Money Service Business Banking Challenges

Money services businesses (MSBs) in Canada rely heavily on having banking services.  Without access to those services, MSBs would not be able to operate.  As financial institutions work to improve their compliance regimes, there has been a change in attitude towards servicing MSBs in Canada.  The standards to meet in order to obtain and keep an account with these institutions are not always clear.   

Generally, there are at least 2 categories which are considered in accepting an MSB client.  These must be well documented by the MSB before applying for an account:

  1. Regulatory:  MSBs are identified in the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA) as reporting entities and have regulatory obligations that include registration as an MSB, appointing a compliance officer, having a documented risk assessment and AML compliance program, training staff and agents and regular effectiveness reviews.
  2. Business case:  Financial institutions need to know that the MSB’s business model makes sense.  This is important not only in establishing creditworthiness, but also in establishing that the funds flowing through the account stem from legitimate sources.

The Canadian Regulatory Environment

In order to operate in Canada as an MSB or as a financial institution, there are certain AML regulatory bodies to be aware of.

Regulator Entities Types
Office of the Superintendent of Financial Institutions Canada (OSFI)
http://www.osfi-bsif.gc.ca/
Federally regulated financial institutions
Financial Transaction Reports Analysis Centre of Canada (FINTRAC)
http://www.fintrac.gc.ca/intro-eng.asp
Accountants, Casinos, Financial Entities, MSBs, Securities Dealers, British Columbia Notaries, Dealers in Precious Metals and Stones, Life Insurance, Real Estate

In addition, provincial bodies such as Deposit Insurance Corporations or Securities regulators may also provide guidance to institutions on matters pertaining to AML.  For Instance, Ontario’s Deposit Insurance Corporation of Ontario (DICO) recently released an advisory document that outlines the procedures they expect credit unions to follow when providing banking services to MSBs.  This would affect credit unions by impacting the extent of their offerings to MSBs and incorporating DICO’s standards into their procedures.

Challenges of Banking an MSB

Although there are varying degrees of risk associated with different types of MSBs, they are all labeled as high risk according to authoritative sources, such as the Financial Action Task Force.  According to Canadian legislative standards, high risk clients must be subjected to ongoing enhanced due diligence.  There is no prohibition against maintaining a high risk client relationship, as long as all the requirements have been met.

Risks associated with MSBs are:

  1. Money Laundering / Terrorist Financing Risk: MSBs are vulnerable and can be misused by criminals.  The risk of providing services to MSBs may be that the financial institution would be indirectly supporting criminal activities.
  2. Financial Risk:  The risks posed by MSBs are similar to commercial clients, such as the risk of charge-backs and NSF cheques.
  3. Regulatory Risk: Failure to comply with Canada’s legislative requirements may result in direct regulator intervention.
  4. Legal Risk:  Financial institutions may face the risk of action being taken by someone other than the regulator, such as a lawsuit, based on the financial institution’s actions or inactions concerning their due diligence against money laundering/terrorist financing.
  5. Reputation: Financial institutions can face reputational damage if they are found to be associated with MSBs that are linked to money laundering or terrorist financing.

For financial institutions that are willing and able to appropriately mitigate these risks, these relationships can be rewarding for all parties.  Financial institutions that recognize banking services needs of MSBs in their communities benefit from the income and channels that the MSBs can provide.  Properly managed MSBs can help financial institutions grow their asset bases and increase their income.

For more information on how your institution could benefit from dealing with MSBs or how to meet standards in getting a banking relationship, contact Matthew McGuire, National AML Practice Leader at MNP at 416.263.6959 or matthew.mcguire@mnp.ca

Matthew J. McGuire, BA(Hons), MAcc, CA, DIFA, CAMS, AMLP: Director: matthew.mcguire@mnp.ca; 416-263-6959

Matthew McGuire, Chartered Accountant, is a partner at MNP LLP and the National AML Practice Leader, founder of vCAMLO, and co-founder of the Canadian Institute for Financial Crime Analysis. Together with his team of full-time AML specialists, Matthew leverages his private and public regulatory and investigative experience to empower our clients with anti-money laundering compliance and financial crime risk mitigation strategies, with a focus on federally regulated financial institutions, emerging payment technologies, and credit unions.   Matthew has been qualified and admitted by the Ontario Superior Court of Justice as an expert witness, is certified as an Anti-Money Laundering Specialist by the Association of Certified Anti-Money Laundering Specialists, and is accredited as an Anti-Money Laundering Professional by the Bank Administration Institute.

Since his time as a strategic and tactical intelligence analyst with the Financial Transactions Reports and Analysis Centre of Canada (FINTRAC), Matthew has managed multi-national anti-money laundering and fraud investigations as manager of the Forensic & Dispute Services Group of Deloitte & Touche LLP, as well as consulting engagements for commissions of inquiry, and reporting entities to the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA).  Most recently, his engagements involve tuning technology designed for money laundering and financial crime monitoring to accord with identified risks and increase efficiency.

Matthew regularly speaks on the topic of money laundering and financial crime to reporting entities, law enforcement, prosecutorial authorities, university courses, and conferences, and authors articles for periodicals.  Over the past three years, Matthew has supervised the conduct of post-graduate students’ research papers which were peer reviewed and rated outstanding.  Those papers canvassed the topics of insurance and money laundering, money laundering constraint in developing economies, and the effectiveness of political corruption counter-measures.

Matthew has had significant experience in forensic accounting and has worked on cases in London, New York, Ottawa, and Toronto.  He holds an Honours Bachelor of Arts as well as a Master of Accounting degree from the University of Waterloo.  In 2005, Matthew completed and was valedictorian for the 2-year Diploma in Investigative and Forensic Accounting program at the Rotman School of Management (University of Toronto).


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