[House Hearing, 111 Congress]
[From the U.S. Government Publishing Office]
REGULATION OF MONEY SERVICE BUSINESSES
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON FINANCIAL INSTITUTIONS
AND CONSUMER CREDIT
OF THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED ELEVENTH CONGRESS
SECOND SESSION
__________
MARCH 10, 2010
__________
Printed for the use of the Committee on Financial Services
Serial No. 111-107
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56-771 WASHINGTON : 2010
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HOUSE COMMITTEE ON FINANCIAL SERVICES
BARNEY FRANK, Massachusetts, Chairman
PAUL E. KANJORSKI, Pennsylvania SPENCER BACHUS, Alabama
MAXINE WATERS, California MICHAEL N. CASTLE, Delaware
CAROLYN B. MALONEY, New York PETER T. KING, New York
LUIS V. GUTIERREZ, Illinois EDWARD R. ROYCE, California
NYDIA M. VELAZQUEZ, New York FRANK D. LUCAS, Oklahoma
MELVIN L. WATT, North Carolina RON PAUL, Texas
GARY L. ACKERMAN, New York DONALD A. MANZULLO, Illinois
BRAD SHERMAN, California WALTER B. JONES, Jr., North
GREGORY W. MEEKS, New York Carolina
DENNIS MOORE, Kansas JUDY BIGGERT, Illinois
MICHAEL E. CAPUANO, Massachusetts GARY G. MILLER, California
RUBEN HINOJOSA, Texas SHELLEY MOORE CAPITO, West
WM. LACY CLAY, Missouri Virginia
CAROLYN McCARTHY, New York JEB HENSARLING, Texas
JOE BACA, California SCOTT GARRETT, New Jersey
STEPHEN F. LYNCH, Massachusetts J. GRESHAM BARRETT, South Carolina
BRAD MILLER, North Carolina JIM GERLACH, Pennsylvania
DAVID SCOTT, Georgia RANDY NEUGEBAUER, Texas
AL GREEN, Texas TOM PRICE, Georgia
EMANUEL CLEAVER, Missouri PATRICK T. McHENRY, North Carolina
MELISSA L. BEAN, Illinois JOHN CAMPBELL, California
GWEN MOORE, Wisconsin ADAM PUTNAM, Florida
PAUL W. HODES, New Hampshire MICHELE BACHMANN, Minnesota
KEITH ELLISON, Minnesota THADDEUS G. McCOTTER, Michigan
RON KLEIN, Florida KEVIN McCARTHY, California
CHARLES A. WILSON, Ohio BILL POSEY, Florida
ED PERLMUTTER, Colorado LYNN JENKINS, Kansas
JOE DONNELLY, Indiana
BILL FOSTER, Illinois
ANDRE CARSON, Indiana
JACKIE SPEIER, California
TRAVIS CHILDERS, Mississippi
WALT MINNICK, Idaho
JOHN ADLER, New Jersey
MARY JO KILROY, Ohio
STEVE DRIEHAUS, Ohio
SUZANNE KOSMAS, Florida
ALAN GRAYSON, Florida
JIM HIMES, Connecticut
GARY PETERS, Michigan
DAN MAFFEI, New York
Jeanne M. Roslanowick, Staff Director and Chief Counsel
Subcommittee on Financial Institutions and Consumer Credit
LUIS V. GUTIERREZ, Illinois, Chairman
CAROLYN B. MALONEY, New York JEB HENSARLING, Texas
MELVIN L. WATT, North Carolina J. GRESHAM BARRETT, South Carolina
GARY L. ACKERMAN, New York MICHAEL N. CASTLE, Delaware
BRAD SHERMAN, California PETER T. KING, New York
DENNIS MOORE, Kansas EDWARD R. ROYCE, California
PAUL E. KANJORSKI, Pennsylvania WALTER B. JONES, Jr., North
MAXINE WATERS, California Carolina
RUBEN HINOJOSA, Texas SHELLEY MOORE CAPITO, West
CAROLYN McCARTHY, New York Virginia
JOE BACA, California SCOTT GARRETT, New Jersey
AL GREEN, Texas JIM GERLACH, Pennsylvania
WM. LACY CLAY, Missouri RANDY NEUGEBAUER, Texas
BRAD MILLER, North Carolina TOM PRICE, Georgia
DAVID SCOTT, Georgia PATRICK T. McHENRY, North Carolina
EMANUEL CLEAVER, Missouri JOHN CAMPBELL, California
MELISSA L. BEAN, Illinois KEVIN McCARTHY, California
PAUL W. HODES, New Hampshire KENNY MARCHANT, Texas
KEITH ELLISON, Minnesota CHRISTOPHER LEE, New York
RON KLEIN, Florida ERIK PAULSEN, Minnesota
CHARLES A. WILSON, Ohio LEONARD LANCE, New Jersey
GREGORY W. MEEKS, New York
BILL FOSTER, Illinois
ED PERLMUTTER, Colorado
JACKIE SPEIER, California
TRAVIS CHILDERS, Mississippi
WALT MINNICK, Idaho
C O N T E N T S
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Page
Hearing held on:
March 10, 2010............................................... 1
Appendix:
March 10, 2010............................................... 29
WITNESSES
Wednesday, March 10, 2010
Cachey, Joe, Chief Compliance Officer, The Western Union Company. 4
McClain, Scott K., Deputy General Counsel, Financial Service
Centers of America (FiSCA)..................................... 6
Thoren-Peden, Deborah, Partner, Pillsbury Winthrop Shaw Pittman
LLP............................................................ 8
APPENDIX
Prepared statements:
Gutierrez, Hon. Luis......................................... 30
Cachey, Joe.................................................. 35
McClain, Scott K............................................. 41
Thoren-Peden, Deborah........................................ 45
REGULATION OF MONEY
SERVICE BUSINESSES
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Wednesday, March 10, 2010
U.S. House of Representatives,
Subcommittee on Financial Institutions
and Consumer Credit,
Committee on Financial Services,
Washington, D.C.
The subcommittee met, pursuant to notice, at 10:03 a.m., in
room 2128, Rayburn House Office Building, Hon. Luis Gutierrez
[chairman of the subcommittee] presiding.
Members present: Representatives Gutierrez, Maloney, Watt,
Sherman, Waters, Hinojosa, Green, Miller of North Carolina,
Scott, Ellison, Foster; Hensarling, Royce, Marchant, Lee, and
Paulsen.
Ex officio present: Representative Bachus.
Also present: Representative Lynch.
Chairman Gutierrez. This hearing of the Subcommittee on
Financial Institutions and Consumer Credit will come to order.
Good morning and thanks to all of the witnesses for
agreeing to appear before the subcommittee today.
Today's hearing will examine how money service businesses
are regulated under the current Federal and State system and
examine proposed legislative reforms that have been introduced
in this Congress.
We will be limiting opening statements to 10 minutes per
side, but without objection, the record will be held open for
all members' opening statements to be made a part of the
record.
I yield myself 5 minutes. I ask unanimous consent to submit
my opening statement for the record. Hearing no objections, it
is so ordered.
Mr. Hensarling, you are recognized for 5 minutes.
Mr. Hensarling. Thank you, Mr. Chairman. I certainly
appreciate Chairman Gutierrez for holding this hearing on the
money service businesses, the MSBs, and the positive role they
can play in our financial sector, particularly for constituents
without well established banking relationships.
We have tens of thousands of MSBs ranging from mom and pop
convenience stores to large international market players. I
think we recognize that for most of our constituents, they
provide valuable financial services, providing a vast array of
options for consumers to determine which best meets their
individual financial needs.
Although the money service businesses are subject, as we
know, to Federal registration and certain anti-money laundering
provisions, such as the Bank Secrecy Act, they are largely non-
bank institutions that do not have a comprehensive Federal
regulator, leaving State agencies to enforce State statutes
governing their operations.
This decentralized system coupled with frankly the sheer
number of MSBs in our economy today has raised certain
questions about the effectiveness of their anti-money
laundering provisions.
As a result, Federal financial regulators have proposed new
compliance rules for institutions doing business with MSBs, and
regardless of their intent, I believe this has had a perverse
effect of leading some institutions to frankly just cut their
ties with the money service businesses rather than deal with
the increased obligations or scrutiny or indeed, potential
increased liability.
FinCEN has correctly stated that, ``An effective AL program
requires sound risk management,'' a point which I
wholeheartedly agree with, but we must also be cautious that in
our pursuit of A&L compliance, we do not use such a heavy hand
that we end up pushing currently monitored transactions
underground into a shadowy world of illicit transactions.
What is ultimately the impact upon many low-income
citizens, low-income neighborhoods, if we drive MSBs deeper
into the non-banking sector, I think, is a relevant question
for this subcommittee.
As I said before, we know that each and every regulation
that has been imposed on our banking system seemingly made
sense at the time, but our challenge is to constantly look at
the cost of these regulations that are being imposed on our
economy and our Nation, particularly at a time when so many of
our fellow citizens remain unemployed in this recession.
It is important and incumbent upon us to recognize any
unintended consequences that these regulations may cause.
