NCUA warned credit unions about the risks of providing account services to money services businesses (MBSs) in a December supervisory letter and offered guidance to institutions that chose to do so.
MSBs are entities that offer transactional businesses like check cashers, prepaid card providers, foreign currency dealers, money transmitters, money orders and travelers checks issuers. They can range from large international money transmitters to small independent businesses that offer financial services subordinate to their principal activities.
Credit unions may themselves consider providing services to MSBs.
"However, like any third party, MSBs can expose credit unions to certain risks, and NCUA expects credit unions to consider, monitor, and mitigate those risks," NCUA chairman Debbie Matz wrote in the letter.
Such potential risks, which depend upon the nature and scope of an MSB, include, among other things, large MSBs generating significant transaction volumes that could overwhelm small credit unions. For example, a CU with only a few million dollars in assets could "end up processing billions of dollars' worth of money services transactions," the letter warned.
MSBs can also pose risks if they launder money for criminal organizations, like drug traffickers and terrorist groups. Under such circumstances, CUs could unwittingly become subject to substantial fines from enforcement authorities for failing to satisfy compliance requirements of the Bank Secrecy Act.
NCUA said the agency along with the U.S. Treasury Department's Financial Crimes Enforcement Network (FinCEN) are "particularly concerned about the vulnerability of credit unions that do not have sufficient scale, internal controls and compliance programs to perform the necessary due diligence on MSBs and manage high volumes of cash flows."
Indeed, as Credit Union Journal reported last month, a small South Florida credit union was assessed a $300,000 fine by FinCEN for ignoring reporting and record-keeping requirements under BSA between 2009 and 2014.
Based in Miami Gardens, Fla., the North Dade Community Development Federal Credit Union, with only $3.6 million in assets, generated $1.01 billion in outgoing wires and $984 million in remotely captured deposits last calendar year.
"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 at the time.
To mitigate such risks, NCUA advises that CUs, perform customer identification program procedures; confirm that member MSBs register with FinCEN; confirm that member MSBs comply with state or local licensing requirements; confirm the member MSBs' agent status; and conduct a BSA/Anti-Money Laundering (AML) risk assessment to "document the level of risk associated with the account and whether greater due diligence is necessary."
The NCUA also recommends that credit unions assess risks posed by each MSB account on a "case-by-case basis, monitor and report any unusual activities, and implement appropriate controls to manage any risk exposure."
The supervisory letter also noted that since MSBs provide services to other MSBs, this "added layer of anonymity between the credit union and the transactions originator could pose additional complexity in identifying suspicious activities."
Alicia Nealon, NAFCU's director of regulatory affairs, told Credit Union Journal that CUs have a "strong track record" of regulatory compliance and constantly strive to thoroughly assess the level of risk associated with all their accounts in order to protect their memberships.
"NAFCU appreciates NCUA's efforts to develop guidance tailored to the risks associated with [MSBs]," Nealon added.
CUNA SVP and Deputy General Counsel Mary Dunn said her trade group recognizes that NCUA's guidance deals with a number of MSB risk issues that should be addressed, including appropriate due diligence.
"CUNA will be working with the leagues to monitor how the guidance will be used by examiners so that credit unions that manage risks appropriately will not be subject to undue pressures or scrutiny from examiners in the use of MSBs to help their members," Dunn said.