1 Manuel Orozco, October 7 th 2013.

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1 Family remittances and business intermediation: the challenge in account closures 1 Each month, money transfer companies perform more than thirty million financial transfers 2 originated by US citizens and migrant workers to countries around the world. These transfers, also known as family remittances, amount to US$110 billion a year, monies that represent 50% of household incomes of more than 30 million households worldwide. Families that receive remittances often use the money for food, healthcare, and education, and the flows contribute to development by facilitating investment, savings, and entrepreneurship. Remittance companies perform an important service in securely and efficiently transferring these funds. They operate in a very competitive and highly regulated environment, offering low-cost transactions. 3 More importantly, these small and medium size businesses present themselves as the first line of defense against financial crimes. Money transfer companies comply with a wide variety of complex state and federal regulations, establish robust prevention and risk mitigation strategies, and regularly cooperate with US and state authorities. To operate, remittance companies rely on basic banking services to deposit cash collected for money transfers into bank accounts. 4 Over the last several years, numerous US banks, however, have decided to stop working with remittance companies based on the assumption that these businesses represent a high criminal risk. While unproven, the systematic practice shows that the average remittance company operating in the US-Latin America corridor has undergone more than two national account closures per year. The consequences of these closures are disturbing and manifold; they increase barriers to entry in the competitive marketplace, they create stereotypes associating these businesses with illicit activities, they increase operating costs for money transfers for US consumers, they could potentially shut down a business if no other depository options were available, and lastly, they risk shifting funds into informal, underground business channels which are completely opaque to US law enforcement. It is essential to mitigate risk and strengthen confidence in the reliable services these financial intermediaries provide to millions of households. Preventing and Controlling Risk Remittance companies are reliable, federal and state highly regulated businesses that have developed sophisticated and highly effective means of preventing financial crimes such as tax fraud, money laundering, and terrorism financing. The remittance industry is highly regulated against any sort of financial irregularity. In order to operate and meet licensing requirements, companies must pass frequent audits all of its stakeholders, namely, by independent reviewers, banks, the IRS, national and international correspondents and financial 1 Manuel Orozco, October 7 th These transactions are typically small, with 98% of them under $ The average cost to send money abroad from the US average transfer is $8. 4 These accounts are used later to settle transactions among financial partners.

2 institutions and each state in which they operate. For a typical company, this may amount to as many as 20 to 50 separate and regular rigorous audits in a single calendar year, all of which are precisely focused on AML/CTF issues. This regular and intense scrutiny of the quality of the companies prevention, detection and reporting systems in these areas help ensure that the overall quality of the AML/CTF programs are as good and in many cases better than analogous systems in banks, which have a much wider range of products to handle. Moreover, companies engage in extensive monitoring of all transactions in order to prevent financial crimes. Because 98% of transfers are under US$300, illicit larger transfers can be easily detected. Moreover, because 80% of clients are frequent customers, businesses have been able to control risk and prevent it, particularly against the remaining 20% that would potentially attempt a crime on a first try. Specifically, companies design stringent procedures to monitor transactions, including setting indicators of sending thresholds, monitoring customer information for both the money sender and recipient, transaction frequency monitoring, regular collaboration and monitoring of agents in the origin and destination of a transaction, as well as pattern detection tools to flag a suspicious activity. Equally important is the fact that money transfer companies are able to monitor transactions in real time. They rely on their trained agents (small and large businesses), sophisticated transactionmonitoring software, and compliance and monitoring staff at the headquarters to freeze any suspicious transaction. Their ability to control and prevent risk includes screening all transactions and flagging or detaining and monitoring some for further investigation. Companies then, in compliance with US regulations, submit Suspicious Activity Reports (SARs) for transactions that may require US government oversight and investigation. The table below 5 shows that less than two-tenths of one percentage of all transactions are suspicious enough to report, and that of those, only a tiny fraction are deemed serious enough to be investigated by authorities. 6 To better understand these risk control measures, consider, as a point of comparison, the case of nonimmigrant visas. Out of 12 million non-immigrant visa applications submitted to US Consular agencies, 2.9 million (24%) are considered ineligible, of which 35% are eventually approved. Then, of the 2.9 million ineligible, 1,000 are ineligible for reasons of terrorism, smuggling, fraud or money laundering, and 50% of that number (or.1% of all rejected visas) is rejected. In comparison, money transfer companies handle more than thirty million transactions, but the number of suspicious activities that emerge from careful screening and investigation is much lower than those emerging from the rigorous US visa process. Table 1: Putting Risk in Perspective Remittance Transfers USCIS Non- Immigrant Visas Total volume per year 37,500,000 12,000,000 5 The table is based on confidential review of SARs remitted by several money transfer companies. 6 The vast majority of suspicious activities are related to attempts of tax fraud.