That is why last year I was pleased to join with Ranking
Member Bachus in co-sponsoring our colleague Carolyn Maloney's
bill, H.R. 2893, which would establish a self-certification
process for the money service businesses.
This year, Ranking Member Bachus has once again led the way
on the MSB issue with his bill, H.R. 4331, the Money Services
Business Compliance Facilitation Act, co-sponsored by our
chairman, the gentleman from Illinois, Mr. Gutierrez.
Ranking Member Bachus' bill would establish the Office of
Money Services Business Compliance within Treasury and empower
the director of that office to recognize a self-regulatory
organization for MSBs and their agents and avoid a burdensome
regime that could potentially drive participants underground.
With that, I look forward, Mr. Chairman, to hearing the
testimony of our witnesses today, and I yield back the balance
of my time.
Mr. Miller of North Carolina. [presiding] Thank you, Mr.
Hensarling. The Chair now recognizes the gentleman from
Georgia, Mr. Scott, for 2 minutes, or slightly more, if he
would like.
Mr. Scott. Thank you, Mr. Chairman. Thanks to our witnesses
for appearing before us today.
Money service businesses offer valuable financial services
to the public, such as money transfers, money orders and check
cashing. These services, while often vital to the community,
are regulated by the Internal Revenue Service in an attempt to
impede any kind of abuse.
There are reports that persist, that MSBs operate in this
country without the proper compliance and registration where
appropriate.
My home State of Georgia is among 37 States that have some
form of registration for MSBs. The MSB section of the Non-
Depository Financial Institutions Division is responsible for
supervising those who are licensed or registered to do business
in Georgia as a check casher or a money transmitter.
The department is charged with the supervision and
examination of their business affairs to ensure that they
operate in compliance with State law and for the protection and
interest of consumers who are served by these entities.
A comprehensive and effective registration and regulation
system, perhaps resembling the one we have in Georgia, could
very well provide a benefit on the Federal level in deterring
money laundering or financial transactions that support
terrorist activities.
I anticipate informative testimony from each of the
witnesses this morning on this very important and timely topic,
and I look forward to their suggestions on how we in Congress
can act.
Thank you, Mr. Chairman.
Mr. Miller of North Carolina. Thank you, Mr. Scott.
The ranking member of the full committee, the gentleman
from Alabama, Mr. Bachus, is not actually a member of this
subcommittee, but I ask unanimous consent that he be recognized
for 4 minutes for an opening statement. Hearing no objection,
Mr. Bachus is recognized for 4 minutes.
Mr. Bachus. I appreciate that, Mr. Chairman, and I thank
you for holding this important hearing about an issue that is
long overdue for a fair and effective solution.
Money service businesses or MSBs offer a valuable service
to consumers who may not have access to other financial service
providers.
Among other functions, MSBs facilitate global payments and
allow families to send funds back to their home countries.
Unfortunately, regulation of money service businesses has not
kept pace with the volume of their businesses.
Right now, MSB compliance is a complex patchwork of
regulations which involves both Federal restrictions on money
laundering and terrorist financing as well as State consumer
protection mandates.
For tens of thousands of MSBs that exist, the Federal
Government has fewer than 500 people on the regulatory beat.
Mr. Chairman, failure to devise an effective MSB regulatory
regime has led to the situation where banks who offer account
services to MSBs are forced to act as de facto regulators.
After a series of regulatory actions in which some banks were
fined heavily in connection with the accounts they offered
MSBs, most banks felt they had no choice or they had to make a
choice to either do their own on-site investigation of an MSB
anti-money laundering compliance or live with the liability.
Consequently, most banks stopped offering accounts to MSBs.
When banks discontinue account relationships with MSBs, the MSB
customers may seek financial services from the underground
financial system, which could create greater money laundering
risk and increase costs for MSB customers.
In response to shortcomings of the current regulation,
Chairman Frank and I, along with Representatives Maloney,
Gutierrez, Hensarling and Biggert have tried for several
Congresses to craft commonsense MSB legislation.
The House has sent bills to the Senate twice only to have
them ignored. Last December, I joined Representatives Gutierrez
and Tiberi in introducing H.R. 4331, the Money Services
Business Compliance Facilitation Act of 2009, which takes a
similar approach to Ms. Maloney's bill.
H.R. 4331 is based on the underlying principle that given
the right guidance and oversight, industries can self-regulate.
The legislation would centralize MSB money laundering
compliance in a small office at Treasury and authorize that
office to recognize the self-regulatory organization. The
organization would be similar to the private nonprofit
financial industry regulatory authority or FINRA, that
regulates about 170,000 brokers and their branches and more
than 600,000 of their agents.
The bill would lead to the uniform registration and
supervision of MSBs without creating a big, new Federal
bureaucracy, and without preempting State safety and soundness
and consumer laws.
Mr. Chairman, H.R. 4331 is a good solution to make thorough
uniform and effective national registration and compliance for
money laundering businesses a reality.
MSBs will appreciate legislation that gives banks the
confidence to continue working with them and helps to disrupt
funding channels used by crooks and terrorists.
Mr. Tiberi should be commended for his hard work on this
issue and we look forward to working with the gentleman from
Illinois and the gentlelady from New York and all other
interested Members to make this effort a success.
I thank Mr. Hensarling for his work, and I yield back the
balance of my time.
Mr. Miller of North Carolina. Thank you, Mr. Bachus.
That completes the opening statements. We will have one
panel this morning. Our panel consists of three witnesses: Mr.
Joe Cachey, chief compliance officer for The Western Union
Company; Mr. Scott McClain, deputy general counsel to the
Financial Service Centers of America; and Ms. Deborah Thoren-
Peden, a partner in the law firm of Pillsbury Winthrop Shaw
Pittman LLP.
You will each have 5 minutes for your oral statements. Your
written statements will be made a part of the record.
Mr. Cachey, you may begin.
STATEMENT OF JOE CACHEY, CHIEF COMPLIANCE OFFICER, THE WESTERN
UNION COMPANY
Mr. Cachey. Good morning, Mr. Chairman, and Ranking Member
Hensarling.
My name is Joe Cachey. I am chief compliance officer for
The Western Union Company. Western Union is a leader in global
payment services with more than 410,000 agent locations in 200
countries and territories around the world.
In 2009, Western Union completed 296 million customer-to-
customer transactions worldwide, moving $71 billion of
principal between those customers and also performed 415
million business payments, or people sending money to a
business.
Interestingly, the majority of Western Union's customers in
the United States also have bank accounts and use our services
ancillary to the services they would normally obtain at their
branch bank and local bank.
Western Union applauds the committee's efforts to provide a
more streamlined and efficient regulatory model for money
service businesses. Western Union does not fully support H.R.
4331, but looks forward to working with the committee to
improve the bill or future legislation to improve the
regulatory structure of money service businesses.
Currently, MSBs like Western Union are licensed by States
in which they do business. States are responsible for the day-
to-day regulatory supervision and oversight of our businesses.
Western Union itself is regulated by 48 States, the District of
Columbia, and several of the United States territories
offshore.
Moreover, MSBs are also subject to Federal laws such as the
Bank Secrecy Act, the USA Patriot Act, and other relevant
Federal laws, such as the sanctions programs administered by
the Department of Treasury's Office of Foreign Assets Control.
With respect to its obligations under the BSA, Western
Union is subject to regulatory oversight by FinCEN and as
mentioned, is examined by the Internal Revenue Service.
Western Union has several concerns with H.R. 4331. MSBs are
highly regulated and supervised by both State and Federal
agencies. However, H.R. 4331 does not create uniform standards
for safety and soundness.
Rather than preempting and providing uniform standards for
companies, H.R. 4331 preserves State laws and State enforcement
powers, leaving in place the current regulatory chaos that we
experience and layers on top of that a new Federal regime which
could potentially be in conflict with our State regulation.
We encourage the committee to consider creating a single
regulator for MSBs. This license would grant the Federal
Government greater oversight over the industry and its related
issues and would provide the industry with more consistent
guidance and regulation than it currently receives.
Federal oversight of compliance with the Bank Secrecy Act
and the anti-money laundering laws will better serve the
interests of the United States and the industry in battles
against terrorism and illegal drugs.
This structure could provide for an optional Federal MSB
license that companies could choose if they desire. The license
would be issued and enforced by a Federal regulator responsible
for all safety and soundness examinations and enforcement, as
well as the examination and enforcement of all Federal money
laundering and terrorist financing laws.
Western Union appreciates the committee's effort to take a
first step towards modernization of the MSB regulations and
looks forward to working with the committee to improve H.R.
4331 or future legislation to achieve these important goals.
Thank you again for inviting me to testify. I look forward
to answering any questions you may have.
[The prepared statement of Mr. Cachey can be found on page
35 of the appendix.]
Mr. Miller of North Carolina. Thank you, Mr. Cachey. You
used 4 of your 5 minutes. You set an excellent example not only
for the witnesses, but for members of the committee.
Mr. McClain is recognized for 5 minutes.
STATEMENT OF SCOTT K. McCLAIN, DEPUTY GENERAL COUNSEL,
FINANCIAL SERVICE CENTERS OF AMERICA (FiSCA)
Mr. McClain. Thank you. Chairman Miller, Ranking Member
Hensarling, and esteemed members of the subcommittee, my name
is Scott McClain. I serve as deputy general counsel to
Financial Service Centers of America, also known as FiSCA.
