct or indirect.

3) Customer Fraud

Through fake or stolen identity documents, customers of MSBs can also commit fraud and conduct transactions or may attempt to cash fraudulent checks.

4) Ponzi Scheme

It is a serious crime and a type of investment fraud where fraudsters promise the victim high returns on their invested money. The returns are paid to these victims from new investors and there is no actual profit to both victims.

5) Crowdfunding Fraud

Crowdfunding Fraud is an activity to collect money or funds through different means for a scam or other illegal activity. Money Service Businesses are widely used as a fast-paced medium for Crowdfunding by sharing the account number with ‘backers’ and asking them to pool in the money. Once the desired amount is collected the fraudster can cash it out and flee away.

What Measures MSBs Should Take to Prevent Frauds?

Money Service Businesses (MSBs) require robust and fool-proof fraud management techniques to prevent fraud and protect their customers. Here are a few preventive measures that everyone should know at a beginner’s level to prevent fraud while using MSB services.

Also Read: What is synthetic identity fraud?

i) Implementing strong authentication processes:

You should confirm that your MSB service is using a multi-factor authentication process to verify the identity of customers before allowing them to open accounts or complete transactions. This can include using security questions, biometric authentication, or one-time passcodes.

ii) Monitoring transactions for suspicious activity:

Your MSB service provider must use software and tools to monitor transactions for behavior patterns that may indicate money laundering or other forms of financial fraud. Unusual amounts or frequencies of transactions or transactions with high-risk countries or individuals must be clearly reported and flagged. You can also act responsibly and be in contact with law enforcement if you see suspicious activity in your MSB.

iii) Implementing internal controls to prevent fraud:

MSBs should implement effective internal controls such as separating duties within the organization. Also, they can establish clear policies and procedures, and conduct regular audits to ensure that these measures are being followed. Meanwhile, you should stay updated on all security measures, policies, and procedures of your MSB service to prevent any hassle.

iv) Providing training to employees:

Make sure that MSB employees are well-trained against all forms of fraud and must be equipped with the latest techniques, tools, and training to identify, report, and combat fraud of all forms. Moreover, they must be able to clearly differentiate between a genuine customer and a potentially risky customer while serving them best.

v) Collaborating with law enforcement:

Most importantly, the law is above all. MSBs should abide by the country’s laws and regulations and stay in close contact with law enforcement of the jurisdiction. They must keep them updated with the latest developments and any suspicion that needs to be timely reported.

Western Union Example of FinCrime in MSBs

Western Union, the famous financial services company, has faced several financial crime charges in recent years. In January 2017, Western Union agreed to pay $586 million to settle claims that its agents were involved in helping suspicious transactions. The MSB failed to maintain an effective anti-money laundering program. Despite knowing that its agents were involved in fraudulent transactions, it didn’t take any action against them. This followed a multi-year investigation by the U.S. Department of Justice and the Federal Trade Commission.

Western Union reportedly violated Global Terrorism Sanctions Regulations and later voluntarily disclosed them. Investigations by the Department of Justice revealed that Chinese immigrants made structured transactions that didn’t abide by the Bank Secrecy Act to send millions of dollars worth of funds to human smugglers in China. Furthermore, Western Union received thousands of complaints from people who sent money to scammers via Western Union.

Final Words

MSBs are financially regulated institutions that deal with large amounts of money worldwide. Since, most of the time they deal in money exchange and facilitate the flow of remittances, they are often a go-to place for criminals who want to clean their dirty money. Therefore, it is mandatory for these institutions to know who are their customers, what are the resources of their funds and to whom they intend to send money.
For this purpose, MSBs must implement respective KYC & AML guidelines so that even inadvertently, they don’t become a channel to funnel illegitimate money or get involved in any fraudulent activity.


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Misbah Tayib
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Misbah Tayib is a compliance journalist and freelance writer with almost 6-year long experience of covering developments in blockchain sector, crypto industry, AML compliance, privacy regulations, and relevant political advancements.