By Ray Birch
MIAMI GARDENS, Fla.—How did a $4-million credit union here come to process more than $1 billion in outgoing wire transfers and $984 million in remotely captured deposits in one year?
And just what are money service businesses (MSBs), which with the tiny North Dade Community Development Credit Union partnered on the transactions, and could other credit unions with similar relationships be at risk of violating Anti-Money Laundering (AML) and Bank Secrecy Act (BSA) laws?
Those questions and others will be the subject of a roundtable to be hosted by the Treasury Department in early January. And NCUA has issued a supervisory letter to federally insured credit unions that provides guidance on dealing with MSBs.
The financial community got an eye-opening introduction into a new abbreviation, MSBs, when the Financial Crimes Enforcement Network (FinCEN) slapped North Dade with a $300,000 fine for what it termed “significant” BSA violations.
But how did a small, community development CU ever get into such a predicament? An investigation by CUToday.info has found a confluence of issues facing both small credit unions and money service businesses have created a scenario in which each finds an answer in the other.
As much as a credit union might need the amount of non-interest income that a relationship with an MSB can create, it isn’t just a one-way street. Many MSBs are being denied access to the banking system and are searching for FI partners, while others with more nefarious motivations are simply in search of financial institutions without strong internal controls, several sources observed.
MSBs, which move hundreds of billions of dollars annually—$84 billion alone in Texas this year through July, according to the state’s Department of Banking—have landed in the crosshairs of Congress, FinCEN and the CFPB for movement of illegal funds.
Despite concerns about dirty money—wittingly and unwittingly—flowing through MSBs, FinCEN said that much of the business MSBs handle is legitimate, stating that in most cases MSBs provide valuable financial services, especially to individuals who may not have ready access to the formal banking sector.
Nevertheless, there is a consensus, too, that U.S. financial institutions are culpable, with estimates projecting stateside FIs laundering half of the $500 billion to $1 trillion of global dirty money each year.
What Are MSBs?
The definition of what qualifies as an MSB is broad. FinCEN defines money services businesses as currency dealers or exchangers, check cashers, issuers of traveler’s checks, money orders, or stored value, sellers or redeemers of traveler’s checks, money orders, or stored value, and money transmitters.
Among the types of businesses classified as MSBs are local Western Unions to sophisticated money transmitters that have global relationships with other MSBs and move large sums of cash.
MSBs, which pepper many U.S. cities, must comply with Office of Foreign Assets Control (OFAC)/BSA/AML rules, are required to register with FinCEN, and are listed on the agency’s website.
According to FinCEN, North Dade CDFCU contracted with a third-party vendor and money services business to provide services and sub-accounts to 56 MSBs located in high-risk jurisdictions far outside its field of membership, including locations in Central America, the Middle East, and Mexico.
The location of those MSBs raised numerous red flags. FinCEN said such non-bank “third-party processors” can offer a back door for MSBs to access the financial system, initiating transactions on behalf of merchant clients that do not have a direct relationship with the payment processor’s financial institution.
“Payment processors can be used by criminals to mask illegal or suspicious transactions and to launder proceeds of crime . . . Payment processors have been used to place illegal funds directly into a financial institution using ACH credit transactions originating from a foreign source,” FinCEN stated in a 2012 advisory letter.
FinCEN assessed North Dade the civil money penalty for BSA violations. The amount of outgoing transactions alone that North Dade was moving came to about $4 million a day, based on 250 business days a year.
“That is a lot of money for any credit union, let alone a small one,” observed Michael Moebs, economist and CEO at Moebs $ervices in Lake Forest, Ill.
Challenges For All Parties
While that daily volume of transactions was equal to the credit union’s asset size, it is reflective of the types of challenges both small credit unions and MSBs face in remaining viable. Small CUs, which industry data show continue to lose members and struggle as the large CUs gobble up most of the movement’s growth, need revenue streams—not only to boost sagging ROA but to also cover growing compliance and technology costs.
For MSBs, gaining access to mainstream banking services for deposit and liquidity needs is becoming more difficult, a number of sources to CUToday.info, indicating banks are being pressured by regulators and the U.S. Department of Justice’s Operation Choke Point, not to serve MSBs. Regulators, they say, are concerned about OFAC, AML and BSA violations among MSBs.
In a November statement, FinCEN acknowledged MSBs are losing access to banking services, “which may in part be a result of concerns about regulatory scrutiny, the perceived risks presented by money services business accounts, and the costs and burdens associated with maintaining such accounts,” said the agency, adding that MSBs play an important role in a transparent financial system. “Currently, there is concern that banks are indiscriminately terminating the accounts of all MSBs, or refusing to open accounts for any MSBs, thereby eliminating them as a category of customers.”
The result? MSBs are moving toward smaller and smaller institutions, one source explained. Institutions like North Dade Community Development Credit Union.