On behalf of the FiSCA membership, we are grateful for this
opportunity to discuss issues concerning the regulation of
money services businesses.
FiSCA is a national trade association representing nearly
7,000 neighborhood financial service providers operating in the
United States. Our membership serves millions of customers from
all walks of life, including those with bank accounts as well
as the ``unbanked.''
Our members, which we call ``financial service centers'' or
``FSCs,'' provide a broad range of financial services and
products, including check cashing, remittances, money order
sales, and utility bill payments, to name just a few.
FSCs make up an economically significant industry that
conducts more than 350 million transactions each year,
providing over $100 billion in various products and services to
over 30 million customers.
FSCs specialize in delivering retail financial services,
offering convenient locations, extended hours of operation, and
transparent and affordable transaction fees.
Our customers pay only for the services they use with no
account maintenance fees, no minimum balance requirements, and
no NSF fees.
We are proud of recent industry surveys showing that more
than 90 percent of our customers rate the value and level of
our services as ``good to excellent.''
Check cashers and other MSBs are dependent on access to
depository and banking services for their very survival. Banks
that service our industry, however, are faced with onerous
regulatory burdens and are required to expend ever greater
resources in maintaining customer compliance and monitoring
systems. As a result, many banks have terminated their MSB
customers, are refusing new accounts, or placing burdensome
requirements on the accounts they maintain.
There is a dangerously small pool of banks willing or able
to provide services to MSBs. As a result of these trends, check
cashers and other MSBs are experiencing problems in locating
and maintaining accounts, banking costs are increasing, and
would-be entrepreneurs in this area are experiencing barriers
in opening new businesses.
Part of the current bank discontinuance problem stems from
a misperception in the eyes of some regulators and bankers that
check cashers are inadequately regulated.
Let me demonstrate how this is not accurate. At the State
level, check cashers are regulated in most U.S. jurisdictions,
typically by banking departments or other regulators.
State regulation typically includes licensing or
registration requirements, mandatory recordkeeping,
examinations, financial reporting, regulation of fees and
consumer protections.
Virtually every State with any sizable check-casher
industry has enacted legislation to regulate these businesses.
Moreover, all check transactions are subject to the Uniform
Commercial Code adopted in all U.S. jurisdictions.
In addition, at the Federal level, as of 2001, MSBs have
been required to register every 2 years with the U.S.
Department of the Treasury. They must also implement anti-money
laundering programs, including policies and procedures,
compliance officers, employee training programs, and
independent compliance examinations.
Like banks and other financial institutions, check cashers
and other MSBs are subject to Bank Secrecy Act reporting
requirements, including currency transaction reporting and
suspicious activity reporting for certain types of
transactions.
They are also required to maintain detailed records of
monetary instrument sales and remittance activities at certain
levels as mandated by the BSA.
MSB compliance is overseen by the Financial Crimes
Enforcement Network with the examination function administered
by the Internal Revenue Service. In a typical Title 31 audit,
IRS examiners will go on-site to access the level of a check
casher's compliance, including a review of all reporting and
recordkeeping functions. The IRS examination process is
rigorous.
In short, the perception that the check cashing industry is
underregulated is simply not accurate.
FiSCA will continue to work with Members of Congress and
this subcommittee to help ensure the availability of banking
services to the industry.
One solution currently being considered is H.R. 2893, the
Money Service Business Act of 2009, introduced last year by
Representative Maloney and co-sponsored by Chairman Gutierrez,
Ranking Member Hensarling, and Representative Biggert.
This proposed solution continues to have bipartisan support
and industry support. We are grateful to the bill's sponsors
for their continued efforts in this regard. We also appreciate
the concern of Congress for this problem as demonstrated in
H.R. 4331, the Money Services Business Compliance Facilitation
Act of 2009, as introduced by Chairman Gutierrez and Ranking
Member Bachus.
As a final point, although the MSB industry continues to
experience significant problems in access to banking services,
a number of depositories have seized on this as an opportunity.
Many banks have found check cashers to be excellent, profitable
customers whose accounts can be efficiently and safely managed,
and who can significantly add to the bank's bottom line.
FiSCA has developed written materials on banking MSBs and
we will gladly work with any depositories who may want to take
a second look at our industry.
In conclusion, FiSCA and its members are committed to
working with the subcommittee and our industry partners to help
ensure that MSBs continue to have access to banking services.
Again, we thank you for the opportunity to present these
views.
[The prepared statement of Mr. McClain can be found on page
41 of the appendix.]
Mr. Miller of North Carolina. Thank you, Mr. McClain.
Finally, Ms. Thoren-Peden is recognized for 5 minutes.
STATEMENT OF DEBORAH THOREN-PEDEN, PARTNER, PILLSBURY WINTHROP
SHAW PITTMAN LLP
Ms. Thoren-Peden. Mr. Chairman, Ranking Member Hensarling,
and members of the subcommittee, I am very honored to be here
and thank you for inviting me.
My name is Deborah Thoren-Peden. I am a partner at the law
firm of Pillsbury Winthrop. I am on the firm's financial
institutions team, and I am chair of the privacy team. I am
also co-chair of the firm's consumer and retail team.
Prior to joining the firm, I spent 10 years in-house at
First Interstate Bank in the retail sector, where amongst other
things I was the Bank Secrecy Act attorney. I have been doing
Bank Secrecy Act and financial work and payment work since the
early 1980's, so for almost 25 years.
I have also been general counsel and a senior executive
officer and chief privacy officer of an Internet payment
company, as well as general counsel of a financial subsidiary
of another Internet company.
My practice includes representing many different sorts of
companies in the payment space, ranging from money transmitters
to check cashers, pre-paid card issuers, distributors, sellers,
money order issuers, Travelers Checques, etc. I work with a
broad range of people and companies, and in that regard, I have
ended up working with most of the regulators in one way or
another in this space throughout the country.
One certainly strong opinion that I have is I believe the
MSB industry is already among the most heavily regulated
industries. Right now, they have the State regulators in
virtually every State in which they offer services and licenses
are required. Those State regulators, by the way, are extremely
diligent in their duties and their oversight. They care
tremendously as to whether or not the people, the consumers,
and companies in their States are properly protected, and they
are very vigilant in terms of their oversight and examinations,
and for certain of my clients, what that means is actually they
will have State examiners in their offices for months,
literally months, every year, because different State examiners
come in.
Just to give you an idea, and this is by way of an example,
I brought with me the Bank Secrecy Act and AML examination
manual from FinCEN and the Department of the Treasury. This is
just one exam manual from one agency. As you can see, it is
fairly robust.
The MSB industry has FinCEN oversight, and people at FinCEN
care deeply about the industry. Also, OFAC has oversight in
terms of whether or not there is compliance with the economic
sanctions by the Office of Foreign Assets Control.
The IRS has the right under the Bank Secrecy Act to examine
them. All the States have an examination right, and the Federal
Trade Commission would have rights to oversee the non-bank
financial institutions as well.
You have a large number of different entities already in
place regulating these industries today.
One thing I know of significance to the committee, with
which I wholeheartedly agree, is there does need to be more
protection for the banks in terms of offering accounts to MSBs.
What has happened today is the risk of banking MSBs has
been heightened, many of the banks very logically have chosen
to not take the risk because the risk of their having problems
or encountering problems later is very possible for them, so it
does not make it sensible for them to do so.
I truly believe there needs to be some sort of a safe
harbor enacted for the banks in terms of banking the MSBs, so
that the banks cannot be gone after for an MSB's actions.
Additionally, I think the MSB industry, including the
prepaid card industry, etc., needs to continue to be nurtured
and supported because they offer extremely important financial
services to millions of consumers in the United States,
including the unbanked and the underbanked, which some estimate
to be 10 to 15 percent of the population.
If there is more regulation and more oversight requirements
that are particularly burdensome, you will find that some
people currently offering services through convenient
locations, perhaps some retailers by way of example, will pull
out of the business because it is simply not worth it to them
to risk having potential actions brought against them in
exchange for offering the services through their locations.
In terms of even additional oversight, I think careful
thought has to be given to what is going to be the impact of
additional regulation, especially on some of the retailers, mom
and pop stores, etc., that offer the products, because you may
find the products are withdrawn from the marketplace, which I
think is contrary to everyone's wishes.
I think one thing everyone can agree upon is no one wants
these monies and transactions going underground. If they are
not offered and available conveniently, they may go
underground, and neither the industry, law enforcement or the
regulators want that to happen.
Instead, I think we need to help nurture the industry.
Thank you very much.
[The prepared statement of Ms. Thoren-Peden can be found on
page 45 of the appendix.]
Mr. Miller of North Carolina. Thank you. We will now have a
series of questions from the members. Each member will have 5
minutes. I will begin by recognizing myself for 5 minutes.
Mr. Cachey, you rejected the Bachus/Gutierrez model,
although you said you would be happy to continue to work with
the committee on a proposal, but you did support instead an
industry self-regulatory model, full Federal regulation of
MSBs.
