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It has been over ten years since the enactment of the USA PATRIOT Act shone the spotlight over all financial institutions and their AML, BSA, CFT and regulatory compliance programs.
Throughout this time much has been written about the rules and regulations that apply and do not apply to each type of financial institution, the perceived and real threats of non-complying with them, and the dozens of cases in which institutions have failed to meet the expected standards and suffered the consequences. In the case of MSBs, a lot has also been written about the difficulties they have faced in obtaining and retaining banking relationships, which continue to this day. Very little, however, has been written by compliance officers about what the world looks like from within their organizations. Understandably so, one might say, given that it may be inappropriate or, if one believes that there might be adverse personal consequences in doing so, simply foolish.
I do not subscribe to the latter. I believe the best way to fully understand and resolve the issues is to bring them to light, as respectfully and objectively as possible, of course. That is what I intend to do on this blog.
On this occasion, I would like to talk about money transmitter state regulators and some of their enforcement practices. I am a strong believer in reasonable regulation (especially, self-regulation), and I am a stronger believer in its sound and fair enforcement and in the ever elusive risk-based approach. I have been wondering for years when (or whether) the risk-based approach will ever be adopted in the United States of America. Why my skepticism? For a multitude of reasons, among which is one that will transpire from the following real incident, which the following letter makes self-explanatory:
Dear Mr. Regulator,
I’m writing to you to express my bafflement at something that just does not make sense to us. As you know, Ms. Examiner recently scheduled an examination of our company for the week before Christmas. For a number of reasons that I will expound below, we requested that she kindly accept conducting the examination remotely, as other states where we are not operational have done, or that she reschedule for a non-peak time, but she refused to do either on the grounds that, “because there is a schedule, an examination of our company by the XYZ State Banking Department was overdue.” Furthermore, it is now too late because “travel arrangements have already been made.”
If there is an examination schedule that needs to be met, that is fine. However, I take issue with the facts that (a) the exam was scheduled with less than a month’s notice, (b) it was scheduled for a time in the year when we are extremely busy and short-staffed due to the year-end holidays, (c) in spite of having been licensed for years, our company has not yet launched operations in XYZ state.
We understand that the purpose of state money transmitter regulation is primarily to protect the rights of XYZ state consumers of the money transmission service. Other purposes include the safety and soundness of the regulated entity and the protection of the financial system from criminal abuse such as money laundering and terrorist financing. We could argue that no XYZ state consumer rights are being jeopardized by our company’s operations because we have no business in XYZ state. There simply is zero risk for XYZ state citizens. So why conduct an examination?
Assuming it makes sense to conduct an examination because your Department needs to establish our safety and soundness, as is statutorily mandated, why then does it have to be in person and at such an inconvenient (and expensive for travel purposes) season? In the last MTRA meeting in Jacksonville, Florida, I heard many industry members complain about the unreasonableness of certain states’ practices, including what seems to be, quoting one of the speakers, “paid vacations for examiners.” Don’t you think that Ms. Examiner’s New York visit on the week before Christmas may be deemed as such, and reflect negatively on your Department?
For the reasons above, I kindly request to you that you reconsider (a) conducting the examination remotely, or (b) rescheduling it for a non-peak time of the year.
I hope you understand our point of view. We are a group of responsible, rational entrepreneurs who are highly committed to the highest possible operational and compliance standards. My intent with this communication and request is nothing more than applying common sense and reasonableness for the mutual benefit of our institutions and for the ultimate benefit of our constituents –our customers.
After three weeks of silence, the regulatory agency accepted conducting the exam remotely. Of course, upon its conclusion, we received an invoice detailing the expenses, which amounted to several thousand dollars but were considerably lower given that there were no travel expenses.
I wonder how widespread this is among the thousands of money transmitters who are licensed by dozens of jurisdictions in the United States.
I already hear some voices of sympathy with the state regulators, and public servants in general -always under-resourced, under-appreciated and underpaid. I agree with them to some extent, but not as far as to allow their circumstances, like anybody else’s, to justify anything they do or fail to do.
MSB Compliance Officers often work in high-pressure environments, in circumstances not dissimilar to those in which public servants work. Both of them, allow me to say, owe their existence to the laws and regulations one complies with and the other enforces. Why would they and the businesses they protect have to tolerate the reprehensible, especially when it is the private sector that sustains the public bureaucracies through the payment of taxes and fees? One difference, however, is that if compliance officers fall short of discharging their duties in a professional and effective way, they lose their job. Does that ever happen in the public sector?
I encourage compliance professionals to stand up, armed with objectivity and rationality, against whatever runs counter to their noble mission, whether it comes from regulators, examiners, bankers or even colleagues or superiors. If they do not, they will be partially responsible for the corrosion of ethical and professional standards, and the worst possible thing that could happen to us all -the loss of common sense.