“At one time many MSBs had accounts with banks like BofA and Chase,” one source told CUToday.info. “With regulatory pressure on the banking system, MSBs are having their accounts regularly closed, hopping from big banks to smaller community banks and then to credit unions…You lose your account again and again, make phone call after phone call, and finally one small credit union says ‘yes.’”
Government Schedules Roundtable On MSBs
The U.S. Treasury has scheduled a Jan. 13, 2015 roundtable discussion on financial access for MSBs, inviting members of the U.S. Government,
regulatory community, banking and credit union sectors, and MSB sector to participate.
Experts insist that the big banks are the only institutions with the necessary resources to handle the OFAC/AML/BSA requirements that accompany working with MSBs that move a lot of money. “A commercial bank would be best equipped to handle this type of business because it has the resources to support a department dedicated to controlling the bank’s relationship with MSBs nationwide—supervising the customer base and managing the risk,” one source explained.
But the regulatory pressure, the expert said, has led most banks to finally conclude that the amount of revenue and resulting profits to be had from serving MSBs is not worth the “extraordinary risk and expense they are running.”
North Dade faced its own set of problems. The revenue the credit union was generating from the outgoing wires apparently had been propping up its financials—from 2004 to 2011, prior to entering the wire business, North Dade lost more money than it made.
And the CU’s Call Report data reveal a credit union whose direction markedly shifted over the last three years—away from generating income from typical credit union services to relying heavily on income from wire transactions.
Lending Takes A Slide
North Dade’s focus on lending and membership growth apparently changed in 2010. Total loans have fallen by almost 50% since 2010, dropping to $457,454 through September of 2014 from $889,197 in 2010. Share drafts dipped to $181,131 this year from $265,219 in 2010. Regular shares declined to $2 million in 2014, from $3.8 million in 2010.
The declines in lending and shares correlate with a decline in membership, which dropped an astounding 42% in 2011, 16.01% in 2012, 13.87% in 2013 and 14.38% so far this year. NDCDFCU was founded in 1997 and describes itself on its website as place providing “friendly, growth-oriented financial services that also serve to support a successful community,” and that it offers that community a “wide range of financial services, debt counseling, entrepreneur classes and fee free business and personal checking.”
While FinCEN and NCUA would not discuss details with CUToday.info of the MSB relationships North Dade entered into, FinCEN’s statement on North Dade notes the relationships strayed well outside the borders of the CU’s field of membership.
“Why would MSBs located all over the world choose a small Florida credit union to conduct close to $2 billion in transactions? Credit unions pride themselves on close and low-risk relationships with known neighborhood customers,” FinCEN said. “However, North Dade welcomed customers far beyond its field of membership, without adequate policies and procedures to ensure AML compliance.”
One source, asking for anonymity, noted it’s pretty obvious North Dade was simply too small to effectively handle all the business that came flooding in—at one point representing 90% of its annual revenue—and comply with all of the OFAC/BSA/AML compliance and record-keeping rules.
Another analyst told CUToday.info that if the credit union does not have a strong centralized computer system capable of handling “all the different ways a transaction could be posted on an MSB customer’s account, they will have trouble keeping track of the money movement—meaning they will have trouble complying with their OFAC, AML, and BSA obligations.”
A Complex Business To Be In
Managing that MSB business can become complex.
“When financial institutions start moving beyond the money transfer businesses and check cashers, to more exotic businesses like mobile Internet money transfer, or move beyond the borders of this country, they leap to another level of complexity and risk.”
It’s a level of complexity and risk that even the largest credit unions find challenging. Henry Wirz, CEO of the $2.1-billion SAFE CU in North Highlands, Calif., acknowledged the challenge of BSA compliance for his own credit union, much less one with limited staff and resources.
“I know it (can be challenging) for us and we have a good-sized BSA/loss-prevention team. We moved from Patriot Officer to Verafin, because the new software makes it easier for us to monitor, analyze and control our BSA reporting.”
According to FinCEN, from 2009 through 2014 North Dade had significant deficiencies in all aspects of its AML program. FinCEN said NDCDFCU admitted that it willfully violated BSA programs, reporting, and recordkeeping requirements. Included within these lapses, the credit union failed to comply with Section 314(a) of the USA PATRIOT Act, a program requiring financial institutions to search their records to locate accounts and transactions of persons that may be involved in terrorism or money laundering, FinCEN said.
“When a small institution opens its doors to the world, takes on greater risks than it can manage, and puts profits before AML controls, bad actors are bound to take advantage,” said FinCEN Director Jennifer Shasky Calvery in a statement. “This case raises pretty obvious questions that no one seems to have asked.
“North Dade’s anti-money laundering failures exposed the United States financial system to significant opportunities for money laundering and terrorist financing from known high-risk jurisdictions,” said FinCEN.
Of ‘Great Concern’
While North Dade may have been looking for a new revenue stream, some inside credit unions wonder if MSBs partnering with North Dade didn’t need the credit union as much as it seems to have needed them.
“The bad guys can quickly determine who has weak BSA controls and take advantage of the weakness,” said Wirz.