Do you have a notion of how big the price tag will be for
the examiners it would take for the Federal Government to do it
as opposed to an industry-based model with Federal supervision,
which presumably either one will come out of fees charged to
MSBs? Which do you think will be more expensive?
Mr. Cachey. The proposal that we are contemplating would
allow for an MSB to choose in or out to be federally licensed
and regulated. The idea would be that if you had a smaller MSB
that maybe did business in one State, they could continue to be
licensed by that one State.
But if you had MSBs like Western Union or others that offer
services throughout the country or maybe a significant region
of the country, it might prove more efficient for them to opt-
in to a Federal licensing scheme, thereby allowing entities
where that is advantageous to do that, but not requiring the
tens of thousands of smaller MSBs, what people commonly refer
to as the mom and pop's, to have to deal with a Federal
licensing scheme when it is not suitable to their business
model.
Mr. Miller of North Carolina. Ms. Thoren-Peden, you also
proposed legislation for creating among other reasons an office
within Treasury to ensure compliance with current regulations.
Is the current oversight of MSBs by FinCEN and the IRS and
any of the relevant agencies sufficient that non-compliant MSBs
are receiving the regulatory oversight that is needed?
Ms. Thoren-Peden. I certainly think that for MSBs that are
licensed and are acting appropriately, the current regulatory
structure is more than sufficient.
I think there may be some shops out there, probably smaller
retailers, to be honest, who may engage in activities that they
do not understand to be money services businesses directly. I
think some of that has come about because of need, where there
is need for additional services. People may offer the services
without being fully aware of the legal requirements.
I do agree where you have entities that are operating in a
context where they are subject to licensure and they have not
been licensed, that is obviously a situation that needs to be
addressed.
For anyone who is already licensed, I believe there is a
significant amount of regulation out there already.
Mr. Miller of North Carolina. Ms. Thoren-Peden, you
described your clients who have an interest in this area. By
way of explaining your interest and your expertise, are you
representing any of those clients today?
Ms. Thoren-Peden. I am not.
Mr. Miller of North Carolina. Is the point of view that you
have expressed in any way at variance with the point of view of
your clients?
Ms. Thoren-Peden. I have not spoken with my clients about
what my testimony was today. I cannot really speak to that.
Mr. Miller of North Carolina. The Chair now recognizes Mr.
Marchant for 5 minutes. I yield back my time.
Mr. Marchant. Thank you, Mr. Chairman. Mr. McClain, you
talk about the small and dwindling pool of banks that continue
to provide account services to MSBs. What separates a bank
willing to offer services from one that does not?
Mr. McClain. That is a very good question, Congressman.
Currently, our industry is served by a handful of large
national banks and I would say a broader base of smaller
community banks and even some credit unions.
There is not really a bright line that will identify what
will cause a bank or enable a bank to service our industry
versus those that do not.
I think what we have seen, however, is a problem of
perception. For banks that may otherwise be willing to service
our industry, I think there is a concern or there has been a
perception that check cashers and other forms of MSBs are high-
risk accounts. I think if you look to the record of the
industry, you will find that perception is not borne out.
The banks that do service our industry successfully, and I
will add there really are some very fine banks, very fine
financial institutions that service our industry, what they
have been able to do is balance the costs and the risk
associated--the regulatory risk, I should say--associated with
banking MSBs with a profit structure.
They have been able to develop a specialty in this area,
man appropriate compliance departments, and do so in a
profitable manner.
The problem, I think, that we are faced with is that due to
the regulatory structure, the burdens that banks that service
this industry are faced with, it becomes unprofitable for them
to service our industry.
Again, one solution that was being considered in connection
with the MSB bill, H.R. 2893, was to alleviate banks of this
role as being a de facto regulator for the customer, thereby
making it more profitable for them to service our industry.
Mr. Marchant. In all instances now, the MSBs are regulated
by the laws of the State in which they operate; is that
correct?
Mr. McClain. Not all States, certainly the vast majority
and certainly any States with any sizable check casher or MSB
industry generally have very rigorous regulatory structures for
our industry.
Mr. Marchant. Does the casa de cambio business fall into
this?
Mr. McClain. No, that is generally south of the border,
Mexican casa de cambios, that is not something we see here in
the United States, or that is my understanding.
Mr. Marchant. There are quite a few in Houston. If that
industry is located in a State, it has nothing to do with this
money service business?
Mr. McClain. To the extent they are offering any product or
service that falls within the definition of a ``money service
business,'' i.e., check cashing, money order sales, remittance
activity as agents or principals, they would fall under the
Bank Secrecy Act and they should be subject to regulation;
absolutely.
Mr. Marchant. Ms. Thoren-Peden?
Ms. Thoren-Peden. Yes. The casa de cambios, basically
currency exchange entities in essence, are subject to the Bank
Secrecy Act. They are deemed to be money services businesses
and are therefore covered by the Bank Secrecy Act and anti-
money laundering requirements.
Certainly, some States do license them and they are subject
to licensure. In addition to that licensure, the moment they do
anything else that triggers licensure in a State, they are also
required to be licensed. I thought this information might be
helpful.
Mr. Marchant. The proposal would create a national optional
Federal charter for MSBs. Is that the essence of the bill? Mr.
Cachey?
Mr. Cachey. The essence of the bill, and I will paraphrase,
but my understanding is to create an office in the Department
of the Treasury to regulate money service businesses which will
then have oversight over an SRO, which would be an industry
organization that would self-regulate itself under the Federal
laws, but would also leave in place the 48 State law schemes
that also regulate the money services businesses.
Mr. Marchant. Would not an MSB have the ability or the
right under this bill to not be regulated by this Federal
entity?
Mr. Cachey. I think right now that is unclear. Typically,
the SROs that I am familiar with, and there are a number I am
familiar with, even offshore for the industry, there are
internal standards that are set for an entity to be able to
join that SRO, and those types of details would need to be
worked out.
With the tens of thousands of small money service
businesses out there, it seems to me it would be difficult to
make sure that many organizations can meet the type of
standards that maybe some of the larger players in the industry
would want to have to be comfortable and affiliated with those
other organizations.
Mr. Miller of North Carolina. The gentleman's time has
expired. For the witnesses, you see the lights in front of you,
if you see the time has expired during your answer, I am
reluctant to cut you off or interrupt you, but if you would
keep your answer succinct, and you may elaborate upon it later
in writing.
Mr. Lynch has joined us. Like Mr. Bachus before him, he is
not actually a member of this committee, but I ask unanimous
consent that the gentleman from Massachusetts be allowed to sit
with the subcommittee, and that he be allowed to ask questions
in turn. Hearing no objection, it is so ordered.
Mr. Sherman is recognized for 5 minutes.
Mr. Sherman. Thank you. I will be brief.
People who purchase remittance services are often folks
getting by on a very small amount of education and yet they are
dealing with an international financial transaction, and they
face three different charges. They face whatever charge is
imposed upon the sender. There are sometimes charges imposed on
the recipient, and then you have whatever currency conversion
spread is being used.
What do we do or what do you suggest we do so that people
will have simple and clear information and can pick the best
service at the best price?
Mr. Cachey. I guess I will address that, since we engage
directly in remittances. We find our customers to be very
financially savvy. Typically, if you interview a typical
remittance customer, they can tell you what the price is and
what exchange rate they are going to get with a number of
services.
Additionally, anybody can walk up to a location for our
service and many others, quite frankly, and just ask, what are
you charging today, and what is the FX rate I am going to get
if I send money overseas? That is freely shared with the
customer because we think the customer should know that.
Western Union does not charge people to pick up money, so
there is not a receiver fee, if you will.
Mr. Sherman. Do you have a consistent spread? I will define
the spread as let's say one customer is sending dollars for
pesos and the other customer is sending pesos for dollars. The
difference that those two customers face as the spread, do you
have a consistent spread day after day or are there sometimes
when you walk in and the fee for service part is probably
consistent but the amount you are losing on the currency
transaction is different?
Mr. Cachey. Depending on the currency, because some
currencies are more volatile than others--
Mr. Sherman. What I am saying is day by day. You are
sending money to Zimbabwe. You are going to face some
additional charges.
Mr. Cachey. Yes. Day by day. The spread stays consistent
but it can change day by day.
Mr. Sherman. Is the difference between the number of
dollars you will give for a peso and the number of pesos you
will give for a dollar--you may have somebody in Mexico sending
money north, is that difference the same every day?
Mr. Cachey. I cannot answer that. I do not know.
Mr. Sherman. I will ask you to answer for the record and I
yield back. Thank you.
Mr. Miller of North Carolina. Thank you. The Chair now
recognizes Mr. Royce of California for 5 minutes.
Mr. Royce. Ms. Thoren-Peden, if I could ask you a question,
because in your testimony, you describe MSBs as being among the
most heavily regulated businesses in the United States, and our
other two witnesses in their testimony had commentary to that
effect.
I am going to ask you based on a line of argument here that
while this may be true, that in terms of effectiveness, the
current regulatory structure overseeing MSBs could probably be
improved.
