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March 14, 2012

How do new faces affect risks in money transfer business?

According to a February 21 American Banker article, Facebook has officially entered into the money transfer business. Facebook reported in its S-1 filing last month that it generated about $555 million dollars in 2010 (or 15 percent of its revenue that year) from payments, and that it holds money transmitter licenses in 15 states. Facebook credits are a digital currency that companies use on the site's online applications and games such as Farmville.

Facebook is not the only nonbank business entering the money transmittal business, though it certainly may be one of the more prominent. But as money transmitters are playing an increasingly larger role in our nation's payments system, now may be the time to take stock of the risk environment and continue our discussion on an appropriate strategy for risk governance.

FinCEN SAR filings on the rise for money transfer services
According to FinCEN's May 2011 report The SAR Activity Review: By the Numbers, depository institutions have a greater potential of exposure to money laundering crimes than do nondepository institutions. Nondepository institutions include money service businesses (MSBs), securities and insurance firms, and even casinos. You can see from the following table that over the last five years, the number of depository institution SARs decreased as of December 2010, while nondepository institution SARs have increased.

The report's findings for MSBs in particular are startling. It says, for example, that “in 2010, suspicious activity filings by the MSB industry hit an all time high with 596,494 SARs filed in 2010, up 12% from the prior year and over 18,000 more forms submitted than the previous high in 2007.” In fact, money transfer SAR filings in 2010 comprised 70 percent of all financial services filings by MSBs. SARs by MSBs listing money transfers increased 23 percent from 2009, while money order SARs fell 3 percent for the same period.

2010 SAR filings by financial services

Under the radar: When MSBs fail to file
When MSBs were subject to enforcement actions in 2011, their primary infraction often involved failure to register with FinCEN. In addition, according to FinCEN's 2011 Annual Report, filing failures were often accompanied by other legal violations, such as failing to file currency transaction reports and currency structuring.

To help industry partners, regulators, and law enforcement monitor MSBs, FinCEN recently announced the launch of a new MSB registration website. FinCEN updates the database weekly.

As nonbank companies, including social media firms like Facebook, enter the payments business, it will be critical to keep an eye on small innovative and possibly unlicensed start-up money transmitters.

Cindy MerrittBy Cynthia Merritt, assistant director of the Retail Payments Risk Forum

March 14, 2012 in fraud, money services business (MSB), payments risk | Permalink

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