3 Flagged for possible additional investigation by 94,551 1,300,000 authorities % of total volume that are flagged 0.02% 10.83% Merit investigation by authorities 632 2,600 % of flagged items that are investigated 0.67% 0.1% Source: Data compiled by the author. Immigrant and Nonimmigrant Visa Ineligibilities, USCIS, FY2012. Remittance companies not only maintain a close relationship with various Federal and state agencies, but also collaborate and cooperate in the investigation of suspicious activities to detain any criminal or criminal activity. The cooperation between Jamaican money transfer companies and the US government, for example, speaks to this cooperation: as a means to prevent what are known as lottery scams, Jamaican companies regularly report and cooperate with US authorities to reduce such scams and catch criminals. Account closures on the presumption of risk Despite the robust mechanisms in place to prevent financial crimes, there is an assumption that money transfer companies, by their very nature, are high risk. Among banks and regulators, this uninformed and untested assumption has led to massive account closures threatening the industry and the welfare of the millions of consumers who send/receive money transfers. On average, companies are facing two national bank account closures per year. Given the fact that many companies do not have more than 3-5 bank accounts, these closures create severe hurdles and constraints. The closures are a subject of concern, not only because they are so widespread, but also because they are conducted on the basis of prejudices and perceptions, rather than on the individual business practices of each company. A multistate or regional or national remittance company can expand and grow only if it has access to basic regional or national banking services. Otherwise, its prospects for growth and its ability to survive in a very competitive environment are limited and few. That is the major industry challenge today for most industry participants in spite of all of the regulatory compliance of these licensed enterprises. Reviewing multiple account closure letters, we find not a single instance in which company wrong-doing is mentioned as the reason for the account closure. Rather, the account closure letters cite general policies such as the account does not fall within the scope of the bank s business customer profile or we can no longer serve your needs. Some account closure letters offer no reason at all for the decision. In fact, most of the large AML industry fines have been levied against the largest industry public companies that continue to work with most large financial institutions, defying logic and against the following general policies being unjustly applied to private companies. Account closures have numerous negative consequences: Lack of access to bank accounts makes it difficult for a company to operate because it is impossible to settle transactions. Companies must spend significant time and resources looking elsewhere including out of state to find banks that are willing to do business with them.

4 Denial of accounts, particularly by large banks, constitutes a barrier to entry because national banks control a large percentage of the national banking marketplace. Those banks that are willing to work with remittance companies are often located at a considerable distance, forcing companies to undergo the cost and risk of transporting large amounts of cash long distances in armored vehicles. It is not uncommon to hear of companies with as few as 1-3 accounts remaining, particularly among mid- to small-sized businesses. Without bank accounts, remittance companies cannot operate, and may be forced to go out of business. Regulators tendency to assign a high risk status to remittance companies, regardless of their specific practices and businesses characteristics, constitutes undue financial exclusion and creates two different risks. Among large banks, there is a reputational risk (they don t want even the smallest possibility of being associated with dirty money ), and among smaller banks there is a punishable risk (they run the risk of being sanctioned for working with these companies). While the leadership of the federal banking agencies insist that their agencies do not target remittance company accounts in their examinations, the perception of the bankers involved in those examinations is very different. In fact, there may be a significant disconnect between the stated policies of the federal banking agencies regarding the remittance industry and the perceptions, actions and attitudes of line level examination staff regarding the industry. Moreover, the negative stereotype of remittances unfairly extends to hard working individuals who send money to their families abroad. Proposed Solutions at hand We need to create an enabling and secure environment for international money transfers that poses neither threats or obstacles. Transparency is essential to this endeavor. To that effect, it is important to consider the following options: Hold a Congressional hearing, with representatives from industry, banking associations (eg ABA, Community Bankers, CUNA) and federal banking agencies (FDIC, OCC, Fed) to increase transparency and portray the reality of the situation. Explore practical solutions that show confidence in the industry. Among these solutions are joint money transfer screening boards integrated by money transfer companies, banks, and regulators from the US Treasury Department. These boards could consist of a shared data clearinghouse that would aggregate and analyze all transactions originating from all MTOs and agents, thereby helping regulators and MTOs identify patterns of risk. Produce a transparent review of each business compliance regulators agree to use as a reference point and Common Standards of Presumed Compliant Companies for banks to rely on for basic account relationship. This will mitigate unproven assumptions of third party liability. Moreover, bear in mind that part of the CRA includes the offer of remittance services provided directly by banks. Providing CRA credit to banks that provide wholesale services to remittance companies would send a strong message that these services are beneficial to the customer base that the CRA seeks to assist.

5 Appendix A: Common operating procedures and Standards among remittance companies: Monitoring customers and transactions Transactions monitored in real time based on sending and receiving patterns, location, frequency, amount, and behavioral analysis. All senders and recipients screened against OFAC and other AML/CFT lists Software prevents any transaction from being processed that has incomplete information Software automatically freezes and flags cases where customer cancels transaction midway Enhanced Monitoring and Suspicious Activities Oversight of agents Companies practice enhanced due diligence for all transactions Less than 1% of all transactions require reporting as Suspicious Activity. Regular cooperation with law enforcement, and strong support of their AML/CFT efforts. All companies screen prospective agents for: criminal background, valid business registration, tax payment, financial statements, credit history, and OFAC. All new agents receive a compliance and risk-mitigation training. All companies require new agents to master this information before they are authorized to make transactions. Companies require yearly trainings for ongoing agents. A major focus of this training is controlling the risk of financial crime. Companies monitor agencies in real time via transaction software, are in touch with them via phone or on a daily basis. Partners overseas (payers) Audits Companies formally visit agencies on a regular basis. They also send unannounced mystery shoppers to evaluate agencies on their compliance. All companies require that partners have a valid local business license, demonstrate adequate AML/CFT policies and procedures, and undergo audits and background checks. Companies pass numerous audits, including: independent audits every 1-2 years; state audits every months, for each state in which the company operates; bank audits yearly; IRS audits of company and agencies.