Let me just see if you would concur with this. We have a
number of recent studies, including some by the Treasury
Inspector General, that found that the IRS could not be doing a
complete job of ensuring Bank Secrecy Act compliance, and there
are a couple of examples here.
One, if they tally the number of MSBs operating in the
United States, they get an estimate--a lot of these are small
and local outfits--they are somewhere between 40,000 and
160,000, and they say something less than 20,000 are actually
registered at FinCEN.
Then they say due to the limited resources at the IRS, the
enforcement of anti-money laundering and anti-terrorist
financing oversight is largely left up to State regulators.
One of the arguments they cite is the IRS entering into
memoranda of understanding with 40 States to facilitate the
sharing of information that would come from examinations, and
the fact that the IRS actually examines 3 percent of MBFIs.
When we look at the collection of various State regulators,
there are 37 States that have some form of registration or
regulation apparatus, and then as you look further into the
level of sophistication and aptitude within those States, you
see a very wide range, it is a very dramatic range in terms of
the ability or expertise that is applied here.
Is there a segment of the MSB industry that is outside of
the purview of strong anti-money laundering and anti-terrorist
financed compliance, and in your view, how could we bring
increased registration and increased compliance of these
smaller MSBs?
Ms. Thoren-Peden. In terms of the MSB registration, there
certainly are more sites in the United States that offer money
services businesses, but I think the higher numbers refer to
authorized delegates, also known as ``agents.''
If they are only acting as a money services business on
behalf of someone else who is licensed and registered, there is
no requirement for them to register at the Federal level,
although there are separate recordkeeping requirements. I just
wanted to mention that.
One thing that happens at the State regulatory level, and I
believe 48 States as well as D.C. and other jurisdictions,
actually have licensure for money transmittal purposes. There
are very few States that do not have something in place.
Part of their examinations go into not only what is the
licensee doing, how are they financially, how are they
compliant with the anti-money laundering, how are they
compliant with OFAC regulations, but they also as part of their
examinations go out and look at the agent locations as well.
They do not look at every agent location. The same is true
functionally for banks as well. If you have 10,000 branches in
the United States, if there is an examination, quite logically
the examination is of the entity itself and some of the
branches. It is the same structure here.
In answer to your question, do I think that everything is
examined to the nth degree, no, but I also think if you impose
that sort of a structure where every authorized agent location,
every delegate has to have an examination, you will find many
people will no longer offer those services.
Mr. Royce. Let me explain the dilemma. We have come some
way in terms of combatting terrorist financing, but the level
of resilience and innovation among those who would contemplate
terrorism is out there, and they are desperate to find funding
mechanisms that operate under the radar and out of the
mainstream financial system.
They understand their ability to carry out operations is
directly tied to their fund raising. You saw recently in the
paper here, we have an al-Qaeda leader, Shireen Mazari, who
called funding, ``the mainstay of Jihad.''
As we look at reforming this portion of the non-traditional
banking sector, I think transparency is the key to closing
vulnerabilities. We need competent and consistent oversight
that can address these apparent gaps and ensure anti-terrorist
financing laws are properly enforced.
I thank you, Mr. Chairman.
Mr. Miller of North Carolina. If you want to respond to
that, you may do so in writing.
Ms. Thoren-Peden. Can I respond to that?
Mr. Miller of North Carolina. In a sentence, but you may
respond as fully as you like in writing for the record. You may
respond in a sentence.
Mr. Royce. Mr. Chairman, on H.R. 4049, whether she thinks
that would be helpful or not.
Mr. Miller of North Carolina. When I said ``a sentence,'' I
meant in the Ernest Hemingway sense.
Ms. Thoren-Peden. I think the State banking regulators
actually are very capable and they actually do an excellent job
in terms of overseeing their licensees.
Mr. Miller of North Carolina. Thank you. Mr. Frank would be
a great deal less polite in his wielding of the gavel.
The gentlelady from California, Ms. Waters, is recognized
for 5 minutes.
Ms. Waters. Thank you very much. I would like to ask
Western Union first, and maybe the other MSBs can answer.
When you have disasters in places like Haiti and Chile, and
these tsunamis that have taken place in the last decade or so,
you have a lot of transmitting of money. The relatives here in
the United States are trying to give support to their relatives
in those countries.
Do you have any policy that would reduce the amount that
you charge to transmit when these disasters take place?
Mr. Cachey. The simple answer is yes, both for the tsunami
2 years ago, I think, and most recently for Haiti. Western
Union for a number of months after the disaster was sending
money transfers for free for customers from the United States,
France, and Canada into Haiti.
As well, the Western Union Foundation, which is the
charitable arm of Western Union, I believe made $2.5 plus
million available to other charitable activities and disaster
recovery activities to Haiti.
Yes, these are our customers as well, because they are
receiving funds through our dedicated service, so the people in
Haiti are our customers as well as the people in the United
States sending the money, and we understand they are in dire
straits, so we do have programs to reduce or charge no fee at
all, depending on the extent of the disaster.
Ms. Waters. Is that true of Chile also?
Mr. Cachey. Chili is less dependent on remittances than
Haiti might be. I know we have made charitable contributions in
one form or another. I am not personally familiar with what our
reduction in fee structure was for that event though.
Ms. Waters. Thank you. Mr. McClain?
Mr. McClain. Thank you. Our membership primarily provides
retail financial services in the United States. We act as
agents for Western Union. We did work with Western Union and
our State associations and actually assisted to promote Western
Union's activities in terms of discounted remittance fees for
serving Haiti and we also did some of our own internal fund
raising, but again, we do not directly provide financial
services in Haiti or other external jurisdictions.
Ms. Waters. I have another question that I would like to
ask, and that has to do with how you calculate the value of
U.S. dollars, for example, if in fact one is transmitting $100
to Haiti and the exchange rate is $37.50, how do you do that?
How do they get the full value of the $100 that is transmitted?
In the calculation, do you round up? Do you round down? How
do you do that?
Mr. Cachey. First, in Haiti, I believe it is a U.S. dollar
payout because they want dollars in Haiti. There is no
conversion for that particular portal of transactions. People
sending a dollar from the United States, a dollar would be paid
out in Haiti.
From a currency exchange standpoint, in jurisdictions where
we do pay out in the local currency, Western Union states what
the exchange rate is that we are offering and then explicitly
tells the customer this is the amount of pesos, pounds, euro's,
whatever the currency may be, that is going to be put into the
hands of the customer receiving the money, so that the sender
knows exactly how much money the receiver is going to have
placed in their hands when they show up at our correspondent
location in that jurisdiction.
Ms. Waters. It may be a problem in that the currency of the
receiving country may not have the kind of denominations, I
guess, to be able to capture the partial percentage point or
what have you.
It seems to me that could add up to a lot of money. Do you
calculate how much that is and is that captured in your
earnings report separately from the way you capture the other
straight amounts that are transmitted?
Mr. Miller of North Carolina. The witness may answer in a
sentence with a maximum of two commas and no semicolons, and
you may answer as fully as you like in writing for the record.
Mr. Cachey. I will answer in writing with a period.
Mr. Miller of North Carolina. All right. Mr. Hinojosa of
Texas is recognized for 5 minutes.
Mr. Hinojosa. Thank you, Mr. Chairman. I thank the
panelists for coming to visit today and get us better informed.
I represent the 15th Congressional District in deep South
Texas, along the Texas/Mexico Border. Hidalgo County is the
largest county that I represent, and it is approximately 90
percent Hispanic.
It is also one of the poorest counties in the whole Nation
and home to the poorest of the poor because we have so many
colonias in that county. It contains the largest number of
colonias, like I said, and they number something like 800.
I am concerned about the charges that are being charged by
the check cashers and payday lenders, and many of my comments
and questions will be directed towards that group.
This cash society makes it very difficult for the majority
of my constituents to obtain non-predatory loans and forces
them to rely on these check cashers and payday lenders for
their financial transactions, and such transactions make it
very difficult for them to obtain non-predatory loans and
thereby prevents them from establishing credit, possibly
purchasing a car or appliances. It is just very difficult for
them to be able to get into the mainstream of financial
institutions.
In fact, payday loans over a period of time can result in
my constituents paying up to 400 percent in interest if they do
not pay the loans by the end of each month.
Over the years, I have worked with Chairman Frank,
Subcommittee Chairman Gutierrez, and Subcommittee Chairwoman
Maxine Waters to find ways to move our unbanked constituents
and all the unbanked in the United States into the mainstream
financial services.
Unfortunately, many of them remain unbanked, distrust banks
and other mainstream financial services and entities, and
continue to suffer at the hands of those folks I mentioned and
predatory lenders.
The first question would be to Joe Cachey with Western
Union. What can you do to help us get many of these unbanked
into the financial services and the system that we have here in
the United States so they can have more disposable income to be
able to enjoy a better quality of life?
Mr. Cachey. As I stated in my oral testimony, more than
half of Western Union's customers in the United States are
banked and really use Western Union as an asset, a cash
management vehicle for services that banks may provide but
which Western Union provides at a more convenient and speedier
manner than a bank might.
Many people use our systems to make bill payments, for
example, where they do not want to run the risk of bouncing a
check and having to pay a $35 bounced check fee. Let's remember
that last year, the U.S. banking industry made approximately
$40 billion just on returned check fees.
