New Bank Secrecy Act/Anti-Money Laundering Examination Manual for Money Services Businesses

December 23, 2008

On December 9, 2008, as anticipated, the Department of the Treasury’s Financial Crimes Enforcement Network ("FinCEN") issued the Bank Secrecy Act/Anti-Money Laundering Examination Manual for Money Services Businesses (the "Examination Manual" or "the Manual"). This 153-page document sets forth a road map for examinations by the Internal Revenue Service ("IRS"), to which FinCEN has delegated examination authority for Money Services Businesses ("MSBs") and other businesses that do not have a federal regulator but that have been designated as financial institutions under the Bank Secrecy Act and its implementing regulations (collectively, the "BSA").[1] The Manual is available from the FinCEN website, www.fincen.gov.

In addition to providing detailed examination procedures for IRS examiners, the Manual serves as guidance for the MSB industry. It provides useful information to MSBs about the government’s expectations for BSA/Anti-Money Laundering ("BSA/AML") compliance and for identifying and controlling money laundering and terrorist financing risks. MSB BSA Officers and management can benchmark their BSA/AML Programs against the Manual. MSB internal audit departments and outside auditors will be able to refer to the Manual in developing or refining independent testing programs for reviewing the BSA/AML Programs of MSBs. A risk-based audit program that matches the applicable examination procedures point-by-point should assist an MSB in identifying issues and deficiencies before they would be identified by the government.

The Examination Manual was developed by FinCEN in collaboration with the IRS, the State agencies responsible for MSB regulation, and the Money Transmitter Regulators Association, an association of state regulators. The goal was to ensure consistency in the application of BSA requirements and expectations and to "facilitate the effective allocation of examination resources between federal and state BSA regulators." Examination resources are of critical concern to the government in that the IRS only has some 400-plus dedicated BSA examiners nationwide who are responsible for thousands of MSBs and other financial institutions.

The Manual is modeled on the BSA/AML examination manual for federal bank examiners, the Federal Financial Institutions Examination, Council Bank Secrecy Act/Anti-Money Laundering Examination Manual ("FFIEC Manual"), which was first issued in 2005. As in the FFIEC Manual, the examination approach is risk-based. Unlike the FFIEC Manual, the MSB Manual does not address compliance with the economic and trade sanctions administered by the Treasury Department’s Office of Foreign Assets Control. Similar manuals are expected to be issued for the casino and insurance industries at some point in the future. In the meantime, while the BSA requirements differ for the various types of entities examined by the IRS, the MSB Manual should be a helpful reference in understanding the approach that the IRS will take in BSA/AML examinations.

There is very little in the Manual that should come as a surprise to MSBs that have experienced IRS examinations and that have been following FinCEN guidance and enforcement actions in recent years. The overall impression from the Manual is that the government’s BSA/AML compliance standards for MSBs are very high, as are the government’s standards for the IRS examiners conducting the MSB examinations.

Some highlights and notable points:

The Manual addresses all types of businesses that are considered MSBs under the BSA except issuers, sellers and redeemers of stored value. Issuers and sellers of stored value (if they ever sell more than $1,000 to one person in one day with currency or monetary instruments) are required to maintain BSA/AML Programs but are not subject to other MSB requirements, such as suspicious activity reporting and FinCEN registration. FinCEN has been considering how best to refine the requirements applicable to stored value issuers and sellers for some time. The fact that there is no discussion of stored value in the Manual may be reflective of this ongoing process and that the main examination focus of the IRS is on more traditional types of MSBs — money transmitters; issuers, redeemers, and sellers of money orders and travelers checks; currency exchangers; and check cashers.
The starting point for the IRS examiners in scoping the course and extent of the examination is the MSB’s risk assessment, which should take into account the MSB’s products and services, types of customers, risks associated with the geographic locations where the MSB offers services and processes and facilitates transactions, and operational (compliance) risk. While a risk assessment is not a regulatory requirement for MSBs, it is clearly a regulatory expectation. If a business has not conducted a risk assessment or an adequate risk assessment, the examiners are instructed to complete one.
Before getting started, examiners also are to review a sample of the MSB’s BSA filings and the Suspicious Activity Reports ("SARs") filed by other financial institutions on the MSB and to request documents from the MSB. Appendix D to the Manual lists the documents that generally should be requested. The examiners also are to conduct preliminary interviews with appropriate MSB employees and managers and the BSA Officer. Appendix G suggests an extensive list of questions that may be raised in interviews. A transaction testing plan is to be developed based on the MSB’s risk profile, which may be adjusted over the course of the examination.
It is interesting to note that the Manual uses the term "principal" and agent to describe MSBs that provide their products and services through independently-owned sales outlets. The use of the term principal may be used just for convenience and should not be read necessarily as new FinCEN thinking on the legal liability of MSBs for the acts of their agents. In the Manual, FinCEN states, as it has in the past, that MSBs and their agents may allocate BSA compliance responsibilities, but that each remains independently responsible for implementation of BSA requirements, including BSA/AML Program and currency transaction and SAR reporting requirements. This can be contrasted with the approach of the Department of Justice on MSB/agent liability. In the Statement of Facts that accompanied the Deferred Prosecution Agreement earlier this year with Sigue Corporation, a money transmitter, the Justice Department stated that Sigue could be held criminally liable for the illegal acts of its agents, i.e., that the knowledge of an MSB’s agents could be imputed to the MSB. United States v. Sigue Corporation, 4:18 CRI 0054 RWS (E.D. Mo., Jan. 8, 2008).
Some of the procedures contained in the Manual apply only to principals, e.g., agent selection, monitoring and termination, due diligence on agents, including foreign agents or counterparties, and currency transaction aggregation across locations, whereas others apply to agents or to both. Very little specific information is provided about examining MSBs with multiple branches that are agents of MSBs, e.g., large grocery store chains that sell money orders of a certain issuer at every store.
In the Manual, FinCEN has articulated the long-understood expectation that domestic and foreign agent management should be a component of the BSA/AML Program of an MSB with agents. The Manual requires examination of policies, procedures, and internal controls of an MSB’s agent management program for both U.S. agents and foreign agents, which would include agent due diligence, risk-based agent monitoring, standards for agent discipline, and agent training. Previously, guidance only had been provided for due diligence on foreign agents.
There are several references in the Manual to the fact that MSB management must be knowledgeable about and committed to the MSB’s BSA/AML Program and receive periodic updates on BSA compliance by the MSB. Examiners are directed to interview "upper management" and to understand the level of knowledge of MSB owners and board members, where appropriate. The lack of involvement of senior management would be considered an element of operational risk.
With respect to the BSA Officer’s authority, the Manual states that the examiner should check whether the BSA Officer has adequate involvement in the development of new products and services.
Examiners are told not to second guess whether a particular decision to file a SAR was correct unless the failure to file is significant or accompanied by evidence of bad faith.
In the discussion on reviewing SAR compliance by money orders and travelers check issuers, examiners are directed to review clearance records to identify potential suspicious patterns of activity of $5,000 or greater (which is the threshold for suspicious activity identified by issuers of money orders and travelers checks for instruments in the clearing process). Then, the examiner presumably would check to see if a SAR had been filed on the transaction. One example of a potential suspicious pattern is of ten consecutively-numbered money orders, each with a face amount of $500, clearing together through the same bank account. As FinCEN and the IRS are aware and appear to have accepted in the past, money order and travelers check issuers are monitoring groups of apparently related cleared items at a higher threshold than $5,000 through their automated systems. If the expectation is that a SAR should have been filed by the issuer in the example, as opposed to the selling agent (i.e., because the group of money orders clearing together totaled $5,000), this could mean a major overhaul of the issuers’ current processes and a significant additional compliance burden. This point requires some clarification.
Another matter that requires clarification is whether FinCEN expects issuers of money orders and travelers checks to collect and review monetary instrument sales records (required for cash sales between $3,000 and $10,000, inclusive, on the same day) to identify suspicious activity. In this context, the Manual does not specify the relative responsibilities of principals and agents. The examiner is supposed to identify where there may have been sales between $3,000 and $10,000 from clearance records (records maintained by the issuer) and then compare them to $3,000 or $10,000 sales records (records generally only maintained by the selling agent).

FinCEN plans to hold conference calls on January 27, 2009, to discuss the Manual. MSBs will be able to call-in to hear FinCEN’s presentation and will be able to submit questions to FinCEN. FinCEN has not yet determined how the questions will be handled, e.g., by email during or before the call. Details about the call will be posted on FinCEN’s website, www.fincen.gov.

[1] In addition to MSBs, the IRS has been delegated examination authority for casinos and card clubs, insurance companies with respect to certain covered products, operators of credit card systems, and dealers in precious metals, stones, or jewels.

Gibson, Dunn & Crutcher lawyers are available to assist in addressing any questions you may have regarding these issues. Please contact the Gibson Dunn attorney with whom you work,

Amy G. Rudnick (202-955-8210, [email protected]) or
Linda Noonan (202-887-3595, [email protected])

in the firm’s Washington, D.C. office.

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