ECSH51175 - Money transmitters – what you would expect to see at a compliance intervention

Money transmitters transfer money, or a representation of monetary value, from one location to another without the physical cash moving.  Often this may involve exchanging currency as well, though this is usually incidental to the money transmitting activity. Where the movement of money is the sole purpose of the movement, this is called remittance. 

Money remittance means a service for the transmission (or any representation of monetary value) without any payment accounts being created in the name of the payer or the payee. Where:  

 (a) funds are received from a payer for the sole purpose of transferring a corresponding amount to a payee or to another payment service provider acting on behalf of the payee; or

(b) funds are received on behalf of, and made available to, the payee.

Money transmitters are made up of:

  • Money value transfer services (MVTS).
  • Informal value transfer system (IVTS).
  • Intermediary payment services providers (IPSPs).
  • Foreign exchange (FOREX).


Money or value transfer services

Money or value transfer services (MVTS) refers to a financial service in which the service provider receives currency, cheques, or other financial instruments (electronic or otherwise) in one location and provides the beneficiary with the equal value in currency or financial instruments or other means in a different location.  Transactions performed by such services can involve one or more intermediaries and a final payment to a third party and may include any new payment methods.

The Financial Action Taskforce has produced guidance on the risks around MVTS.


Informal value transfer system

The informal value transfer system (IVTS) sometimes referred to as Hawala by certain communities, works by transferring monetary value without the need for electronic remittance via the international banking system. The monetary value is most often transferred solely by communication between IVTS operators. IVTS relies on personal connections between operators, often within specific ethnic communities in different locations, usually international. A standard transaction typically occurs when an individual will go to an IVTS operator to transfer funds abroad. The IVTS operator, after agreeing to a rate of exchange with the customer, will accept the funds, usually in cash, but this can also be deposited electronically into the MSBs bank account. The IVTS operator then contacts their counterpart located in the country the funds are destined for, details are exchanged, and the IVTS operator gives the customer instructions on how the beneficiary can receive their funds. No funds are exchanged or sent out of the country during the transaction and the two IVTS operators will settle their accounts at a later date.

IVTS can be used for legitimate purposes but are also attractive for criminals to facilitate their criminal transactions.  IVTS is illegal in some countries, meaning that registered IVTS operators need to ensure they are remitting to a country where it is legal to do so.

 

Compliance with the Funds Transfer Regulations

Under regulation 63 MLR 2017, HMRC must ensure that MSB money transmitters, bill payment service providers (BPSP) and telecommunications digital IT payment service providers (TDITPSP), which it supervises, comply with the Funds Transfer Regulations and information on payer (REGULATION (EU) 2015/847 – Information of payer Transfer of funds regulations (FTR)) and additionally liaise with other external stakeholders (including internationally) to undertake joint actions combatting money laundering, terrorist financing and proliferation financing (ML/TF/PF) which includes, but isn’t limited to, the development and implementation of new government policies and guidance for example petitioning to further develop regulations.

It also requires that where HMRC identify a reason to know or suspect ML/TF/PF or have reasonable grounds for it, that they raise a suspicious activity report (SAR) to the National Crime Agency (NCA).

Where a business’ “firm status” on the FCA register shows they are an authorised payment institution (API) or registered small payment institution (SPI), officers will need to check the HMRC MLR registers to ensure that the business appears. Therefore, HMRC is the supervisor of payment service providers for the purposes of the Transfer of Funds Regulations (Regulation (EU) 2015/847 – Information of payer Transfer of funds regulations). Officers will need to determine whether the business complies with regulation 64 of The Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (MLR 2017).     

 

Currency conversion in a remittance transaction

Where remittance transactions cross jurisdictions (for example, an MSB sends money from the UK to a country where another currency is used) there will be an element of currency conversion so the funds can be paid out in the local currency when that money arrives in the destination country.

Where this conversion occurs can vary depending on the economic corridor these funds move through, and the financial institutions involved with processing the transaction.

MSBs may have a business relationship with another financial institution who will provide the conversion service separately from the remittance. Banks can provide the conversion service, although are traditionally slower and charge higher fees. Electronic money institutions have risen in popularity in recent years because of their ability to process these transactions faster and at cheaper rates. Where another financial institution completes the conversion, the MSB sending the money does not need to register for additional MSB services.

If the MSB converts the currency themselves as part of the money remittance service, they may also be required to register as providing other MSB services, such as FOREX (FX). Small and mid-sized MSBs typically use a third-party to convert currency and incorporate the cost of this into the cost of the remittance service.

More information on currency exchange and FOREX can be found in ECSH51125.


Intermediary payment service providers

Intermediary payment service providers (IPSPs) provide a money transmission service to other MSBs. IPSPs are entities that provide a payment platform for other entities who may not have the same ability to transfer money, perhaps due to the IPSP having better banking connections.  IPSPs can provide services to other MSBs that have been de-banked, or who are unable to obtain a bank account, allowing them to distance themselves from the mainstream banking sector. This can result in a reduction of SARs reporting. An IPSP can serve multiple MSBs, collating cash and moving or transmitting this worldwide.

For information on money transmission money laundering risks see ECSH51100.

 

What would you expect to see at a money transmitter?

Most small money transmitters only offer money transmission as a secondary business activity. The main profit is often derived from their other business activity, for example, travel agency, grocery or accountancy. They are usually based in communities with extended families living outside the UK and the local residents use these businesses to send money to their relatives or businesses abroad. English is sometimes not the first language of MSB proprietors.  The business must understand the risks and legal requirements of MLR 2017 to be regarded as fit and proper, but care is needed to make sure that any advice or instructions that you give to an MSB are fully understood.   For further information on language barriers see ECSH32927.

It is also quite common for the premises to have CCTV in operation, but the footage is not always recorded because the system is simply in place so the MSB can see into the main part of the shop if in a back room.  CCTV may also be in place as a crime prevention tool but may not be functional or switched on.

A small number of independent money transmitters carry out their activity from their own residential premises. In this situation it is likely that the money transmitter does not advertise the service provided to the wider community and only does money transmission for close friends and family.  If they are not charging a fee, they are not in scope of MLR 2017.


How does a money transmitter operate?

Money transmitters offer convenient low cost worldwide remittance for their customers. They usually have lower operating costs, so commission rates are low (0.25% to 1.25%) and exchange rates are generally more attractive than the banks or other large financial institutions.

There are many different ways these businesses are able to ‘transmit’ money. They may not use the formal banking systems exclusively to transmit the money to its destination. They may use methods that by-pass or only partially use the banking system and use a trust-based system of swapping financial liability.

In order to avoid exchange controls operating within a country, a business within that country may agree to pay a money transmitter’s customers for them. The business will ask for an equivalent amount in another currency to be paid into a bank account held outside that country in their name. Frequently the business paying out money will request payment in dollars, so they can pay for goods purchased on the open market.

It is important that you concentrate on identifying the audit trail of the money transfer in order to identify non-compliance with MLR 2017.