A lot of people are banked and use our services to manage
their cash flow to avoid the types of fees that banks charge
people.
Mr. Hinojosa. Joe, let me interrupt you because time will
get away from us. You said half of them are banked. You had
about $71 billion last year. That leaves another $35 billion of
transactions that are by people who are unbanked. I did not
hear you say what you could do, your company, to educate and to
encourage people that I represent to use the financial
services, and if you cannot answer the question, I would like
to ask the lady if you have some services that would help us in
my district.
Mr. Miller of North Carolina. Time has gotten away from us.
One sentence orally, and as full an explanation as you would
like in writing for the record.
Ms. Thoren-Peden. Yes, sir. I think there are a number of
prepaid products that have become available over the last
couple of years that are offering many financial services to
the unbanked and underbanked that hitherto were not readily
available to them.
Many of them are priced at a level that is reasonable, and
it can be very helpful. Some customers are able to establish
long-term relationships with the underlying banks. That is
usually at the option of the customer, but there are a number
of prepaid products that have arrived in the marketplace over
the last couple of years that I believe and have seen really do
facilitate getting the unbanked and underbanked financial
services.
Mr. Hinojosa. Thank you.
Mr. Miller of North Carolina. Thank you. That was a very
long sentence. If any of you testify before the full committee,
you will think I am a real sweetheart.
The Chair now recognizes for 5 minutes a leader on this
issue who has introduced relevant legislation, the gentlelady
from New York, Ms. Maloney.
Mrs. Maloney. Thank you very much. As the chairman
mentioned in his opening remarks, I have re-introduced my bill,
the Money Services Business Act, which is identical to the
legislation that unanimously passed the House of
Representatives last year.
I am proud to sponsor this legislation and to have it co-
sponsored by the ranking member of the Financial Services
Committee as well as the chairman and ranking member of the
Financial Institutions and Consumer Credit Subcommittee,
Congressman Luis Gutierrez and Jeb Hensarling, and
Representative Judy Biggert.
The Money Services Business Act addresses the critical
problem of MSBs, money service businesses, being denied access
to the banking system, and without a relationship, MSBs are
unable to provide financial services to communities, making it
difficult for millions of Americans to pay their bills, send
money or cash checks.
Federal regulatory agencies recognizing the problem facing
MSBs have sought to address this issue through agency guidance
and regulatory changes with very little effect.
This bill establishes a mechanism that would allow MSBs to
self-certify their compliance with the Bank Secrecy Act and
anti-money laundering requirements, while allowing banks to
make risk-based decisions about banking, particularly with
MSBs.
My concern has been that if this issue is left unaddressed,
the viability of MSBs will be compromised, potentially pushing
many of these transactions underground and potentially
untraceable to law enforcement.
This is something we all agree is not the result we are
looking for, and I hope to have a discussion that can lead to
the best possible conclusions.
I would like to ask Mr. McClain, as you know, my colleague,
Mr. Gutierrez, has a bill that would recognize a self-
regulatory organization that would be delegated rulemaking
authority as well as enforcement.
Are there regulatory organizations that have been
identified as capable of performing the self-regulatory
function and how were they identified?
Mr. McClain. Thank you, Congresswoman Maloney. With respect
to this industry, I am not aware of any self-regulatory
organizations that would be able to have oversight over the
very large and very diverse money service businesses industry.
We have, as you know, what I will term as ``wholesalers''
of financial services and products, such as Western Union and
MoneyGram and others, and then we have at the level of our
members, retailers of very basic financial services, check
cashers, etc., that act as agents.
I cannot as we sit here today perceive what type of self-
regulatory organization could have oversight over this whole
universe of MSBs, but it is certainly an innovative and
creative bill, and it is something that I think deserves some
serious consideration and we will continue to look at it and
work with the committee.
Mrs. Maloney. Do you believe this is a better approach to a
self-certification process?
Mr. McClain. I think it is certainly a different approach.
With respect to the self-certification process, the real focus
and appeal of that proposed legislation is the fact that it
would relieve banks of being in the role as de facto regulators
of their MSB customers, so it is a very different bill. It is
not contrary to the self-regulatory organization proposal.
Again, I think it attacks the issue or the problem from a
different perspective.
Mrs. Maloney. I would like to ask Mr. Cachey and Ms.
Thoren-Peden, I know you both testified you do not believe that
additional regulatory oversight is appropriate, and I am
curious whether you view a self-certification process as
additional regulatory oversight.
I do agree that MSBs are already regulated at the State
level, but would a self-certification process pose an
additional burden on MSBs that might dissuade them from
continuing to serve customers?
Ms. Thoren-Peden. I think if the self-certification process
allows a bank to rely upon the MSB's certification and
basically gives the bank a safe harbor for allowing them to be
a banking customer, that would be very helpful.
As you indicated, that is one of the core issues that has
come up over the past couple of years.
Mrs. Maloney. Mr. Cachey, your response?
Mr. Cachey. I think self-certification is probably the
easiest way for smaller MSBs to address the banking issue that
everybody has expressed concern over.
Mrs. Maloney. I would like to ask anybody on the panel to
discuss the current banking situation for MSBs, how is it
affecting businesses and their ability to deliver financial
services?
Mr. McClain. I think at least with respect to the retail
MSB industry, I can address that. What we are seeing is, again,
a very small pool of banks willing or able to service the
industry. We are seeing some bright spots in some smaller
community banks that are willing to step in. I think they see
some opportunity here.
Generally, the problem is certainly not on a large scale
improving. We have some regional areas, particularly Florida,
Ohio, the Northeast, where there are really just very few banks
that can service our industry. It continues to be a problem.
Mr. Miller of North Carolina. The gentleman from Texas, Mr.
Green, for 5 minutes.
Mr. Green. Thank you, Mr. Chairman. I thank the witnesses
for appearing. To make sure I direct my questions to the
appropriate persons, if you believe that there is no need for
additional regulation, will you kindly extend a hand into the
air? Witnesses, if you think there is no need for additional
regulation.
[show of hands]
Mr. Green. Two. Thank you. Given my source of information,
and I will share with you what I have, the indication is that
we have approximately 40,000 to 160,000 MSBs with only 15,000
to 20,000 actually registered.
Is this a fair statement? If you differ with the statement,
kindly extend a hand into the air. Does anyone differ?
[show of hands]
Mr. Green. Yes, sir. What would your number be in terms of
the actual number of MSBs, please?
Mr. Cachey. I think something between 30,000 and 40,000
MSBs. I think the 160,000 number is probably agent locations or
locations that do not need to be registered.
Mr. Green. Do you agree that we have more that are not
registered than are registered?
Mr. Cachey. I do not know, but I think you are right in
that there are a number out there that are not.
Mr. Green. The indication was that we have about 40,000
that are MSBs; correct? My indication is we have 15,000 to
20,000 that are actually registered. If it is 40,000, we have
at least as many that are not registered as are registered.
Fair statement?
Mr. Cachey. Fair.
Mr. Green. Ma'am, do you concur?
Ms. Thoren-Peden. I do not have the estimates in front of
me.
Mr. Green. Without the estimates in front of you, do you
agree we have more that are not registered than are registered?
Ms. Thoren-Peden. I--
Mr. Green. Do you agree that we have a good number that are
not registered?
Ms. Thoren-Peden. That, I agree with.
Mr. Green. Given that we have a good number that are not
registered and given that we have found that some banks are
having great difficulty with the current circumstance and they
are discontinuing the service, do you both agree the banks are
discontinuing this service and working with these MSBs?
Do you agree? If you do, raise your hand.
[show of hands]
Mr. Green. This is the only way I can do it. I am sorry to
be so elementary.
Ms. Thoren-Peden. I believe there are certainly a number of
banks that have chosen to not bank MSBs.
Mr. Green. Do you agree that banks are in a tough position?
Ms. Thoren-Peden. Yes.
Mr. Green. They are trying to engage in a legitimate
business practice and they find themselves having to not only
vet the MSBs but even after vetting, they may find that they
have done something that is inappropriate, but they have not
done it with malice or forethought.
Do you agree, ma'am?
Ms. Thoren-Peden. I agree, sir.
Mr. Green. Do you agree, sir?
Mr. Cachey. Yes.
Mr. Green. The banks are really the entities that are of
concern, there are others as well, but it is hard to get around
the fact that you have banks that are engaged in legitimate
business practices that have this concern.
Given that we have the banks with the concern and we have
those that are not registered, my question to you is, how will
you stand on the premise that we do not need additional
regulation, given this circumstance that exists with our
banking institutions?
How do you stand on this premise that we need no additional
regulation? My guess is you may not like the regulation that is
being proposed. You may think this is not a panacea, but
surely, given the circumstance, something has to be done
because we have legitimate business enterprises, known as
banks, who are not engaging in the process and others that are
considering discontinuance as it relates to this.
How can you stand on this, and so as not to give you a
moment to just talk about it endlessly, and I am sorry to do
this to you, would you agree rather than answer the question,
which was rhetorical, would you agree that some regulation is
necessary?
I will start with you, sir, Mr. Cachey. Would you agree
that some regulation is necessary?