Shasky Calvery expressed concern about North Dade’s failure to comply with BSA programs. “It is of great concern that North Dade failed to even review the 314(a) requests it received. These are time-sensitive requests that, by their very nature, are intended to further criminal investigations into significant money laundering and terrorist financing activities.”
“Without itself knowing or understanding its customers or risks, North Dade was unable to adequately monitor, detect, or report significant suspicious transactions and other activities taking place through the credit union, including those related to money laundering and drug trafficking,” FinCEN said. “When the credit union did file suspicious activity reports, the reports were often late and insufficient.”
All of that raises the question that was asked by several sources: “Where were the regulators?”
“Why NCUA did not catch this early is the big question, especially after the 9/11 situation, which had many of the pilots who crashed the planes in the World Trade Center trained in Florida and laundered terrorist money to fund their activity,” said Moebs.
NCUA did issue a cease-and-desist order in August 2013, and North Dade appears to be following the order to stop, or suspend the activities that led to a $300,000 FinCEN fine.
Credit Union Offers Limited Statement
NCUA says its examiners have been doing their job in overseeing the $4-million CU.
North Dade CEO Beverly Coffey told CUToday.info the credit union is abiding by that 2013 C&D. “We have done everything (NCUA) has told us to do,” said Coffey, referring CUToday.info to attorney Edward Reisinger for further comment.
When contacted, Reisinger, a partner at the Birmingham, Ala. firm Trimmier Kudulis, LLC, said North Dade would not be commenting at this time.
North Dade’s Call Report data shows it finished in the black by $191,379 in 2012 and $384,290 in 2013. But in the year that followed the C&D order the credit union posted a $298,615 loss through September, which does not include the FinCEN penalty. The $300,000 fine represents almost half of the small credit union’s net worth.
In an exclusive interview with CUToday.info, NCUA stated the agency has not instituted any other additional enforcement actions against North Dade since it issued the cease and desist order.
“We did progressive steps and then the C&D,” explained Myra Toeppe, regional director for Region III. Saying the agency cannot discuss details of supervisory matters, including how long NCUA was aware of North Dade’s practices, Toeppe added, “Our examiners have been doing their jobs (at North Dade).”
Toeppe stated that NCUA takes a credit union’s BSA/AML/Office of Foreign Assets Control (OFAC) obligations “very seriously and we don’t tolerate violations by our supervised institutions. We follow the agreement with FinCEN as to how to address such violations and we expect credit unions to follow their obligations to the rules.”
Among steps outlined in the C&D, North Dade was ordered to suspend transacting business with all MSBs until the credit union developed and implemented an adequate BSA/AML/OFAC program that provides a system of internal controls to ensure ongoing compliance and BSA training for appropriate personnel.
The order also called for engaging with a firm or consultant specializing in BSA/AML/OFAC to assist in correcting the deficiencies in North Dade’s BSA/AML/OFAC program, and to hire a BSA compliance officer.
‘What NCUA Should Do’
“It seems to me that what NCUA should do is to identify those credit unions with high wire volumes and look at their BSA compliance,” offered Wirz. “Wires are a high-risk area. A few years ago CUMIS had many claims for losses due to unauthorized wire transfers from members’ accounts. Credit unions allowed members to call and request wires. I wonder what steps NCUA takes to look at how a credit union does wires and what controls they have in place to control the risk?”
Stephanie Newberg, deputy commissioner at the Texas Department of Banking, said examiners must dig into the transactions. She said signs of suspicious activity include multiple transactions just under the reporting threshold, incorrect social security numbers, the same sender sending money to hundreds of different people, and hundreds of different people sending money to the same person. “Or just large volumes of cash there is no purpose for,” she said.
NCUA provided estimates on the number of CUs doing business with MSBs, saying:
- The number of federally insured credit unions that report accounts provided to entities operating as MSBs is 240.
- The total number of accounts from federally insured credit unions provided to entities operating as MSBs is 1,485.
- The total dollar value (for federally insured credit unions) of accounts provided to entities operating as MSBs is $77 million.
One source observed that the NCUA numbers provide no indication of the amounts of money MSBs could be moving through credit unions, only MSB deposits on hand at the time of the estimates. The source indicated the size of money movement volume North Dade handled would be possible among the credit unions serving MSBs, and that key to large sums of money movement are CU relationships with large money transmitters doing business outside U.S. borders.
What actually transpired at North Dade many never be revealed, speculated sources. FinCEN has declined further comment, the FBI said it could not confirm or deny the existence of any investigation, and NCUA is limited in what it can say regarding supervision of a credit union.
However, what is clear, in looking at North Dade’s financials, is that the apparent decision it made to shift its focus to serving MSBs is not paying off.
The credit union already shows a $298,615 loss this year through September, without the FinCEN fine. Despite 16.88% net worth, the future of the credit union could be in jeopardy.
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NCUA Discusses Case Of $4M CU, $1 Billion In Wires, And Compliance