Mr. Cachey. No, I think we just need to apply the
regulations that we have to the entire industry.
Mr. Green. How would you apply the regulations that you
have to the entire industry when the IRS only has 500 people
and they are already overworked? How would you do that?
Mr. Cachey. Give them more people.
Mr. Green. You would hire more people at IRS and let the
more people at IRS, the 500-plus additional people, service
this industry?
I take it, ma'am, that would be your position as well?
Ms. Thoren-Peden. Yes. The regulations and licensure
structure are already in effect. They are on the books.
Mr. Green. You would just enforce the regulations that are
on the books?
Ms. Thoren-Peden. Yes, sir.
Mr. Green. If the regulations that are on the books have
not picked up as many persons as are registered, how can you
contend that is an efficacious regulation? You have more
people--this is my statement and at least one person agrees
with me--unregistered than registered.
How do you contend that is effective regulation when they
are going under the radar to the extent they are?
I thank you for the time, Mr. Chairman, and I thank
Representative Maloney for her legislation as well as the other
members.
The members are trying to do something about the problem
and I think while you may not concur with what is being
proposed, you have to admit it is time to act.
Thank you.
Mr. Miller of North Carolina. If any witness wishes to
respond in one sentence with ordinary punctuation, or you may
respond for the record, if you would like.
[No response.]
Mr. Miller of North Carolina. The Chair now recognizes the
gentleman from Georgia, Mr. Scott, for 5 minutes.
Mr. Scott. Thank you. Let me ask Western Union, Mr. Cachey,
what mechanisms do you use to ensure that the services that are
provided by Western Union do not support terrorist activities
or money laundering?
Mr. Cachey. That is actually the function that I am
personally in charge of at Western Union. We spend over $35
million a year and I have over 325 employees located in 40
offices around the world who work on anti-money laundering and
the counter financing of terrorism.
This includes not only monitoring transactions, looking for
suspicious activity that can be reported to the government
under the Bank Secrecy Act, but also doing things like
government-sanctioned programs in conjunction with OFAC and the
Department of Treasury, but also gathering and building
relationships with law enforcement and regulators around the
world, since we do business in 200 countries, and bringing that
intelligence back in and trying to determine where in our
system there might be abuses, and then either eradicating those
abuses or if there is potential abuse, reporting those to the
government so they can be acted upon.
Mr. Scott. Can you share with us some examples perhaps of
where you have found out that terrorists, organizations or
sympathy organizations for terrorists have been able to use
Western Union's services, and if you could tell us, does most
of your business now--Western Union is international--how much
of it is national and how much of it is international?
Mr. Cachey. Approximately 60 percent of Western Union's
transactions do not touch the United States. Therefore, the
money goes from France to Algeria, let's say, or some other
corridor.
Frankly, when we report to the government what we suspect
may be some type of illicit activity, we do not get a lot of
feedback from the government as to hey, good job, that was
something connected to money laundering or terrorist financing
and we stopped it.
We do not get that feedback with all the reporting that we
do. I cannot cite examples of that, although anecdotally, you
see things that might get reported in the paper or you hear
something, oh, yes, an investigation occurred and yes, we know
we were part of what people are reporting.
There is not a good mechanism to get information back from
the government on how much we are helping with the government's
efforts.
Mr. Scott. You would say in conclusion that there have been
several suspicious examples, but nothing concrete. For 9/11, if
my memory serves me correctly, there were about 28 individuals
who were intimately involved. They were over here. They
received money.
Was any of that suspicious activity through Western Union?
Mr. Cachey. Actually, there was about $5,000 that was
returned the day before 9/11 back to the Middle East. Again, it
was not suspicious because these individuals had the
appropriate government-issued i.d.'s on the State level. They
had bank accounts. They had credit cards.
In looking at our system, the transaction looked like a
normal day-to-day transaction to us because there was nothing
irregular about the identification or about the mode in which
the people sent the funds.
The only way the funds were identified as being part of
that was after the names were released by the government and
then we ran the names through the system and found that $5,000
transaction.
Mr. Scott. There have been reports of MSBs that falsely
certify they are compliant with the requirements of the Bank
Secrecy Act. How prevalent is this problem?
Mr. Miller of North Carolina. Again, one sentence orally,
and as long as you would like in writing for the record.
Mr. McClain. Thank you, Congressman. I will field that
question. I am not aware of any particular circumstances
involving those types of violations.
I am aware that the IRS has conducted thousands upon
thousands of examinations of MSBs and there have only been a
handful of cases that have been referred to FinCEN for
enforcement action.
Again, I am not aware of any of those circumstances to
which you referred.
Mr. Scott. All right. Thank you, Mr. Chairman.
Mr. Miller of North Carolina. Thank you. The Chair now
recognizes the gentleman from Illinois, Mr. Foster, for 5
minutes.
Mr. Foster. Thank you. My questions have to do with the
technological future of this industry. I think you all must be
thinking about whether even 2 to 5 years from now, everyone is
just going to have their smart phone and that is how they will
do everything from check cashing, money transfers, prepaid
cards, all this sort of thing. We are going to just be
transferred to electronic platforms.
I think just the existence of storefront operations is in
question within a few years.
The two questions I have, first, if you could just comment
on what you think the industry will look like 5 years from now,
from a technological point of view, and what regulation, if
any, we should be thinking about to get ahead of the curve on
the changes here, and finally, any comments you have on the
proposals that I guess are coming through the Senate for
effectively a biometric worker i.d. card, which could be an
important part of authentication, which is a huge issue in all
these things, and what are the main reasons why you would have
a remaining need for a store front operation.
A wide range of issues. Let's start with Mr. Cachey.
Mr. Cachey. We agree with you, things like mobile money
transfer, mobile banking, that we think are the wave of the
future, although we do not think the storefront is going to
become obsolete because eventually people want to figure out
how to get cash in or cash out of their cell phone.
Mr. Foster. Is that not why God invented the ATM?
Mr. Cachey. In a lot of places around the world, they do
not have ATMs, but there is a Western Union location there that
can help people with their financial needs.
That is why we still think the brick-and-mortar locations
will be viable.
From a transfer standpoint, we agree and we are already
offering services between the United States and the Philippines
and the United States and Kenya based on mobile money transfers
as pilots to determine what is the best way to offer those
services and also be compliant with things like the Bank
Secrecy Act and foreign jurisdiction bank secrecy acts.
Mr. Foster. Mr. McClain?
Mr. McClain. It is difficult to foresee the future, but as
Mr. Cachey has pointed out, I think there will always be a need
for brick-and-mortar retail financial services.
Cash will always be with us, I think. I think we are seeing
in our industry a decline in the number of check transactions,
as some payments move toward electronic payment systems. I do
not think we will ever get to a point or certainly not in the
foreseeable future, where all of a sudden checks will just be
obsolete. There is certainly a need for them and they serve a
very convenient need.
With respect to regulation, it always takes some period of
time before the law catches up with the technology. I think it
is just a question of identifying how new technologies create
these risks and acting aggressively to enact appropriate
legislation to address that.
Mr. Foster. Thank you. Ms. Thoren-Peden?
Ms. Thoren-Peden. I agree. I think a lot of payments and
payment systems are absolutely growing electronically, whether
it is going to be through E-Wallet, mobile payments, even the
clearinghouse in the Federal Reserve is opening up to 37
countries by the end of the year through the ACH system. It
tends to be faster, quicker. I believe there will be a shift.
Like Joe, I still think there is going to be some cash as
well in the community.
In terms of the biometric question, it would be a
convenient identification methodology. I recognize that on a
privacy front, there are significant privacy issues. Certainly,
in a voluntary capacity, I think it would be terrific. I think
it is a good way to do i.d.
In terms of the current regulations, most of them are
written with an eye toward electronic payments, so I think
while the regulations are in pretty good shape, probably there
needs to be a little more guidance on some of them. I think it
is going to be more adapting them and helping people understand
as they offer new services how it applies to them.
Mr. Foster. Thank you. I yield back.
Mr. Miller of North Carolina. Thank you, Mr. Foster. The
Chair recognizes the gentleman from Massachusetts, Mr. Lynch,
for 5 minutes.
Mr. Lynch. Thank you very much, Mr. Chairman. Thank you for
your courtesy in allowing me to sit in. I am not a member of
this subcommittee, but along with Mr. Royce, the gentleman from
California, I co-chair the Taskforce on Terrorist Financing.
This overlaps with that jurisdiction.
As Mr. Royce has indicated, we have had some success there
in terms of denying access to the legitimate financial system
to terrorists. We owe a lot of credit to Treasury, FinCEN,
OFAC, FATF, the Financial Action Taskforce, which is an inter-
governmental agency, but there has been some success.
We have been able to drive out a lot of terrorist financing
from the major banks and major institutions, but what has
happened is like squeezing a balloon; we have seen that it has
gone down to less formal institutions.
Right now, we just concluded a round of discussions with
the Central Banks in Pakistan. We were very involved in Jordan,
Tunisia, and Morocco to get them to adopt anti-money laundering
statutes and to actually stand up financial intelligence units
in those countries.
Part of our focus has been on these hawalas that operate,
and it is an informal value transfer system, you might call it
the ``Muslim Western Union.'' Because of the connection with
Muslim culture, it has been a delicate area.
Here we are requesting these foreign governments to require
hawalas to register and to adopt anti-money laundering
measures, to know their customers.
It seems like what you are suggesting here because of bank
discontinuance is that we are going to move away from that in
this country. It is just going to make it very difficult for us
to require other nations to be more prudent while we, at least
at your urging, are moving away from this tighter regulation
and tighter standard, at least with respect to terrorist
financing.
I am just wondering how you think this is going to help us
on the terrorist financing end if banks are required to do less
and if MSBs are required to do less. How is that going to help?
Mr. Cachey. I think in the bank certification bill, if I
can call it that, my understanding is banks still have the
right to say to a prospective client, you are an MSB, so I need
to see your FinCEN registration. I do not think it is the guys
who already play by the rules who are the challenge here.
The typical challenge that we are all having with hawalas
is that they do not register with whatever entity they are
supposed to register with, they do not get the licenses they
are supposed to get at the State level, and therefore, they are
outside the scope of examination.
A self-certification process as contemplated in the bill
would not preclude a bank from doing its normal due diligence
which we recommend to banks, let me see your FinCEN
registration, let me see your State license, to make sure you
are being regulated appropriately, let me see your compliance
program, and let me see your certification that you are doing
everything that you say you are doing.
I do not think it diminishes or sort of opens the banking
system up, if you will, to hawalas to infiltrate it.
Mr. Lynch. No, but I am using our example here in this
country with MSBs. The fact that we have half the folks maybe
registered. I am not sure what the exact number is. Half the
people are not.
We seem to have a very loose and informal system here. You
are arguing, at least from the testimony here, because of bank
discontinuation, we are going to lower the responsibilities
they have and also with no further regulation on MSBs, we are
going to reduce the requirement to you as well.
It seems to be sort of an open system or a less secure
system. I just see problems in that. I just was wondering how
you anticipate addressing that.
Ms. Thoren-Peden?
Ms. Thoren-Peden. Yes, sir. I do not think the banks are
going to go away at all. I just think transactions are going to
become more electronic. That is what I was saying.
Even under the current regulations, the bank's obligations
to file suspicious activity reports will continue under the
Bank Secrecy Act, as is the case with the money services
businesses as well, which today are also subject to the
filings.
The monitoring systems and the filings, I do not see as
changing with any of the proposals for self-certification.
Mr. Lynch. As long as there is a connection between the
bank and the MSB; right?
Ms. Thoren-Peden. Yes.
Mr. Lynch. Are we talking about the possibility that is no
longer the requirement here?
Mr. Miller of North Carolina. A one sentence answer,
orally.
Ms. Thoren-Peden. I think financial services would continue
to be provided either through the bank or the money service
businesses, both of which are subject to the Bank Secrecy Act
and will continue to be.
Mr. Lynch. Thank you, Mr. Chairman.
Mr. Miller of North Carolina. Thank you, Mr. Lynch.
The Chair recognizes the gentleman from Minnesota, Mr.
Ellison, for 5 minutes.
Mr. Ellison. Mr. Chairman, thank you for your work here,
and thank you for this hearing.
In my district in Minneapolis, we have a number of hawalas.
These folks are small business people. I think they are trying
to do the right thing. A number of them have had their
relationships with their financial institutions cut off.
I guess my question to the panelists is, for hawalas doing
business, trying to get money to remote parts of the world, who
are working to try to comply but for whom there is no specific
reason to believe they are not in compliance, how will this
affect their business? How will the bill, H.R. 4331, affect
their business?
Mr. McClain. I will take that, Congressman. I do not think
it was really designed to affect their businesses at all. I
think this proposed--first of all, if they are conducting
business and acting as a money transmitter, they have to be
registered as a money transmitter, and at the State level, they
have to be licensed in most jurisdictions. That is an absolute
threshold they do have to meet.
With respect to the proposed legislation, I do not think it
would impact at all their ability to do business. One of the
proposals is the creation of a self-regulatory organization.
I think that again bears some further examination by the
industry and some additional work with the subcommittee. I
think again it is something that would not necessarily directly
impact a money transmitter's ability to conduct business.
Mr. Ellison. I am also curious to get your views on this
topic. Post-9/11, our country very correctly took measures to
try to stop terrorist financing.
Given the 9 years or 8\1/2\ years hence, in your view, are
there things we should do to allow for more enterprise and more
money transmitting that will not sacrifice our ability to stop
terrorist financing?
Mr. McClain. I think I will direct that to Mr. Cachey, who
represents Western Union.
Mr. Cachey. Our point of view is that the laws are there.
The Patriot Act has been very effective if you look at the
reports coming out of the Department of the Treasury year after
year. Therefore, the need here is not a different regulatory
scheme or a regulatory scheme that has more laws, but how do we
push the effectiveness of the regulations through the entire
industry?
When you have a Western Union or a MoneyGram, which is a
Minnesota company, and you are doing the right thing, that is
one thing, but when you have 5,000 or 10,000 other companies
out there that according to the statistics are not even
registered with FinCEN, it seems to me that is where the risk
is, and that is where the effort should be put, as opposed to
passing more laws and trying to just create more regulations
for the industry.
Mr. Ellison. Why do you think this large number of
companies are not registered with FinCEN? Is it because they
are just small mom and pop operations? Based on your
institutional knowledge, is there any general reason why not?
Mr. Cachey. I think it is typical of regulation of any
industry. The small guys are the start up's, they are
entrepreneurial, they are willing to take the risk. Compliance
costs money. If you are only making $50,000 a year on this
service, are you going to go out and spend $20,000 on a
compliance system and a person to take a look at it and lawyers
to advise you on it and all that type of stuff. That is their
decision to make.
I could see how a small business person starting something
up could say maybe I am just going to take the risk for the
first couple of years to see if this works before I am going to
build a process to comply with these laws.
Mr. Ellison. What about a more streamlined way to build
compliance that ensures safety of the system but reduces some
of the barriers to entry? As much as it is great to have a big
company like Western Union and MoneyGram, this is still
America. We still believe in enterpreneurism.
Any reflections on that?
Mr. Cachey. I think there has been a lot of talk recently
about the risk-based approach to compliance, meaning build a
system that is commensurate with the risk that your institution
offers. I think that sheds some light on the subject and gives
us sort of a light at the end of the tunnel for the smaller
remitters.
Mr. Ellison. Thank you.
Mr. Miller of North Carolina. Thank you, Mr. Ellison.
The gentlelady from New York has a great interest in this
topic and has further questions, so we will have a second round
of questions out of the Chair's great affection and respect for
the gentlelady and because she is from Greensboro, originally.
The Chair waives his round. I understand Mr. Marchant
waives a second round of questioning. The Chair now recognizes
the gentlelady from New York.
Mrs. Maloney. I would just like to ask Mr. Cachey, and I
know you testified earlier, I have been in and out with
meetings with constituents in the other room, but I do know you
testified you had concerns about H.R. 4331.
I am wondering whether you can provide your views on the
bill I have introduced that would allow for a self-
certification process for MSBs while maintaining the State
regulatory structure.
Do you believe that this approach is more in line with your
proposal to create a licensing system? Do you see the licensing
system better than these two bills? Do you see it working in
conjunction with these bills? How do you see us moving forward
with some type of legislative framework that could help the
commerce, help the people, and solve this problem?
Mr. Cachey. Congresswoman, I see two separate problems. One
is that the smaller remitters, smaller MSBs, are having
problems maintaining or obtaining bank accounts which they need
to do their business. I see the self-certification bill that
you mentioned as an appropriate way to address that.
On the issue of licensing, as a nationwide business, if you
will, right now, I have 48 licenses. I get examined between 15
and 20 times a year from various State banking departments. I
would rather have one Federal regulator license me and come in
and examine me every year. To me, that is a more efficient way
to operate our business.
I really see them as two separate issues. I think the
certification process is appropriate. I do not think there is
any hidden bogeyman in there. I think it is a way for smaller
businesses to get the services they need from their local
banks.
For a company like Western Union, MoneyGram, which we
mentioned before you came in, and the other larger MSBs, the
bifurcation of licensing among 48 States just is burdensome,
contradictory in some circumstances, and just is not an
efficient way to operate a business.
Mrs. Maloney. Thank you. Mr. Chairman, that was my focus,
to try to figure out what would be a way to move forward. Thank
you.
Mr. Miller of North Carolina. The Chair thanks the
gentlelady, and the gentlelady from the upper east side of
Manhattan is proof that if you can make it in Greensboro, you
can make it anywhere.
Mr. Ellison does not have a second round.
I would now like to thank all the witnesses and the members
for their participation in the hearing. As I have said
repeatedly to the witnesses and to the members, the record will
remain open.
Without objection, the hearing record will remain open for
30 days for members to submit written questions to the
witnesses, and to place the witnesses' responses in the record,
as well as any written responses to oral questions asked today.
The subcommittee hearing is now adjourned.
[Whereupon, at 11:40 a.m., the hearing was adjourned.]
A P P E N D I X
March 10, 2010
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